Memorandum submitted by Sir Adrian Stott
BT (BW 06)
SUMMARY
The Government has officially recognised that
the waterways are a very significant national asset. However,
this recognition has not been translated into the actions needed
to remedy long-standing and increasingly damaging problems associated
with their management.
Two particular issues are:
Finance
Since their decline as a freight mode, the waterways
have been incapable of supporting themselves through direct charges
on their users, especially their boating users. They require permanent
government financial support. This is justified by their large
informal public use.
The waterways are long-term liabilities, being
collections of engineering structures requiring regular annual
maintenance and periodic replacement. These liabilities must be
matched by secure long-term revenues if their operation is to
be effective and economic.
Government grant is thus a fundamentally unsuitable
form of financial support for waterways. A much more suitable
replacement would be a one-time capital endowment, to allow the
navigation authority to invest in real estate for income and capital
gain that will be sufficient every year to cover the difference
between its long-term and current costs and its revenue from users.
Structure
Through accidents of history, there are two
national navigation authorities in Britain—British Waterways
(BW) and Environment Agency (EA). This duplication is producing
needless expense. It is also causing inconvenience and added cost
to boaters through inconsistency of standards, regulations, and
systems of charges.
BW was purpose-designed as a navigation authority.
As a commercially-modelled arms-length publicly-owned corporation,
it is very well suited to the task. On the other hand, EA's navigation
function is a tiny part of a huge regulatory organisation, fundamentally
unsuited in design, mindset, or financing for the navigation authority
role.
EA's navigations should forthwith be transferred
to BW, and EA's navigation authority role be terminated. This
would produce both immediate annual savings and long-term improvements
in national waterway management.
EA argues that it is essential for it to remain
the navigation authority on rivers, to ensure effective flood
control. However, BW has long been the navigation authority on
major rivers such as the Severn and Trent without EA's flood control
there being negatively affected. EA's argument cannot be sustained.
INTRODUCTION
The following discussion is organised under
headings consistent with the topics the Committee is to address,
ie:
1. USERS
The waterways network is now used annually by
millions of people. However, a relatively small minority of them
navigate, either for leisure or commercial purposes. The large
majority visit the waterways on foot or by bicycle, or simply
enjoy the view of them from a riparian property.
The former tend to be formal customers of BW,
typically paying navigation charges. The latter are usually informal
visitors, typically paying nothing at all.
It is generally accepted to be unfeasible to
charge an informal visitor for each use of or visit to a waterways.
An attempt made a few years ago by BW to charge bicyclists for
riding on the towpath was abandoned in the face of strong opposition
from the bicyclists.
However, it is also recognised that BW merits
financial support in recognition of this large informal use. This
recognition is embodied in the annual Government grant to BW.
Although the waterways are attractive to visitors
for many reasons (heritage, technology, wildlife, etc), a major
reason people visit is simply to see boats. Yet despite their
clear contribution, boat owners are viewed by government as the
principal beneficiaries of the waterways, and thus the appropriate
providers of a large proportion of BW's revenue.
Moreover, government tends to see provision
for navigation as the most costly element of BW's operation. However,
studies have shown that the difference in expenditure between
that required for the safe retention of an unnavigable water channel
and keeping that same channel in navigable condition is relatively
small. Unavoidable costs associated with engineering stability,
integration with drainage systems, provision of a corridor for
utilities, prevention of flooding, etc usually well outweigh the
marginal cost of navigability. As long ago as the 1960s, a government
report The Facts About The Waterways recognised that it
is often more expensive to eliminate a waterway than to retain
it.
Ironically, the extra costs falling on boaters
as a result of these inappropriate perceptions is proving them
to be a self-fulfilling prophesy, as boating is steadily becoming
too expensive for many people.
So, although the waterways are a hugely-valuable
asset, it must be understood that they cannot survive based on
direct charges. A significant part of BW's income must continue
to come from government in some form. Failure to recognise this
will result in the waterways becoming ever-more elitist, and in
the charges to users eventually reaching the point of diminishing
returns thus threatening the waterways' very existence.
2. FINANCIAL
FRAMEWORK
It is a core principle of finance that income
should match liabilities. Failures of organisations which attempt
to match long-term liabilities with short-term revenues continually
reinforce that message. Yet this mismatch is exactly the situation
into which the government has forced BW.
BW's waterways, many now over 200 years old,
consist of thousands of significant engineering structures dispersed
in a physically hostile (ie wet and exposed) environment. Such
structures require constant maintenance and periodic replacement,
not just to keep them usable but simply to prevent their collapse
at substantial risk to life and property. They are textbook long-term
liabilities.
