House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Seventh Report

4 FUNDING LEVELS IN THE COMPREHENSIVE SPENDING REVIEW 2007 PERIOD

Necessary funding in the CSR 07 period

24. The Comprehensive Spending Review 2007 (CSR 07) period lasts for the three years between 2008-09 to 2010-11. Throughout our inquiry, negotiations about funding settlements for this period were continuing between Her Majesty's Treasury, Government departments and Governmental executive agencies, bodies and public corporations. Final CSR 07 settlements, including those for Defra and British Waterways (BW), are expected to be announced in autumn 2007.

25. BW told us that the lower-than-expected grant levels in 2006-07 and 2007-08 were "disappointing, but not, for the long-term, disastrous".[41] Its major concern, however, was that the revised Defra grant of £55.5 million in those two years could signal a lower baseline for grant levels in the CSR 07 period:

26. Many witnesses shared these concerns. Waterways engineer Mr Bill Schlegel warned that a continued lower grant level beyond 2008 could mean many waterways returned to the "derelict or semi-derelict" state they were in the 1960s and 1970s.[43] The Inland Waterways Association (IWA) said lower grant levels in the CSR 07 period would create "adverse impacts [that] will be felt across Government departments".[44] The Inland Waterways Amenity Advisory Council, the statutory advisory body to BW, told us that the priority should now be to "influence the outcome" of the CSR 07 negotiations.[45]

27. Whilst CSR negotiations have been underway during late 2006 and early 2007, many users of the waterway network have been involved in a significant lobbying campaign to raise awareness about the perceived dangers of future lower grant levels for BW. Several protests and canal barricades have taken place throughout the country, encouraged by groups such as Save Our Waterways.[46] Three Westminster Hall debates have been held on this issue, and Members of Parliament have tabled numerous Parliamentary Questions and Early Day Motions.[47] A petition opposing further reductions in BW's Defra grant level obtained 38,101 signatures.[48] IWA told us:

BW'S COMPREHENSIVE SPENDING REVIEW BIDS

28. We wanted further information relating to ongoing discussions between the Department and BW about possible grant levels in the CSR 07 period, and the potential impact that a lower baseline amount would have on BW's ability to maintain its network. We received from Defra a plethora of correspondence between BW and Defra, including BW's various CSR 07 proposals and bids to the Department during the second half of 2006 and early 2007.[50]

29. BW's initial CSR 07 paper, in July 2006, made clear to the Department that BW's preferred CSR 07 settlement was the restoration of its grant to the 2005-06 level of £62.6 million.[51] This would enable BW to "fulfil our vision of doubling our visitor numbers and becoming increasingly self sufficient over the 10 year period".[52] BW's submission, however, also included other funding scenarios in which its grant level was not restored to 2005-06 levels over the CSR 07 period, or remained at the £55.5 million level. BW warned that each one of these scenarios would result in an under-spend on the £35 million required each year on 'major works' (repair work on BW's principal and non-principal assets, and dredging costs).[53] Other activities could also be affected, such as:

BW's restoration and regeneration work, including current projects on the Droitwich Canal, Cotswold Canal and the Manchester, Bolton and Bury Canal;
BW's £1.2 million funding contribution of the Waterways Trust, which meant the Trust could be "wound up"; and
BW's promotion of freight transportation on its waterways—BW would "stop promoting waterborne freight as further contracts will only add to our financial difficulties."[54]

30. BW's later CSR submissions in December 2006 and February 2007 indicate that a restoration of the grant to its 2005-06 level is unlikely.[55] All the funding forecasts contained in these submissions are based on a CSR 07 settlement in which BW's funding reduced in real terms on a year-by-year basis, such as RPI -2.5% and RPI -5%. BW's February submission is based solely on the assumption of a RPI -5% settlement, and the information we received during our inquiry in early 2007 reinforced that RPI -5% was becoming the dominant predicted settlement in negotiations.[56] In March 2007, BW's Chief Executive confirmed that:

31. These later submissions to the Department again highlight the implications of such a settlement. BW warns that a RPI -5% settlement would result in a £35 million under-spend on its major works by the end of the CSR 07 period (as shown in Table 2 below): the under-spend would "accumulate to such a level that assets in poor condition with high consequence of failure will remain un-repaired".[58]

