Further supplementary memorandum submitted
by the Department for Environment, Food and Rural Affairs (BW
47b)
I am pleased to supply further material as requested
relating to the information flows between BW and the department
on the subjects covered in my hearing before your committee on
23 April. I am sorry this has taken a little longer to put together
than you had requested.
I should start by reiterating my central message.
BW have to date received £8.9 million more in grant since
2002 than they were then projecting. And over the period 2002-12
they project that, even on an assumed CSR settlement of 5% real
cuts pa, total revenues would be £30.1 million higher than
they had assumed in 2002.
The latest projections also clearly demonstrate
that despite this the waterways will be in a worse state than
they had projected in 2002 due to a range of changed cost and
investment assumptions: they had thought that category D and E
arrears would be 10% in 2012, but their revised asset management
strategy target puts this at 15% in 2016-17.
This is critical information for the debate
about our waterways, which I felt the committee must have if issues
around the projected condition of the waterways and how this has
come about are to be transparent. The Chairman of BW's letter
to me of 20 April enabled me to set before the committee all the
facts as we now have them.
What I have been seeking from BW is clarity
about all of the reasons for BW's inability to achieve their 2012
target and clarity about how a long term settlement could lead
to a steady state for the network. Ultimately in seeking this
clarity I asked for a specific comparison between projections
undertaken in 2002 and the outturn/current projections—and
it is this that we now have, along with a clear up to date assessment
of the state of the network.
Turning now to the material attached, can I
first point out that we cannot release material related to the
Department's position on the CSR as this is policy in progress—the
settlement is not expected until later this year. Can I also correct
one fact on which I inadvertently slightly misled the committee.
The projection based on a 5% real cut in grant pa was not the
worst case, it was the fourth worst out of five cases. The cases
had been worked up with my officials, but the projection used
in the chairman's letter should not be seen as the CSR settlement:
as I have said such a settlement for Defra has not been agreed
by Treasury and after that the Department has to make its allocations.
However, the committee is, of course, aware that there is going
to be a tight spending review settlement for Defra, and it would
be idle to deny that there are strong pressures the implications
of which we have been fully investigating.
The main document I attach is a letter from
the chief executive of BW, Robin Evans, to Sabine Mosner, the
then head of BW and Environment Agency sponsorship. Whilst I had
been briefed on the CSR discussions which led me to seek clearer
projections to steady state under different scenarios, I had not
seen this letter. It summarises a considerable body of email and
other traffic between our organisations. It shows that the department
was aware of some of the changes in projections regarding the
state of the waterways: I draw the committee's attention to section
8, and to paras 8.3.8 and 8.3.10 in particular. It states:
"Our original target was to have the following
profile by 2012:
Following all our analysis under steady state,
we concluded that we could not afford to reduce D and E assets
to these levels if we are also to keep on top of other major works
of repair and renewal to non principal assets.
Our revised approach is to aim for:
It is important to note that this does not make
clear that the new asset management strategy is to set a target
re D and E condition for 2016-17 rather than 2012, the point which
the chairman's letter of 20 April to me brings to the fore.
The second document is an extract from the note
of my meeting with BW on 27 November 2006. This states "The
Minister asked for clarity on income and expenditure projections
(other than grant) post 2011". The note explains that I asked
"how much of any additional income would be needed for maintenance
rather than being put towards reducing the amount of Government
grant needed in future". What is significant is that BW did
not there and then seek to correct this assumption that income
would exceed that required for ongoing maintenance nor did they
establish that, on the basis of their revised target, such a reduction
in grant-in-aid was impossible.
The third document is an extract of an e-mail
between Defra and BW earlier on 20 April. This clearly shows a
pattern of discussions around my request for "details of
the assumptions lying behind BW's target of 2012 for elimination
of maintenance backlog and achievement of `steady state' as well
as transparency over financial projections". Much confusion
has surrounded the definitions of "maintenance backlog",
"statutory arrears", "safety backlog", "principal
asset arrears", "outstanding work to non principal assets",
and "steady state". From my subsequent discussion with
the Chairman I am now content that there has been no deliberate
attempt to obfuscate; however the effect of the interplay of these
different tools for network appraisal and asset management has
been to obscure the fact that the original 2012 target did not
take account of the need to repair non principal works (see paragraph
4 of the Chairman's letter of 20 April):
"As progress has been made on reducing arrears
other priorities have emerged that have now become a chronic problem.
