Tuesday, July 14, 2009

M25 Debacle

For some reason the Department for Transport's offical vid forgot to ask him about the outrageous costs

A few days ago, one of BOM's old friends was out and about in leafy Buckinghamshire. Sadiq Kahn has moved up since he ate that poor IT guy who dared to suggest the NHS Supercomputer wasn't going to work . These days he's the Transport Minister, and he'd come to mark the start of the M25 widening project. Standing in front of the DfT's corporate banner, he said:

"Today marks a major step forward in our commitment to building Britain's future and increasing capacity on the busiest sections of motorways and trunk roads. Everyone who uses these important stretches of motorway, whether business or leisure travellers, will benefit from the massive investment."

Commitment to the future... massive investment... if you think that sounds like another huge bill for taxpayers, you'd be right.

Now let's all agree we need good transport infrastructure. And let's all agree our major roads would be much better shape to handle today's congestion had this clothead government not put a hippy moratorium on new projects during its first term (see this blog).

Let's simply focus on the monstrous cost of the current widening scheme, and how it has escalated since first approved.

The M25 project is a PFI deal comprising two elements. First, the widening of some of the motorway, and second the running and maintenance of the entire M25 network over the next 30 years.

The project was first approved by ministers in April 2004. At that stage, the capital works to widen 63 miles of motorway were estimated to cost £1.6bn, and the 30 year maintenance concession would cost £3bn (£100m pa). Giving a total of around £4.5bn (which was the figure quoted by ministers).

Two years later, in 2006, a shortlist of 3 bidders was announced. And in 2008 the winner was announced - Connect Plus, a consortium made up of Balfour Beatty, Skanska, Atkins and Egis Projects (er, yes... the same BB and Atkins who were also involved in the Metronet disaster).

At that stage, the cost was still put at £4.5bn, and an early deal close was eagerly anticipated - not least because it was hoped to get much of the work out of the way in time for the 2012 Olympics.

But the months ticked by, and the close was postponed. And the quoted cost figure stealthily crept up to £5bn. It seemed the project had encountered some late snag.

Then last autumn the banking crisis struck, and the entire PFI market was thrown into turmoil. That's because - as we've blogged before - PFI deals depend crucially on bank finance, and if the banks won't lend, there's no deal.

Well, there's no deal unless the government is prepared to juice up the terms so much that even cash strapped bankers can't resist.

And in the case of the M25 widening, that's precisely what happened.

Because when the deal finally closed in May this year, the cost had escalated yet again - from £5bn to £6.2bn - a 38% increase over the originally quoted £4.5bn budget.

And that wasn't all.

Whereas the original scheme had called for the widening of 63 miles of motorway, under the final deal only 35 miles are to be widened - a 45% reduction.

So once again, taxpayers are left paying hugely more and getting hugely less.

Of course, the government does have an explanation. According to the Highways Agency:

"This [cost increase] was because margins paid to the banks have increased as a result of the current economic climate."

That is, because of the international financial crisis - which as you know, was nothing to do with this government - the commercial banks have racked up their interest charges - the margin they charge on top of market interest rates. So the costs of this deal have naturally escalated.

What a load of piffle.

HTF can higher interest charges possibly explain a cost escalation from £5bn to £6.2bn (let alone the escalation from the original £4.5bn, or the 45% reduction in road widening)?

Let's do the math.

The consortium is raising £925m of commercial bank debt. But the overall cost to us has escalated by a minimum of £1.2bn. So if that increase is entirely accounted for by higher interest charges, it means that such charges are an average £40m pa higher than previously planned. Which implies that the average interest rate charged has gone up by at least 4.3% pa (40/925). And in reality it would have to be much more, because most of that debt will be paid off long before the end of 30 years.

But how can interest rates have gone up that much? Market interest rates (including LIBOR) have come down - not gone up. And although the margins banks add on to those market rates for their loans have increased, the increase is of the order of two percentage points - not 4-5%.

So what's really going on?

Yup, you guessed it - once again, we taxpayers are being screwed to the floor courtesy of the Simple Shopper.

Ministers were so desperate to push the project through, because of all those jobs and grandstanding opportunities (see vid), they were prepared to pay any price. In fact they were so desperate, work started within hours of the final deal being signed.

The consortium, not unnaturally, took full advantage.

And before you squawk about grasping capitalists, let's remember they are only earning a perfectly legal crust. They can't be held responsible for the idiocies of government. We don't blame them one little bit.

No, next time you're fuming in an M25 superjam, grinding your teeth at the higher fuel duties you've been forced to pay to clear the nation's debts, just make sure you remember where the real blame lies.

PS As we've blogged before, we've changed our mind about PFI. In principle, it ought to give taxpayers a good deal, but in practice - in the hands of the Simple Shopper - it's a recipe for rip-off, especially with one-off megaprojects like the M25.

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