Further supplementary memorandum submitted
by British Waterways (BW 11d)
OVERVIEW
BW is concerned that the information provided
to the sub-committee on 23 April 2007 has caused confusion. It
surprised us as we had spent the last nine to 12 months engaging
with the Department about the long term funding needs of BW. It
recognises that the figures related to this subject are complex
and that we must clearly renew our efforts to explain them to
the Department.
The Minister raised a number of points—they
are answered in detail below, via our answers to the Committee's
questions. However, in essence he raised three main issues that
need to be clearly addressed at the outset:
A) BW was not transparent—a process
demonstrated by its failure to respond to his repeated requests
until 20 April 2007. (eg Q429 or Q432)
The Minister wanted a very specific comparison
with our 2002 10 year plan. His detailed request for this was
made on 16 April 2007 and BW provided the information on 20 April
2007 in the Chairman's letter to the Minister. See answer to Question
1 below.
The Minister appeared to believe that the data
provided on 20 April contained:
— information relating to elimination
of arrears and "steady state" previously unknown to
him or the Department. The Department was in fact aware of this
information—see summary B below and answers in detail to
Question 10. Documented discussion of these issues with the Department
goes back at least to 22 June 2006.
— information showing that BW had in
the past had more income than expected and would also do so in
the period to 2012 thereby making the current grant cuts and any
future ones irrelevant. This is not a helpful interpretation of
the figures. See summary C below and answer in detail to Question
4.
B) BW got its projections about the future
state of the network wrong (Q433) and the network is in a worse
state than BW originally admitted (Q439)
This statement seems to arise from the belief
that "elimination of arrears by 2012" (ie no more than
10% principal assets in condition D and E) and achieving "steady
state" are the same thing. They are not and BW has never
claimed they are. Question 10 documents the discussions with the
Department explaining this since June 2006—the discussions
included a meeting with the Minister on 27 November 2006, as well
as a subsequent fully documented CSR bid on 22 December 2006.
This is important because the Minister seemed
to believe that this constituted a revelation of a hitherto unknown
deterioration of the state of the network. It does not.
Quite simply, in 2002 BW used the arrears of
maintenance on principal assets as its yardstick for assessing
the condition of the system. The measure had served it well since
the mid 1990s.
From 2004, in keeping with developing best practice
in asset management, BW began to develop a more holistic approach
known as "steady state". Ongoing discussions to explain
the changes were held with the Department throughout. The Department
was formally aware of this at least from 22 June 2006, as BW prepared
to integrate the "steady state" model into its business
planning for the period 2007-08 to 2010-11.
Use of the "steady state" model led
BW to recommend a different profile of principal assets in condition
D&E (15% by 2016). This is a new judgment, based on better
information than available in 2002, representing in our view better
value for the taxpayer. We are concerned that this has been represented
as a worsening in condition of the system. It is not.
C) BW had had in the past more income than
expected and would also do so in the period to 2012 thereby making
the current grant cuts and any future ones irrelevant. (eg Q433)
To make sense of the comparison, it is necessary
to divide the period 2002-12 into two parts—the past (that
money is after all now spent on agreed projects) and the future
ie 2007-08 to 2010-11. The full answer is in our response to Question
4, but the summary position is:
2002-03 to 2006-07
BW delivered £61.6 million more commercial
income during this period than planned in 2002 (see table in response
to the committee's question 4)—an excellent result.
BW is obliged by law to balance its income and
expenditure and so this additional income plus additional grant
of £8.9 million (from Scottish Executive) was spent (see
table in response to committee's question 4) over the same period.
The pros and cons of spending more on arrears during this period
were fully discussed with the Department and Ministers at the
time. All agreed we had the balance right.
The main areas in which the money was used were:
— costs to support new business developments
(£24.8 million);
— investment to reduce long term costs
eg redundancy payments (£10.6 million);
— increased pension costs as a result
of actuarial valuation (£7 million);
— accelerated investment in arrears
with safety concerns (£7.4 million);
— spend on other assets and general
repairs and maintenance (£4.5 million); and
— spend on waterway customer service
improvements eg sanitary stations, water points etc. (£7.1
million).
