Roads projects at risk because of spiralling inflation, NAO warns

Watchdog says National Highways and DfT schemes could be scrapped or delayed because of rising costs
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By Jim Dunton

25 Nov 2022

The Department for Transport and government-owned company National Highways will struggle to absorb inflationary pressures on their pipeline of big-ticket road-upgrade proposals and are facing the prospect of scrapping or delaying some schemes, the National Audit Office has said.

A report from the public-finance watchdog says that when the current five-year road-investment strategy comes to an end in March 2025, fewer projects will have been completed than were originally planned, but the cost will have exceeded the originally-budgeted £27.4bn.

The 2020-25 strategy included £14.1bn committed to 69 complex projects, however the figure was reduced to 58 in 2021 when it became clear that the strategy could not be implemented as planned. DfT also cut National Highways’ road-enhancement budget by £3.4bn for the period.

Today’s NAO report says costs related to the projects that remain in the revised portfolio have continued to rise, adding a total of £3.6bn – of which £2.3bn relates to the Lower Thames Crossing project alone.

It adds that National Highways’ projections from earlier this year that around one-third of projects that remain in the revised portfolio are at risk of delay because of planning issues could have knock-on implications for the 2025-30 strategy, RIS3.

While inflation as measured by the Consumer Price Index is at its highest in four decades, at 11.1% in the year to October, prices in the construction sector are rising at a higher rate. According to the Office for National Statistics, the price of materials and fuel for manufacturing rose by 20.5% in the year to August. The NAO said National Highways had based its projections for the current road-investment strategy on an inflation rate of 4%.

According to the NAO, National Highways estimated that the additional pressures from inflation on its capital costs would be around £740m, as of July. It said the greatest impact was expected to be felt after 2023 as construction work peaks and current delivery contracts come to an end – and costs must be renegotiated.

The watchdog said that any delays on projects that were initially planned to open for traffic before 2023 may lead to unanticipated costs as they become exposed to higher inflation on construction costs.

“The extent of inflationary cost pressure is beyond the levels that can be absorbed by National Highways and it may have to delay work, de-scope projects or cancel projects to remain within its overall budget,” it said.

“Similarly, DfT is experiencing cost pressures from inflation across its programme of transport infrastructure work across rail and road.

“DfT cannot absorb the level of inflation risk within its budgets and deliver its work as planned. It is not clear how DfT and National Highways will absorb these costs. Inflation is also likely to increase the estimated cost of completing ongoing projects in the next road strategy, from April 2025.”

NAO head Gareth Davies said DfT and National Highways needed to work with HM Treasury to develop a response to current inflationary pressures that would address the implications for their planned projects.

He added that they should also work with other government departments to ensure that road plans took account of wider government policies to prevent holdups in the planning process.

“The Department for Transport and National Highways put together an extensive road investment plan that has been unfortunate to coincide with the Covid-19 pandemic and rising inflation,” he said.

“Nevertheless, more could have been done to manage risks. Delays to projects have meant that less work has been delivered than planned and at a higher cost.

“DfT and National Highways must now fully address the rising cost of its revised portfolio of projects, undertaking a review of all road plans that it plans to move into the time-period of its third road strategy.

“This review must consider if these projects remain feasible and provide optimal value for money.”

A DfT spokesperson said the current strategy – which is the second five-year programme of its kind – was transforming the nation’s road network and boosting the economy, and that it had seen seven major projects completed in the last year alone.

“As the report recognises, global issues such as the pandemic and inflation have contributed to higher costs and a minority of projects being delivered later than originally proposed,” they said.

“We have allocated £24bn to ensure we have a road network that is safe, reliable, environmentally conscious and good value for the taxpayer.”

National Highways chief executive Nick Harris said the NAO had acknowledged that “external factors” had a significant impact on the organisation’s ability to deliver some of its more complex projects.

“Despite these challenges, we have successfully received consent to deliver several major infrastructure developments,” he said.

“We’re confident that we manage portfolio and project risks well, while recognising that there is always room for improvement as we mature our processes ready for RIS3.”

Harris added that National Highways was working with supply chain partners to develop new ways of meeting cost challenges at the same time as delivering on its commitments.

This story was updated at 14:00 on 25 November 2022 to include a DfT response

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