There are over 11,000 Non Principal Assets (eg weirs, feeders,
culverts, embankments, by-washes etc) that are in a very poor
condition and which fail regularly causing disruption, customer
dissatisfaction and excessive remedial cost. In recent years some
funds that were budgeted for Principal Asset Arrears have had
to be reallocated to deal with these issues..."
And also in paragraph 6 ...
"In addition, there have been asset repair
costs relating to restored canals that were not within the original
Arrears liability."
It is this new Asset Management strategy that
has largely led to the abandonment of the 2012 target of 10% D&E
in favour of 15% D&E by 2016. I do not consider the EFRA Committee
were given clarity about this. Instead the 2012 target was repeatedly
alluded to in both BW's written and oral evidence and the impression
left in the committee's mind that the failure to meet this target
was all as a result of declining income. As we have now established
BW's actual and projected income for the period to 2012 has actually
increased.
It is to the credit of the existing BW management
and board that they have undertaken the reappraisal of the pressures
on the waterways which underpins these figures. They have performed
extremely well in securing the extra commercial income, which
despite projections of falling grant income enable them to achieve
the £30.1 million extra income over the period 2002-12. It
is entirely right in my view that BW uses its assets to generate
income to support the network in this way.
I am happy to reiterate the point I made on
25 April in Westminster Hall: I have full confidence in the management
of BW's business by the chair, board and chief executive.
The Committee already has been supplied with
supplementary evidence relating to changing BW commercial status.
The summary gave three areas where BW is seeking greater freedoms:
— Freedom to borrow commercially.
— Wider development powers so as to
undertake regeneration and development in the vicinity of other
waterways.
I would also like to make clear that the Chief
Executive of BW formally, but unsuccessfully due to timing, asked
Lord Whitty to include provisions for this in the Natural England
and Rural Communities Bill. BW broached the issue with me and
officials met to discuss this on 14 November 2006. I then formally
asked them on 27 November to come back with proposals (see attached
meeting note); they have yet to do this.
Since the EFRA committee I have met with the
Chair of BW on two occasions, once accompanied by their Chief
Executive. We are jointly committed to improving the flow of information
between BW and my department. It would be wrong for ministers
to interfere in commercial matters, or the day to day operation
of the network. But strategic choices need to be clearly presented
to ministers as options with supporting evidence (eg spend priorities
on major works, growing commercial business for the future, customer
service improvements etc). In particular decisions about allocation
of additional commercial income should be guided by ministers
judgement. It may be right to reinvest this into further property
development to achieve a revenue stream at a later date. But this
money could also be invested into maintenance and arrears of major
works to achieve steady state earlier than would otherwise occur.
The choice should be subject to ministerial discretion.
Barry Gardiner MP
Parliamentary Secretary (Commons) (Biodiversity,
Landscape and Rural Affairs)
Department for Environment, Food and Rural Affairs
May 2007
DOCUMENTS FOR RELEASE TO EFRA COMMITTEE
(A) Extract of Email from Defra to BW—20
April 2007.
(B) BW Chairman's letter to the Minister
of 11 April. Commercial in confidence.1[7]
(C) BW Presentation at Quarterly Shareholder
Meeting on 26 February 2007—Board and Shareholder Business
Performance Report Ten Months to 31 January 2007 and F10 Forecast.
Commercial in confidence.2[8]
(D) BW Chief Executive letter to Defra of
9 February 2007.
(E) Asset Condition Schedule based on grant
funding scenarios sent from the BW Chief Executive to Defra on
19 January 2007.3[9]
(F) BW Chief Executive letter of 22 December
2006 to Defra. (Annexes—Commercial in confidence4[10]).
(G) Extract from BW Meeting with the Minister
on 27 November 2006.
(H) Commercial Freedoms—Extract from
BW meeting with Defra officials on 14 November 2006.
(I) Extract of Email from BW Chief Executive
to Defra of 14 August 2006.
(J) BW Comprehensive Spending Review 2008-09
to 2010-11 2006 [31 July] submission. (Annexes—commercial
in confidence5[11])
(K) Extract from Minutes of Quarterly Shareholder
Meeting on 22 June 2006.
(L) Answer to a written question to Defra
from the Committee.
7 Not printed. Back
8
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9
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10
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11
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