Table 2 : BW's under-spend on major works, assuming a RPI -5% settlement for the CSR 07 period


	Forecast CSR expenditure on major works (£m)	Required expenditure on major works (£m)*	Under-spend (£m)

2007-08	27.5	35.0	7.5
2008-09	29.1	37.3	8.2 (cumulative, 15.7)
2009-10	30.0	39.7	9.7 (25.4)
2010-11	32.7	42.3	9.6 (35)

* £35m at 2007 prices increased by construction price

inflation at 6.5% pa

Source: Ev 219 [Defra]

BW warned the Department that "under your proposed CSR07 grant scenario [of RPI -5%], we cannot achieve a fully fit for purpose network", and expressed concern about the "growing gap between Government policy set out in [Waterways for Tomorrow] and the grant regime being proposed".[59] BW also stressed that its commercial income "cannot absorb" the income lost through grant reductions over this period; to do so, net commercial income would have to rise by over 10% per annum for each year of the CSR 07 period.[60]

32. In February 2007, BW made a formal separate bid for an additional £5 million capital funding for each year throughout the CSR07 period (capital funding is not affected by the RPI decreases).[61] The capital bid was made on the assumption of a RPI -5% deal, and was intended to mitigate the effects of such a settlement. Although BW warned the Department that the additional £5 million per year would not fully compensate for the reduction in resource caused by a RPI -5% settlement, the funding would keep BW's major works programme "substantially on track".[62] At the time of publication of this Report, BW's bid for an additional £5 million capital grant each year remains at the table.

MINISTER'S COMMENTS TO THE COMMITTEE

33. We questioned the Minister in April 2007 about the widespread concerns relating to the impact of continued lower grant levels in the CSR 07 period. The Minister first wanted to stress that a RPI -5% settlement had "certainly been discussed" between his Department and BW but was "not agreed", although he acknowledged Defra would receive a "tight" settlement.[63] The Minister surprised us, however, by telling us he had recently received new financial information from BW which suggested that BW's funding circumstances in the CSR 07 period were better than commonly supposed, even with a declining grant level.

34. The Minister said that the new figures he had received showed that—even with a RPI -5% settlement for the CSR 07 period—BW was still set to receive £30.1 million more income between 2002 and 2012 than initially forecast in 2002. This was because BW had earned far more commercial income than it had initially forecast during this period, and also received more grant between 2002 and 2007 than it had expected.[64] The Minister said this additional income exceeded, by £30.1 million, the income lost by a future possible RPI -5% CSR 07 settlement. The Minister also said that the figures showed BW would be saving on operating costs, due to the organisation's accelerated job redundancy programme.[65] He said:

35. When we asked the Minister whether BW was being reasonable in expressing concern about the impact of a lower grant level in the CSR 07 period, he replied:

36. We called BW to a second evidence session to hear their response to the Minister's comments. BW told us this was "not a helpful interpretation of the figures".[68] BW said the additional £30.1 million figure referred to by the Minister had to be divided into the additional income in the past (2002-03 to 2006-07) and additional income expected in the future (2007-08 to 2010-11).[69] Table 3 shows that BW earned over £70 million more between 2002 and 2007 than it had forecast in 2002, primarily because of unexpected commercial income but also because it received £8.9 million more grant than expected. Looking to the future beyond 2007-08, however, BW is set to receive £56.7 million less grant than forecast in 2002, under a RPI -5% scenario. Even with increases in its forecast commercial income over this period, this still left a deficit in the next few years of about £41 million compared to the expectation in 2002.

