Highways Agency

History and Objectives

PFI was launched in 1992. It was intended to facilitate closer co-operation between the public and private sectors and introduce private sector skills and disciplines into the delivery and management of projects and services traditionally undertaken by the public sector. The Government is committed to these principles through the Public Private Partnerships (PPP) initiative.

The Agency formally launched its use of PFI to procure a road service on parts of the motorway and trunk road network in August 1994. The Agency's objectives for each DBFO project were:

• to ensure that the project road is designed, maintained and operated safely and satisfactorily so as to minimise any adverse impact on the environment and maximise benefit to road users;
• to transfer the appropriate level of risk to the private sector;
• to promote innovation, not only in technical and operational matters, but also in financial and commercial arrangements;
• to foster the development of a private sector road-operating industry in the UK; and
• to minimise the financial contribution required from the public sector.

The first DBFO contracts

Eleven DBFO contracts have been signed and construction is complete on the first eight. The A13 Thames Gateway contract has been transferred to Transport for London and is substantially completed. Construction has commenced on the A1 Darrington to Dishforth contract comprising two upgrading and widening schemes with a capital value of about £245 million. The A249 contract was signed in February 2004 and comprises three improvement schemes with a capital value of about £80 million.

The Highways Agency uses a variety of mechanisms to pay DBFO companies. The first eight contracts primarily used the shadow toll payment mechanism, based on the number of vehicles using the road. The A1 Darrington to Dishforth contract uses the Active Management Payment Mechanism. The A249 contract mainly uses the Active Management Payment Mechanism combined with elements of the Availability Payment Mechanism used on the A13 Thames Gateway DBFO Project.

Under the DBFO method of procuring road improvements and maintenance, value-for-money savings averaging 15 per cent have been delivered. This is borne out by the National Audit Office (NAO) report into the first four DBFO projects published in January 1998.

Reports on the first four DBFO contracts

Following the award of DBFO contracts in 1996; NAO examined the procurement process and the final contractual arrangements to ascertain whether the process and deals were likely to deliver good value for money.

The NAO report was very positive, emphasising that the process for delivering the first four DBFO projects was well managed by the agency and that value for money was achieved. The NAO concluded that the first four projects alone were likely to deliver savings of about £100 million.

The NAO report highlighted that two of the four projects were expected to deliver savings of around 20 per cent, compared with conventionally procured alternatives, but that the other two could cost some 7 per cent more.

The main criticism was that the agency's analysis of the winning bids overstated the expected savings by £69 million because of the Treasury's advice that an 8 per cent discount rate be used, rather than a 6 per cent rate.

The NAO report was the subject of a Public Accounts Committee (PAC) hearing. The PAC acknowledged that DBFOs allowed for a productive partnership between the public and private sectors; provided incentives for efficient management; encouraged a commercially minded operating industry; and delivered the environmental and economic benefits of road improvement earlier than would be possible with conventional procurement arrangements.

The PAC report concludes that the four projects can be expected to deliver savings of £99 million. It too focused on the discount rate issue, however, and the sensitivity of the analysis to changes in the rate, and drew attention to the fact that two of the projects are likely to have cost the taxpayer £15 million more than had they been procured conventionally.

Publication of NAO report - Scottish Office A74(M)/M74DBFO Project

This report continues to demonstrate that better value for money can be obtained for the taxpayer by procuring road projects through DBFO contracts in appropriate circumstances.

The Highways Agency's DBFO projects have generally achieved even better value for money than the Scottish Office project. In studying the agency's first four DBFO projects, the NAO concluded that they delivered value for money savings of about £100 million compared with conventional procurement.

The NAO's comments on the desirability of moving away from shadow tolls based on usage to a payment based on availability and safety were reflected in the Highways Agency's approach to developing new payment mechanisms i.e. Availability Payment Mechanism for the A13 Thames Gateway contract. The Active Management Payment Mechanism was also developed and used on the A1 Darrington to Dishforth and the A249 Stockbury to Sheerness project.