PRIVATELY FINANCED DBFO roads only offer value for money if they include a high capital content, according to a National Audit Office report published this week.
Private road concessions combining small bypasses with the operation and maintenance of long stretches of existing road are likely to cost the taxpayer more than equivalent publicly funded schemes, claims the public spending watchdog.
The NAO's conclusions will be a major blow to the DBFO roads sector at a time when the government is set to place further strict limits on new road building as part of its proposed integrated transport debate, leaving maintenance work as the prime roads market.
The findings threaten to undermine the growing use of private finance in the construction of small bypasses or bridges. For these schemes the government and local authorities have tried to add sections of existing road so they can maximise risk transfer and take projects out of public spending calculations.
The NAO report shows that two of the first four privately financed DBFO roads would have cost less had they been built with government money.
The A69 and A419/A417 projects cost more as private finance projects because they incorporated the lowest amount of new construction work.
Most of Road Link's A69 concession covers the ongoing maintenance of the 84.3km road between Carlisle and Newcastle. New construction was confined to the 3.2km bypass.
The A416/A417 Swindon to Gloucester project operated by Road Management Group covers 52km of road of which 25km is new build.
The report says that the Highways Agency overstated the benefits of using private finance on roads projects. It criticises the choice of discount rate used to compare the value for money of conventionally procured roads with DBFO projects.
The report states: 'The choice of discount rate for comparing privately financed projects with conventionally financed alternatives is very important. It enables the extra cost of financing these projects with private sector capital rather than with government borrowing to be taken fully into account. If the discount rate is too high, the impact of the extra cost will be under-estimated, and a misleading impression given as to the financial merits of the privately financed option'.
A higher discount rate effectively distorts calculations in favour of a DBFO solution by making the value of shadow toll payments appear smaller when spread over 20 or more years.
'The higher the discount rate, the lower the value that is put on future cashflows. So a higher discount rate, by discounting the shadow tolls of a DBFO option more heavily, will reduce the apparent costs of that option relative to the traditional alternative', says the NAO.
The report says that the discount rate was set by the Highways Agency at 8%, ignoring Treasury guidance. This recommended that the 8% rate should only be used to assess publicly financed roads. Officials were supposed to use a 6% rate when assessing DBFO projects.
With an 8% rate only the A69 gave worse value for money as a privately financed project, producing a loss of £5M to the taxpayer. The A419/A417 is shown to have saved the taxpayer £11M using this rate, while the A1(M), being built by Road Management Group saved £50M and the M1-A1 link awarded to Yorkshire Link saved £112M.
But if the HA had used the recommended 6% rate, the A69 would have produced a loss of £12M to the taxpayer while the A419/A417 produced a loss of £3M. The larger A1(M) still saves £30M and the M1-A1 £84M.