Table 3: British Waterways' sources of income: differences between 2002 Plan and 2007-08 forecast


	The past 2002-03 to 2006-07	The future 2007-08 to 2010-11

Grant income (difference between 2002 Plan and 2007-08 actual/forecasts)	+ £8.9m	- £56.7m
Earned commercial income (difference between 2002 Plan and 2007-08 actual/forecasts)	+ £61.6m	+ £15.2 m
Net of grant and earned commercial income	+ £70.5 m	- £41.5

Source: Ev 247 [British Waterways]

37. BW told us this distinction between past and future was important because the organisation was obliged by law to balance its income and expenditure within the same period of two to three years.[70] Therefore, the vast amount of additional income earned and received in the past had already been spent, on "new business developments" (£24.8 million), increased pension costs (£7 million) and other areas, with the "full knowledge, full understanding and full approval" of the Department at the time.[71] BW summed up:

38. BW added that the £8.9 million additional grant received between 2002-2007 had not even come from Defra:

39. BW also rebutted the Minister's claims about the savings BW was set to make in the future on 'operating costs' because of staff efficiencies. It stressed that reduced 'operating costs' provided in the figures "include some efficiencies but also means lower spend on maintenance and provided in major works on the waterways".[74] We comment more on BW's accelerated job redundancy programme, and its impact, in paras. 20 and 95.

OUR VIEWS

40. Negotiations for funding settlements during the Comprehensive Spending Review (CSR 07) period are continuing. We acknowledge that British Waterways (BW) is at an informational advantage compared to the Department when determining the level of funding required to maintain the waterways network over the next three years. However, based on the evidence BW has provided to us and to the Department, we are extremely concerned at BW's forecasts of the impact of a RPI -5% settlement on the maintenance of its waterways network. BW says this scenario would result in a £35 million under-spend on major works by the end of the three CSR years alone, and the network would not be "fully fit-for-purpose".

41. We are not convinced by the relevance of the former Minister's statement that, even in an RPI -5% scenario, BW will have received £30 million more grant between 2002 and 2012 than planned in 2002. The Minister failed to take into account the fact that additional grant income in the past was spent in the past, and the additional Scottish Executive funding which was spent in Scotland alone. Although we welcome the Minister's unusual candour and refreshing openness, we were surprised he chose to make such statements in public to the Committee in apparent haste without discussing his interpretation of the figures with BW first. We comment more on the relationship between Defra and BW in paras. 110-123.

42. We are not completely satisfied, however, that the explanations we have been given fully account for the disagreements that have occurred between Defra and British Waterways, or that a conclusive picture of the costs of running the waterways network over the coming years has emerged. We would welcome the National Audit Office's (NAO) view on the correct interpretation of the conflicting accounts given by the Department and BW about BW's finances between 2002 and 2012, taking into account whether BW's forecast income streams from a variety of sources—property, Government grant or elsewhere—are sufficient to maintain the network during the coming years. We recognise that the NAO has no audit access rights to BW and thus the NAO's work would need to be on the basis of a review of papers held by the Department and of seeking the views of British Waterways, as appropriate.

43. The most important outcome from the CSR 07 negotiations must be to secure the future stability of the waterways network; something that the Government and BW both desire. We trust that BW and Defra will put their recent disagreements aside and work together closely to agree a CSR 07 outcome that ensures this stability. We expect Defra to consider carefully BW's claim that additional capital funding will be necessary for each year of the CSR 07 period if its grant settlement continues to reduce in real terms.

Future of the Waterways Trust

44. The Waterways Trust is an independent charity established in 1999, which has a UK-wide remit to help realise the educational, social, economic and environmental benefits of waterways for all sections of the community.[75] It relies on annual funding from BW, and its work includes fundraising projects for BW, bringing together partnerships for waterway restoration projects, and the operation of the National Waterways Museum and Archive. In evidence, the Trust expressed concerned at the impact of possible future reductions in BW's grant level on the Trust's ability to maintain the Museum.[76] Current funding of the Museum was already "unsustainable", and the Trust told us it had approached Government to provide an additional £450,000 per annum to enable it to offer free entry to the Museum, and thus double visitor numbers in two years.[77]

OUR VIEWS

45. We recognise the value of the Waterways Trust, and particularly the value of the Natural Waterways Museum which we consider a priceless store of information on our industrial heritage. We note the concerns of the Trust that the current funding of the Museum is unsustainable. We recommend the Department for Culture, Media and Sport look favourably on introducing methods by which the Waterways Trust could adopt a free-entry policy to the National Waterways Museum—common with some other national museums—and thus increase visitor numbers to provide greater security for the care of the national assets which are its responsibility.