This excellent performance left BW with
an expanded network, a safety related backlog eliminated on time
(April 2004) and also at 31 March 2007 the backlog of arrears
reduced to £107 million (latest estimate—see answer
to Committee question 9 just about exactly on the target of £110
million set out in our 2001-02 Annual Report and Accounts.
2007-08 to 2010-11
Looking forward, we do not recognise the figure
suggested of an additional £10 million income in this period.
We estimate it will be higher at £15.2 million. See table
in answer to committee question 4.
However despite this improvement in income,
if an assumption of a decline in grant from its already substantially
reduced level is made by the much-discussed RPI -5% (a figure
the Department encouraged us to use for planning purposes), we
believe that despite reducing our operating costs and expenditure
on the waterways by £52.9 million compared with the 2002
10 year plan, there will be a net shortfall of £44.9 million
in necessary expenditure over the period 2007-08 to 2010-11. It
is not appropriate to assess total expenditure over the whole
ten year period because the expenditure before 2007-08 is now
made and cannot be redirected to future deficit, even if, with
hindsight, the Government now wished to do so.
This projected shortfall will not cause immediate
crisis, but the positive gradual elimination of the consequences
of thirty plus years of severe underinvestment will halt and we
will be returning to old-style gradual and at first imperceptible
decline. The Board believes it is responsible to make this clear
to Defra. Although it is complicated, we know it concerns many
of our stakeholders who have been delighted with the hard-won
positive improvements of the past 10 years.
DETAILED ANSWERS
TO COMMITTEE
QUESTIONS
In the oral evidence session on 23 April, Barry
Gardiner MP provided the Sub-committee with a set of figures he
received from British Waterways on 20 April.
1. Bearing in mind the Minister's comments
on 23 April, could British Waterways provide its own interpretation
of the figures it sent to the Minister on 20 April?
The request for the 2002 10 year Plan comparison
was first received by BW on 16 April 2006 and the figures were
provided the same week on 20 April.
The only previous request came from Martin Hurst,
a senior civil servant, to the BW Chairman on 6 March 2007. We
provided these figures in a letter to the Minister on 11 April
2007.
BW has been fully transparent with Defra in
its provision of financial and management information. The detail
relating to the figures is explained in the following questions.
BW has changed its asset management strategy and deferred the
Arrears target of 2012 because it believes best value can be obtained
by a new "steady state" approach which involves diverting
some funds from Arrears towards non-principal assets.
BW could still achieve the 2012 Arrears target
under current funding circumstances but at the expense of proper
maintenance of all the network using the "steady state"
model.
See also our answer to Summary point C above.
2. Please provide a breakdown of the "Operating
and admin costs" row in the table, from 2006-07 onwards,
by: (a) operating costs; (b) organisational running costs; and
(c) works. Please provide this breakdown for both the planned
(ie 2002 Plan) and the actual accounts/forecasts
The schedule below provides an analysis of the
actual operating costs over the nine years from 2002-03 to 2010-11.
There have been many changes to the reporting structures during
that period which makes explanation at a more detailed level impossible.
The 2002 Plan for the Future was a high level
forecast and the operating costs are not broken down in sufficient
detail to enable any meaningful comparisons.
With regard to future operating costs, a detailed
analysis of operating costs and costs by business areas is provided
in the BW Corporate Plan 07/08 to 10/11 below.
