The National Audit Office (NAO) will probe the £6.2bn expansion of the M25, a contact awarded under the controversial private finance initiative (PFI) last year.
Fears have grown that the 30-year contract will not provide value for money as it was negotiated during the height of the financial crisis. Banks were reluctant to lend even on big infrastructure projects with stable returns, meaning that the repayment terms might not be beneficial to the Highways Agency.
Under the terms of the PFI, the Highways Agency must pay the private sector contractor, in this case the Connect Plus consortium, every year for its work to expand, maintain and operate the M25. The consortium puts up much of the initial finance, largely through loans, and makes money by keeping costs down through the length of the contract.
However, expensive loans would potentially mean that Connect Plus has had to increase its annual fee. A PFI industry source said: "The NAO is looking at the M25 deal rather carefully, as it was closed in the middle of the market chaos. They are wondering if it was value for money."
The NAO will look to complete its investigation, led by PFI director David Finlay, by the end of the year. It is possible the report could recommend refinancing the debt early should it not stand up to scrutiny. An NAO spokesman confirmed the report, expected to be detailed on the watchdog's website this week.
The NAO would have made the announcement sooner, but like government departments has been in purdah, not allowed to communicate with the public ahead of the election.
Revelations that the NAO was investigating another PFI contract could have been damaging to Labour, as it was one of the favoured policies of the party's 13-year reign and used to finance the construction of roads, schools and hospitals.
The Connect Plus consortium is made up of four companies: Atkins, a listed engineering and design consultant; Balfour Beatty, a Ftse 250 UK construction giant; Sweden-based Skanska; and Egis Projects, a transport infrastructure specialist.
The NAO regularly looks into PFI contracts, having produced more than 80 reports scrutinising this and similarly financed public-sector deals since 1997.
However, the PFI has declined in recent years, following accusations that in effect it mortgages projects for future generations to pay. It has also achieved many of the previous Government's targets, such as the massive reconstruction programme of the UK's hospital estate.
Balfour Beatty shares closed at 264.4p on Friday, down 6.1p on the start of day, valuing it at more than £1.8bn. Atkins was down 5p to 690p – giving it a market capitalisation of £700m.