The Highways Agency mishandled the project to tackle congestion on Britain's busiest motorway at a potential extra cost to taxpayers of around £1 billion, a report from MPs said today.

The agency's cost estimations for a 30-year, £3.4 billion private finance contract for widening the M25 were "poor", the report from the House of Commons Public Accounts Committee said.

The committee expressed concern that the invitation to tender for the contract excluded hard shoulder running (HSR) in which drivers are allowed to use the hard shoulder at peak times.

Launching the report today, Public Accounts Committee chairman Margaret Hodge MP said: "The Highways Agency's mishandling of the project to tackle congestion on the M25 could cost the taxpayer an extra £1 billion.

"The agency should not have focused just on widening but also have given proper consideration to a much cheaper alternative, hard shoulder running. A private finance project intended to transfer risk to the private sector should not have restricted innovation by ruling out this alternative solution.

"The decision to stick with widening was also substantially influenced by a technical error in the agency's cost estimates. Had the error not been made, HSR would have been shown to be the cheaper option."

She went on: "The costs of the widening project have also been driven up by the nine years it took to conduct the procurement process, from the first commissioning of consultants in 2000 to the signing of the private finance contract in May 2009.

"This delay exposed the project to the credit crisis, resulting in £660 million of extra financing costs. And the advisers upon whom the agency spent an excessive £80 million would have benefited from the drawn-out procurement."

Roads Minister Mike Penning said: "This Government is driven by the need to get value for money for taxpayers so I welcome this report. It is another example of Labour costing taxpayers dearly.

"I am determined to learn the lessons of the report and we will act on its recommendations."

Highways Agency chief executive Graham Dalton said: "We note the conclusions reached by the Public Accounts Committee and will act on its recommendations.

"Meanwhile, widening of the M25 in Buckinghamshire, Hertfordshire and Essex is progressing to time and under budget and will be completed before the opening of the Olympic Games in summer 2012."

Campaign for Better Transport roads and climate campaigner Richard George said: "It is great people are waking up to just how much money the Highways Agency wasted on this deal.

"But the problem goes much wider than the M25. We simply cannot afford to give the agency any more blank cheques to spend on ill-considered road-building plans."

Professor Stephen Glaister, director of the RAC Foundation, said: "Next time fuel duty rises drivers will know why - to meet Government costs which shouldn't have been incurred in the first place. Poor procurement seems to be endemic across Whitehall and when the wrong decisions are made it is the taxpayer who foots the bill.

"But for drivers, frustration will stem as much from the time it took to get this project under way as how much money was wasted. Years of needless traffic jams created misery for those caught up in them."

AA president Edmund King said: "While Government agencies should always look to get best value when spending taxpayers' money, the AA does not agree that hard shoulder running would have been a better option than widening this section of the M25.

"The M25 is the busiest and most important motorway in the UK and hence needed widening to squeeze out maximum capacity.

"The widened motorway will reduce congestion and enhance safety.

"We are pleased that the widening work is on target for completion but obviously drivers would like to see their fuel tax spent more efficiently in improving the road infrastructure."

Charlotte Linacre, campaign manager at the TaxPayers' Alliance, said: "It's isn't fair that taxpayers suffer because the Highways Agency lacks the competence or urgency to complete a project on time and to budget.

"It's appalling that so much money has been squandered. They've treated the taxpayers' pockets as an infinite resource."