|
| Analysis of Operating Costs £000s
|
| 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 | 2010-11
|
|
| Property | 7,188
| 7,687 | 9,811
| 9,973 | 8,930
| 8,106 | 7,582
| 7,575 | 7,669
|
| Leisure | 8,799
| 9,998 | 7,332
| 6,537 | 7,098
| 7,452 | 7,046
| 7,259 | 7,415
|
| Core Waterway (inc major Works) | 129,741
| 136,246 | 116,623
| 110,851 | 102,583
| 106,513 | 100,957
| 106,335 | 111,323
|
| Other | 30,590
| 32,230 | 40,176
| 44,486 | 49,935
| 51,778 | 52,696
| 54,646 | 55,098
|
| Operating costs excluding R&R* |
176,318 | 186,161
| 173,942 | 171,847
| 168,545 | 173,848
| 168,281 | 175,815
| 181,505 |
| Regeneration and restoration | 33,782
| 19,080 | 5,777
| 13,527 | 22,032
| 63,516 | 41,563
| 11,191 | 11,922
|
| Total operating costs | 210,100
| 205,241 | 179,719
| 185,374 | 190,577
| 237,364 | 209,844
| 187,006 | 193,427
|
| Deduct contingency | |
| | | | 3,000
| 3,000 | 3,762
| 3,632 |
| As per BW Business Plan 2007-11 |
| | | |
| 234,364 | 206,844
| 183,244 | 189,795
|
|
* per the schedule provided to the Minster
With regard to future operating costs, a detailed analysis
of operating costs and costs by business areas is provided in
the BW Corporate Plan 2007-08 to 2010-11 below.
3. How does capital expenditure fit into the table?
The schedule shows revenue income and expenditure and therefore
does not include capital expenditure.
Waterways expenditure, both general works and major works
(including Arrears) is treated as a revenue expense and fully
written off to Profit and Loss accounts as incurred. These treatments
have been standard accounting practice in BW for many years and
are in accordance with UK GAAP and IFRS.
BW separates capital cash flows from revenue cash flows and
has separate bank accounts for each. Capital cash flows are primarily
concerned with our commercial interests in particular property
investments and disposals and joint venture activities. Property
net rental income and dividends from joint ventures are treated
as revenue income.
4. Does British Waterways acknowledge that—even with
an assumption of RPI -5% over the Comprehensive Spending Review
(CSR) 08 period—it has received £30.1 million more
than forecast (in 2002) over the 10year period in the table, and
is estimated to receive about £10 million more than forecast
between 2006-07 and 2010-11?
The figures quoted in the above question are taken from the
schedule supplied by BW to the minister on the 20 April. The figure
of £30.1m million is the net of £78m of additional commercial
income and £48m less grant over the 10 year period. The figure
of £10m is not readily obvious from the table—we believe
the correct figure is higher—£15.2m. For the purpose
of separating the history from the future, the table below summarises
the income and expenditure figures from 2002-03 to 2006-07 and
from 2007-08 to 2010-11.
SUMMARY OF VARIANCES FROM 2002 PLAN FOR THE FUTURE
Period 2002-03 to 2006-07—the past
In summary commercial income exceeded the 2002 Plan for the
Future by £61.6m, a remarkable performance, which together
with additional grant income of £8.9m totals extra income
of £70.5m over the five year period.
There were of course additional costs totalling £25m
incurred in achieving this income and supporting new business
developments. We also invested £10m to reduce long term costs,
for example redundancies that were not envisaged in 2002. A further
£7m was spent on pension costs resulting from actuarial changes
in life expectancy.
Some £19m was spent on the waterways as follows:
— an additional £7.4m reducing the safety related
backlog of arrears
— £4.5m on other repairs and maintenance
— £7.1m on waterway services enhancements.
These variances in commercial income and operating expenditure
are summarised in broad terms in the table below.