BW's ambition to become "largely self-sufficient"

46. One of British Waterways' ambitions, set in 2002, is to become "largely self-sufficient" by 2012.[78] Our inquiry showed that much confusion and controversy surrounds this ambition, particularly in terms of what implication this had for BW's future Government grant levels. Defra has often referred to this ambition; in evidence, the Department said it expected BW to invest appropriately in the network "while accelerating moves towards self-sufficiency".[79] Many witnesses during our inquiry questioned the suitability of the ambition, and BW's motivations for adopting it.[80] Users of the network, such as IWA, stressed that some Government contribution to the funding of the waterways network would always be necessary because of the public benefits provided by the network and the fact that the vast majority of its users did not directly contribute to its cost.[81]

47. We asked BW about its ambition to become "largely self-sufficient". The Chief Executive was keen to stress the "largely" aspect of the ambition:

He added that self-sufficiency was the "drive within the organisation to realise that being more self-determined is a real asset and benefit for us".[83]

48. When asked what the ambition meant in practice in terms of future grant levels, BW's Chairman told us that, by 2012, BW would like to have only 25% of its income to be Government-funded, with the rest self-generated. He stressed, however, that the crucial issue was "the speed with which one gets there".[84]At present, 45% of BW's income comes from Government, and this proportion was 60% in 2002.[85] He also said certain conditions would have to be guaranteed before BW achieved this aspiration, including allowing the organisation greater commercial freedoms and the repair of its remaining £107 million principal asset arrears.[86]

49. BW's Chief Executive added that BW's situation had changed considerably since 2002, when it initially stated its ambition to become "largely self-sufficient":

He said a RPI -5% scenario over the CSR 07 period (without additional capital funding) would mean that Government grant would be reduced to 35% of BW's total income by 2012, which was still "quite a transformation".[88]

OUR VIEWS

50. Much controversy has surrounded BW's aim to become "largely self-sufficient". The Government, in particular, has often been keen to reiterate this aim, in the context of recent and possible future grant reductions. However, our inquiry has showed that a lack of clarity exists about what exactly BW's ambition to become "largely self-sufficient" means, in terms of its future funding. It is not a very helpful concept, and its vagueness can only have contributed to the tense negotiations occurring between the Department and BW about appropriate grant levels in the near to medium term future.

51. We agree with BW senior management that it is healthy for the organisation to aim to lessen its dependency on Government in the long-term. If BW is to keep its ambition to become "largely self-sufficient", both Government and BW need to provide much more detail about what exactly this means in practice. They must also produce a detailed plan about how it can be achieved. Government should make it clear that it recognises the waterways network as a public asset and that it has a national responsibility to ensure the network is kept in good order. It must also recognise that income from property development is finite and may not always be available to compensate for further reductions in Government support.

41 Q 485 Back

42 Q 485 Back

43 Q 113 Back

44 Ev 1, para 11 Back

45 Ev 45, para 9 Back

46 Protests took place at several locations around the country on the weekend of 3-4 March 2007, including Peterborough, Leicester and Braunston ("Row back canal cuts, say activists", Morning Star, 3 March 2007, p 7). The Inland Waterways Association helped organise a flotilla of 30 canal boats along the river Thames on 16 January 2007 ("Canals in crisis over £35m cuts", Daily Express, 15 January 2007). Back

47 Westminster Hall debates: HC Deb [British Waterways], 6 December 2006, col 112WH; HC Deb [Inland Waterways: West Midlands], 27 March 2007, col 367WH; HC Deb [British Waterways], 25 April 2007, col 271WH. Parliamentary questions include: HC Deb [Colin Challen], 14 December 2006, col 993;HC Deb [Charlotte Atkins], 10 January 2007, cols 593-594W; and HC Deb [Mr. Jim Cunningham], 17 January 2007, cols 1131-1132W. Early Day Motions include: EDM 109 (Session 2006-07), 'Effects of cuts in the British Waterways grant'; EDM 477 (Session 2006-07), 'Waterways in the Midlands'; and EDM 491 (Session 2006-07), 'Southern Waterways'. Back

48 "Huge support for petition against cuts on canals", Birmingham Post, 29 June 2006, p 6 Back

49 Ev 2, para 18 Back