Maintenance needs to be done at the same average
level every year. Failure to do so obviously means that the amenity
of the waterway declines (eg the channel become awkwardly shallow
to navigate, due to lack of dredging). However, perhaps less obviously,
the work required in any given year is not avoided by not doing
it in that year. It accumulates if not carried out, and must be
caught up later. However, it is usually the case that when the
work is caught up, it costs (often substantially) more than it
would have done if carried out on schedule. This is because degradation
accelerates, so that remedying it later requires more (and more
expensive) work than doing so earlier. An ounce of prevention
here is indeed worth a pound of cure.
Also, it is not possible to economise on the
scope of maintenance required. Attempts to do so are almost never
cost-effective, and often financially and operationally disastrous.
As a result, the Government should understand
that there is an irreducible amount of maintenance that must be
carried out annually if the waterways are to be retained. Further,
maintenance effort must be constant on average, and cannot sensibly
by cut one year and (perhaps) reinstated another.
In fact, it costs little if any more to keep
waterways in a good condition than in a poor one. Consider dredging.
The same amount of silt accumulates in a given waterway on average
each year irrespective of its depth. So, at least that amount
must be removed annually on average, or the channel will eventually
clog completely. (In fact, dredging of any given length is usually
done most appropriately every 20 years or so).
On that basis, one might as well remove that
silt while the waterway is still deep enough to use as intended,
as wait until it gets awkwardly shallow. (Waterways are built
sufficiently deep to allow for some silt to accumulate without
usage being impeded.) The cost per tonne removed is much the same
either way, and the number of tonnes to be removed is the same
or less. (Wash from boats is greater in a shallower channel, so
dredging backlogs cause greater erosion from banks. The eroded
material must then be dredged out as well.)
However, one of BW's main income streams is
Government grant, a clear case of short-term revenue. It is absolutely
insecure in amount from year to year, being set annually through
politics. As we have just seen, it can actually be withdrawn or
reduced after it has been granted (and even after expenditure
based on it committed). It is both an unsuitable and damaging
model for the financial support of an organisation with the types
of long-term liabilities that BW has.
We have seen that BW will always need public
financial support to reflect usage for which it cannot feasibly
charge directly. We can now also see that this support must be
secure, long-term, constant, and (to achieve best value for public
expenditure) at a sufficient level to cover the unavoidable costs
of the proper maintenance of the waterways.
3. STEWARDSHIP
BW has long realised the vulnerability caused
by its dependence on Government grant. As a result, it has worked
diligently to development additional sources of revenue.
Some of these have taken the form of finding
new directly-chargeable users. A good example is the use of the
towpaths as alignments for communication fibre. However, such
new uses are very hard to find.
A much more significant other source is real
estate, either through rental income or capital proceeds from
development.
BW inherited a good-sized estate. Through careful
management it has enlarged and developed it into a major asset
that now provides a significant part of its annual income, and
thus vital financial support for the waterways.
Real estate appears to be an ideal way to finance
the waterways. It is a long-term asset, to match BW's long term
liabilities. The income levels from it are secure, as although
the property market does rise and fall, investment in it can be
in ways that even out the fluctuations in revenue from it over
the long term.
Further, although in theory the Government could
suddenly withdraw from BW the capital represented by its property,
in practice this is highly unlikely. Thus a property portfolio
gives BW the secure ability it needs to make and carry out its
long-term maintenance and capital replacement plans. Further,
the Government remains the owner of the capital, so its application
to the production of revenue and gain from real estate is not
classed as government spending requiring annual political review.
Assuming that the Government is going to continue
to provide to BW the financial support necessary to make up the
difference between its unavoidable costs and its revenue from
users, as this submission argues it must if the waterways are
to continue to exist, then a real estate portfolio appears to
be a much more suitable method of doing so than annual Government
grant.
BW has achieved reasonable expertise in real
estate, not just in a direct landlord role but also as a development
partner with other concerns and as a developer in its own right.
Its success shows that it merits trusting with more capital in
this area, which it could manage at small marginal cost using
its current structure and staff.
Provision now by government of a one-time endowment
of sufficient additional capital, in the form of a perpetual loan
(as either real estate or a lump sum for investment in real estate),
would allow complete replacement (ie elimination) of the unsatisfactory
Government grant to British Waterways. Based on long and good
experience with this form of funding elsewhere (eg at universities
such as Harvard) for support of institutions, this approach has
much to recommend it and deserves serious consideration by the
Government.
4. TRAFFIC
BW has proved that its waterways are increasingly
attractive for leisure. A thriving industry has built up in this
respect, supported by an enthusiastic and loyal customer base.
However, the increasing costs of boating described
above, coupled with the (significantly regulation-driven) increases
in the costs of boat maintenance and operation, are causing a
matching increase in the age of boaters. This is very worrying
for the future of boating. The average boater is now in his 50s
or 60s, and the cohort coming behind is very much smaller.
