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Agency maps out road plan

AGENDA

Last week the Highways Agency made public its plan to develop the M25 in one of the UK's biggest ever construction contracts. Stephanie Hendries examines the proposed deal and looks at how the future of Britain's highways rests in the hands of private companies that will design, build, finance and operate our roads

BRITAIN's busiest road is grinding to halt. It is so overloaded with traffic motorists are forced to sit for hours in queues moving at the pace of a lethargic snail.

There are no prizes for guessing that the road in question is the M25 ? a motorway now earmarked for a huge £4.5 billion construction deal.

Since the Highways Agency was formed in 1994, the issue of the M25 has been high on the agenda. Years of meetings and consultation have ensued to determine the fate of the road and finally it was decided that improvement would come in the form of a large-scale widening project to increase the existing three lanes to four.

US and European contractors are poised to begin bidding for the massive project, which comprises all the widening work plus maintenance of the capital's orbital motorway over 30 years.

But it could also set a precedent. The talk is that this type of large-scale contract will be used to widen and maintain the country's other principal motorway routes, such as the M6, which links the Midlands with Scotland, the trans-Pennine M62 and the north-south M1.

So, the M25 deal marks a new era for the Highways Agency, as it moves towards Design Build Finance and Operate mega-contracts to maintain Britain's largest highways.

But will this shift really help to promote best value when it comes to maintaining Britain's major roads?

And will there be a company that is ready to deal with a project of this scale?

Asked about the future of the M25 plan, one industry source said: 'These large-scale DBFO projects need to have a strong team behind them, otherwise they are certainly doomed. The success of DBFO projects is simply determined by the consortium involved, so the Highways Agency needs to make sure it has the right team on board.' The upgrade of the M25 and the DBFO procurement method will no doubt be high on the agenda at the annual Highways Agency conference this week. Transport minister Stephen Ladyman will be leading discussion as the agency outlines its plans for the future of the country's roads at the three-day event in Manchester.

The history of DBFO projects goes back to 1996, when the first schemes were awarded on major A roads and were due to be carried out over a period of 30 years.

The Highways Agency understood that this was an effective way of bringing private finance into the construction of roads. A consortium of three or four companies including a financier would maintain the road over an agreed per iod as par t of one major cont ract.

One insider at Interserve said: 'We were involved in the first DBFO schemes on the A50 and the A30 so we appreciate that they are beneficial. They promote better value because they speed up the procurement process.

But the A30 was a £120 million construction project ? a tiny fraction of what a scheme like the M25 will be. It really is anyone's guess how a project of this scale will pan out.' Several teams are now tipped to be front runners in the race for the M25 deal, even though the bidding war has not officially started. American giants such as Kellogg Brown and Root, Fluor and Bechtel have expressed their interest following a Highways Agency meeting in August. Some critics say these US companies are purely interested in getting on board in a managerial capacity.

One British firm said: 'They do not actually construct anything. They are just keen to get their 10 per cent.' Mouchel Parkman is said to be bidding for the deal in a joint venture partnership and there is talk of other European companies such as Skanska being high on the 'speculative' list.

French contractor Vinci is leading a consortium featuring British subsidiaries Norwest Holst and maintenance firm Ringway together with its French toll road operation, Cofiroute.

A source close to Vinci said: 'We are not new to this sort of deal and are confident we can carry a project of this size out successfully.

'We have experienced similar contracts on the Severn Crossing and, to a smaller scale, on the Dartford Tunnel.

We also fully intend to bid for the M6 project.' It is not yet clear which British contractors will bid for the M25 work when it goes out to tender next month.

One industry source said: 'Amec normally plays a huge part in major roads projects. If it doesn't get involved in the M25 deal, then that's a massive chunk of work its major projects team is missing out on.' The nature of DBFO contracts calls for the prospective companies to bid for the work with their respective banks, which will in tu rn f inance the project.

Banks seeking a role in the project include Barclays, the Royal Bank of Scotland and Australia's Macquarie.

The procurement process for projects such as these is lengthy and costly and those brave enough to bid can expect to lose lots of money if they do not win the work.

Ian Dowling, industry affairs director at the Civil Engineering Contractors Association, warned: 'In a DFBO contract it would be sensible to have a two-stage bidding process where the usual four groups are cut down to two ? otherwise there will be an awful lot of money lost in the procurement process.

'I think a project of this scale will work if they get in large international contractors such as Fluor and Bechtel. These companies have the resources and the financial backing to carry it out successfully. The winning consortium will come in as much more of a management contractor and will effectively act as a mortgage lender, as the Highways Agency pays them off over the course of the 30-year deal.

'Funding for large-scale PFI projects is sourced through suppliers and that is a worrying trend for a project such as the M25. The Government is turning its back on funding these road projects. They are moving the funding that should be allocated to roads and paying for everything by revenue, which is essentially deferring the payment of a bill.' Steve Rowsell, procurement director at the Highways Agency, disagrees. He reckons the DBFO method will benefit all those involved. He said: 'It makes sense for a project of the M25's size.

'It will allow a single team to carry out all the work.

It can save money on the supply chain. Money will also be saved in the procurement process.

'The Highways Agency understands that bidding costs on PFI projects are notoriously high. That's why we have taken steps to ensure best value and help companies limit their costs at crucial stages of the deal.

'Firstly we will have the invitation to submit outline proposals in November. The second stage will be to limit the consortia to three while working closely with them to decide on the specific requirements of the contract.

It is only after this stage and once we have selected our preferred bidder in early 2007 that we will ask to put the funding in place. On normal contracts a lot of discussion goes on with banks and lawyers during the best and final offer stage, where the contractor can lose a lot of money, but we have eliminated this and made our procurement more cost-efficient.' So what is the future for giant DBFO and how will it work on the M25? Mr Rowsell is confident that whatever problems arise can be easily smoothed out.

He said: 'We are still the client on these DBFO projects so we monitor how everything goes but any problems are borne solely by the contractual team.

'We are also looking at working financial incentives into future schemes to help maintain the standard of roads we will be constructing and we have several contenders for large-scale DBFO projects all valued at over £1 billion.'