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City warns TfL on reverse auction 'false economy'

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TRANSPORT FOR London's borrowing costs could soar because of its use of reverse auctions to select civils consultants, City analysts warned this week.

Borrowing costs could rise by millions of pounds, forcing it to cut capital spending programmes.

Interest rates offered by lenders depend on levels of risk taken on by borrowers.

Some city sources are concerned that TfL's use of reverse auctions could drive down bid prices but lead to longer term cost overruns and delays as consultants cut corners to protect profits.

TfL's total planned borrowing at the end of its current business plan period in 2010 is forecast to be about £3.3bn.

An interest rate rise of 0.5% would increase the cost of this debt by £16.5M a year, putting projects in jeopardy.

Bankers are understood to be closely watching TfL, which is in the process of assessing bids for its professional services frameworks.

TfL held an electronic reverse auction for the cost part of the bids in April (NCE 24/31 March).

It is expected to announce bid winners in August.

One senior City source has told NCE that it is uncomfortable with the process.

'If clients are awarding on price and price alone and we feel the quality of bids is degrading, we may degrade their credit rating, ' said the source. 'This means reverse auctions may be a false economy.' A TfL spokesman declined to comment on the exact concerns, but insisted that bids are being assessed 60:40 in favour of quality.

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