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Columnist of the Year Sydney Lenssen DBFO lessons

Prospects for new roads look bleak, even the DBFO variety with Treasury sources talking of over-mortgaging the future. So how relevant is the National Audit Office's report last week on the first four DBFO concessions?

Personally, it is pleasing that the NAO goes along in part with my column last April criticising the Highways Agency and the Private Finance Panel for lending their weight to the then roads minister John Watts bragging about DBFO savings. It turns out that the HA used an 8% discount rate to put present day values on the 30 year contracts, instead of the 6% rate recommended by the Treasury. NAO now finds the two smaller schemes are £15M dearer than traditional procurement.

More importantly, NAO concludes that the public sector comparator - the cost prepared secretly in advance as best estimate of conventional procurement - is far too uncertain to be used for anything more than a guide to the exercise of judgment. Departments and agencies should be wary of spurious precision. That is civil service carte blanche for ministers to get away with any methodology, if they are so minded, unless sleaze is involved.

Two years ago I pleaded for DBFO transparency: the Department of Transport should not hide behind commercial sensitivity. A market in DBFO terms was needed, then and now, and with so few contracts such a market would be difficult to create even if PFI contracts from other sectors were included.

The NAO report gives the best guidance so far on shadow payments and bid prices at the various tender stages. For example it reveals how generous the HA was on the M1-A1 project around Leeds which is mainly new construction with little maintenance outside the new road. As a result the shadow tolls are biased in favour of early payment, reducing the risk of shortfall in payments if the future traffic fails to reach forecast numbers.

The report's most important table exposes the net present values of expected payments which each of the bidders first tendered on all four schemes. All show a range of values far wider than would be expected for conventional bids.

For the M1-A1 project, Yorkshire Link's £224M was £34M less than UK Highways' and £64M below that from Express Route. For the A1 (M) near Peterborough - by far the simplest and most attractive of the four contracts on offer - Road Management Group at £167M was £36M lower than the next and £207M less than Modern Highways. The Swindon to Gloucester A419/ A417's four bids ranged from Road Management Group's £118M to UK Highways at £156M, and the A69 Haltwhistle bypass came in from Road Link at £60M compared to Modern Highways at £100M.

First bids were followed by the shortlisting of two or three, discussions and then requests for best and final offers, holding a second bidder ready to step in until final award. Interestingly, NPVs between first and final award moved up slightly on two jobs and down on the other two. The HA must have been genuinely clarifying terms rather than trying to screw lower terms.

These were the first DBFO awards and everyone involved could be excused for feeling their way timidly. But the NAO findings can also be argued as indicating that the competition was not fully unfettered. Some companies and banks might have felt happier to let others win the first jobs, arguing that subsequent rounds would yield fatter margins and a more generous client.

Competition for the Channel Tunnel Rail Link has shown just how easy it is for bidders to offer more attractive terms by over-estimating traffic flows and income streams. The range of possibilities for future road traffic might be narrower and statistics have been collected for longer than for cross channel freight and Eurostar passengers. But if the CTRL bids had been assessed more conservatively, London Continental Railways might have been protected from what is now seen as optimism.

Finally the NAO report shows plenty of scope for further DBFO economies by reaping the full benefit of closer co-operation by designers and constructors at an early enough stage in the project when innovation and ingenuity can still be exercised.

What a pity it would be if DBFO experience to date were to be lost for want of more schemes.

NAO report HC 476, session 1997-98, published by The Stationery Office.

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