If the ongoing success of the waterways and
the industry they support is to be ensured, government will have
to find a way to reduce costs to boaters. Such aspects as the
recently-announced increases in navigation charges (to make up
for the recent, abrupt, and unjustified Defra funding cuts), the
loss of red diesel, and the ever-rising "safety" standards
are likely to have very serious effects. The over-regulation of
development of moorings is causing a drastic shortage of supply,
with commensurate significant and ongoing mooring rent increases.
Unfortunately, governments at all levels have
generally shown almost no interest in the damaging effects such
cost increases are causing.
Everyone naturally complains about paying more.
But there comes a time when they are simply unwilling or unable
to pay any longer. If too many boaters are forced to that decision,
the loss of business to the waterways may make them unsustainable,
either financially or politically. That would be a very sad loss,
very similar to that of the goose with the golden eggs.
With respect to freight use, most UK waterways
are simply to small too be economic now except in infrequent unusual
conditions or for special traffics. The French are finding that
even their Freycinet-gauge (350 T barges) waterways are now uneconomic
and their new waterways are being built to 1,250 T gauge or bigger,
so how can the British expect that their sub-100 T broad waterways
(let alone their 25 T narrow ones) can pay?
Nonetheless, BW should be encouraged to continue
seeking out those special freight situations that can be made
to pay, such as carriage of materials to and from the London Olympics
and the recycling traffic in west London. Such traffics can provide
not only income, but also additional interest for visitors. They
also can do so without conflicting with leisure traffic and while
providing significant environmental benefits. However, it would
be unrealistic to expect freight to return to being a major traffic,
or a major source of revenue, for the waterways.
5. RELATIONSHIPS
The management structure of the UK publicly-owned
waterways is arbitrary and has arisen as a result of numerous
unconnected incremental decisions over the years. It badly needs
reform, but entrenched views have prevented this to date.
In particular, the existence of two national
inland navigation authorities (BW and the Environment Agency (EA))
is clearly irrational. The duplication of administration is expensive
and inefficient, while the variation in standards and the separate
systems of navigation charges is annoying and inconvenient to
users.
We would not have two railway authorities, or
two highways agencies. We should not have two national navigation
authorities.
BW is a purpose-designed national navigation
authority. International experience suggests that its model of
an arms-length commercial corporation, running on business principles
but with public financial support, is the best available for this
task. As a result, it is unreasonable to suggest that an all-new
body to replace the existing navigation authorities be created.
On the other hand, EA is peculiarly ill-suited
to be a navigation authority. The Agency is a large body with
the principal purpose of regulation. It is not fit for an operational
purpose. Navigation is a vanishingly small part of EA, and its
interests are too easily trampled under those of the regulatory
parts. EA is limited to annuality accounting (it has been forbidden
the business accounting model of trading status), so it cannot
develop the additional revenue streams available to BW for the
support of navigation, nor hold or develop real estate. It naturally
does not have the long-term management viewpoint essential for
running waterways.
EA argues that flood control on rivers (another
EA function) must be within the same administration as navigation,
for effectiveness. However, BW already successfully runs navigation
on a number of rivers, including such major ones as the Severn
and Trent, without impeding EA's flood management. Under closer
examination, EA's protestations in this area are more like turf
defence and scare tactics than rational argument.
The Government should move soon to transfer
the EA's navigations to BW. This would not only produce early
savings through elimination of duplication; it would allow immediate
termination of the expensive project for new IT to administer
EA's navigation charges. This latter would be especially beneficial,
as it appears that, contrary to government direction, EA is intending
to introduce a system of charges that is fundamentally incompatible
with that of BW.
Such transfers should be accompanied by increases
in BW's real estate endowment sufficient to provide income to
cover the additional expenses BW will take on with its new responsibilities.
This would allow the current annual Government grant to EA for
navigation to be terminated.
CONCLUSION
The UK government keeps failing to get a grip
on the waterways.
It does now seem to have realised the great
value of the network to all parts of the population, but has not
translated that realisation into a recognition that all of the
population needs to pay towards it in a secure and sustainable
manner.
It has understood that there are shortcomings
in the way waterways management is structured, but it has not
been able to bring itself to make the changes needed to unify
and reform this and to get inappropriate players out of the game.
It has made numerous statements about the attractiveness
of navigation and thus its usefulness in encouraging activities
from tourism to regeneration, but it still seems to feel that
boaters are really just a well-off source of income.
The waterways have significant problems. However,
their solutions are all in view. They would not be difficult to
implement. Rather than costing public money, they would actually
reduce cost.
All it really takes is the Government to—get
a grip. Why is it so difficult for that to happen?
Sir Adrian Stott BT
January 2007
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