Highway Robbery? A financial analysis of Design Build Finance and Operate in roads in the UK
Jean Shaoul, Anne Stafford and
Pam Stapleton
University of Manchester

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Background to the policy
Scale of DBFO
National Audit Office reports
Other literature
Credit ratings agencies
Financial analysis of Highways Agency and DBFO company accounts

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Some new build
Operation and maintenance of road for
30 years
Annual payments by government based on traffic volumes
Shadow tolls

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Access to finance
Value for money- ambiguous concept - 3Es
Economy: greater private sector efficiency and risk transfer over life of project
VFM - comparison of discounted whole life financial flows - ex ante
Methodology and process critiqued in hospitals
Assumed to be unproblematic in roads
Little financial evaluation of roads

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Little financial information
Inconsistent construction costs
Total capital cost of 14 schemes £1.3bn
56% of total new construction
No estimate of annual payments
Business Cases and Contracts unavailable commercial sensitivity
Highways Agency - description
After the first 8, only about 6 more
25% of 10 year plan will be DBFO

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Little analytical v descriptive research
World Bank project literature
Walker and Con Walker - Australian evidence
Lack of financial information commercial sensitivity
Snippets of information
Lack of transparency

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Cost of public < private finance before risk transfer
After RT, 2 out of 4 failed VFM test at 6%
Risk transfer crucial - methodology?
Only large construction projects were VFM
Uncertainties in quantifying Public Sector
Comparator

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Gov guarantees payments
Who is carrying the risk?
Shadow tolls create extra risks when traffic volumes rising
Own calculations showed that little difference between PSC and DBFO in some cases
Conclusions did not follow own evidence
>>> DBFO expensive

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Haynes and Roden - VFM in aggregate at 8%, not when disaggregated at 6%
NPC of £1,093m
But little re methodology, assumptions, etc

Credit ratings agencies’ reports
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Financial information to the capital markets
Now required to assume more risk
“Significant government support” to offset
“additional risk”
“Continue to offer a comparatively safe haven in times of economic downturn”
Main risk = construction risk, refinancing
Contracts complex, difficult to enforce, few penalties, eg January 2003

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8 DBFOs for period of study
Information is limited and opaque
Total construction cost £590m
Payments not shown for 3 years 1997-1999
Changed from off to on balance sheet – risk?
About £210m p a - 3 elements to payments not broken down by contract
Payments rising due to traffic and payment profile

Highways Agency’s accounts
(Table 2)
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In 3yrs 2000-2002, paid £618m
> £590m construction cost
Refutes the gov’s argument
£6bn cash cost over 30yrs
= NPC approx £2.2-2.5bn
Gov claimed NPC = £1.093bn
Costing more than expected?

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Estimated finance/capital costs = £1.723bn
= 3 x construction costs and 1/3 total cash costs
Most risk is construction risk, estimated
£100/400m risk = 25% premium - to build to time and budget
Gov guarantees payments- who is carrying the risk?

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Shell company, complex web of subcontracting,
95/5 debt/equity
Disclose little financial information
Rising income
Income less than shown in HA accounts
Operating profit = 68% of income in 2002 AFTER subcontracting to sister companies
Tax payable rate of 8% - but deferred, so less
Treasury methodology (2003) assumes 22%

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Cost of capital = £103m (surplus less tax)
Effective interest rate of 11%
Post tax return on capital of 29%
Risk premium = cost of private less public debt
> 6 percentage points
Approx £56m (>50% of £103m) = additional cost of private finance

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Profit on construction, subcontracting and financing
Refinancing
Sale of equity stakes
Yorkshire Link - interest free loan to parent company
Front loaded payment stream - surplus not ring fenced
Must pay maintenance costs in future

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High cost, affordability and implications for service provision elsewhere
Extra public finance and investment eaten up by cost of private finance
Shadow tolls >> direct tolls?
Risk transfer limited and creates additional risks
VFM methodology?
Outcomes are inconsistent with the claims
DBFO in roads no more ‘successful’ than in hospitals
PFI poor VFM in practice?

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Little financial information available to public
More to capital markets
Commercial confidential - smokescreen to hide cost from public
Makes scrutiny, control and accountability all but impossible
Creates potential for future liabilities and calls on public finance
Gives increasing wealth and political power over direction of public policy to financial elite