Highway Robbery? A Financial Analysis of Design, Build, Finance and Operate (DBFO) in UK Roads

Abstract

The ex‐post facto cost of using private finance in roads is examined using a case study approach. The paper focuses on the first eight design, build, finance and operate (DBFO) roads commissioned by the UK Government’s Highways Agency and paid for through a system of shadow tolls. It carries out a financial analysis of the publicly available accounting information from the Highways Agency and its private sector partners for the first 6 years since the start of the 30‐year schemes in 1997. Publicly available financial information about the schemes was found to be limited and opaque. In 3 years, the Highways Agency had paid more than the construction cost. It was unclear whether the payments were higher than expected at financial close. Its private sector partners reported a post‐tax return on capital of 29% and an effective cost of capital of 11% in 2002, twice the cost of public finance. However, operating through a complex web of subcontracting creates additional, undisclosed sources of profit for their parent companies that make it difficult to establish the total cost of using private finance. The paper questions the wisdom of using private finance by providing evidence about the cost, including the cost of risk transfer.

Acknowledgement

Research for this paper was funded by the Association of Chartered Certified Accountants.

Notes

1. A schedule of payments provided by the Highways Agency to the research team.

2. A close company, subject to certain exceptions, is broadly a company: (1) that is under the control of either five or fewer participators, or any number of participators if those participators are directors, or (2) more than half the assets of which would be distributed to five or fewer participators, or to participators who are directors, in the event of the winding up of the company (see http://www.inlandrevenue.gov.uk/manuals/ct123millionanual/ct6001.htm, accessed 27 April 2004).