|
| | |
| | F10F/cast
| |
| *2002-03
| 2003-04 | 2004-05
| 2005-06 | **2006-07
| Total
2002-07
|
|
Analysis of Income variance
(approx) £m
|
| Ventures income | 2.4
| 1.0 | 2.9
| 5.8 | 0.1
| 12.2 |
| Investment property income | 4.0
| 2.7 | 2.4
| 1.9 | 2.2
| 13.2 |
Severn Trent Water Discharge
Income
| 8.0 | 4.0
| 4.0 | 2.9
| 5.5 | 24.4
|
| BWML Income | |
| 4.9 | 5.7
| 1.3 | 11.9
|
| Other | (0.1)
| 0.2 | (0.1)
| (0.1) | |
(0.1) |
| 14.3 |
7.9 | 14.1
| 16.2 | 9.1
| 61.6 |
|
| Analysis of Expenditure variance (approx) £m
|
Customer service
improvements
| | 5.1 |
2.0 | |
| 7.1 |
| Business reorganisation costs |
| 5.0 |
| | 5.6 |
10.6 |
Liverpool Docks operating
costs
| 1.1 | 1.1
| 1.1 | 1.1
| 1.1 | 5.5
|
Costs to support new business
developments
| | 4.3 |
7.9 | 6.6
| 6.0 | 24.8
|
Cost reductions and special
factors 2006-07
| | | |
| (4.0) | (4.0)
|
| Safety backlog | 5.6
| 1.8 | |
| | 7.4
|
Other asset repairs and
maintenance
| (2.6) | 3.9
| 6.0 | 3.6
| (6.4) | 4.5
|
| Pension fund deficit payments |
| | 2.3
| 2.3 | 2.4
| 7.0 |
| Other | (0.2)
| 0.4 | 1.0
| (0.5) | (0.1)
| 0.6 |
| 3.9 | 21.6
| 20.3 | 13.1
| 4.6 | 63.5
|
|
Period 2007-08 to 2010-11—the future
Looking forward the additional commercial income of £15.2
million is negated by grant reductions of £56.7 million to
result in a net adverse variance against the 2002 Plan of £41.5
million less income overall. This reduction includes additional
commitments to future restoration and regeneration projects which
have a forecast net cost of £8 million greater than the 2002
Plan. Taking these together, operating costs are forecast to be
£52.9 million lower than forecast in the 2002 Plan. These
operating cost reductions include some efficiencies but also means
lower spend on maintenance and major works on the waterways.
5. What explains the predicted £25 million increase
in earned commercial income between 2006-07 and 2010-11, compared
with the amount forecast?
The positive variance arises because, like any commercial
company, BW seeks continually to improve its performance and it
would be surprising of our current assessment for the years 2006-07
onwards did not differ from the forecast in 2002.
The table below provides a high level analysis of the commercial
income variance of £24.3 million between the latest Business
Plan and the 2002 Plan for the five years to 2010-11.
|
| | |
| | F10F/cast
| |
| 2006-07
| 2007-08 | 2008-09
| 2009-10 | 2010-11
| Total 2006-11 |
|
| Analysis of Income variance (approx) £m
| | | |
| | |
| Ventures income | 0.1
| 0.1 | (2.0)
| (0.8) | 6.9
| 4.3 |
| Investment property income | 2.2
| 2.9 | (1.1)
| (1.3) | 0.3
| 3.0 |
| Utility and other discharge income | 5.5
| 7.2 | 6.9
| 6.7 | 6.9
| 33.3 |
| BWML income | 1.3
| 2.1 | 2.7
| 3.4 | 4.1
| 13.6 |
| Consultancy | | (1.0)
| (1.7) | (1.8)
| (1.7) | (6.2)
|
| Retail | | (1.8)
| (1.8) | (1.9)
| (1.9) | (7.4)
|
| Freight | | (1.4)
| (1.5) | (1.5)
| (1.6) | (6.0)
|
| Other | | (0.1)
| (2.9) | (3.5)
| (3.9) | (10.3)
|
| 9.1 | 8.1
| (1.3) | (0.7)
| 9.1 | 24.3
|
|
6. How much of the expected earned commercial income
from 2007-08 onwards will be generated through measures taken
in direct response to the expected lower grant levels over the
CSR 07 period (eg increased license fees)?
BW's plan was prepared on the basis that it would always
strive to optimise earned income from all sources. Therefore the
reduction in grant had minimal effect on our earned revenue projections.
The only specific change to BW's planned commercial income
forecast that has arisen as a direct result of the grant cuts
is the proposal to increase boat licence fees by 30% in real terms
phase in over three years from April 2008.
In oral evidence to the Sub-committee, British Waterways
said:
"our vision is to be increasingly self-sufficient...
in an ideal world... …in 2012 we would like to have only
25% of our money coming from the Government... How do we get to
that 25%?... firstly... we get rid of the backlog and we stop
having these very expensive assets which are in poor repair to
put right"
7. Can British Waterways confirm that its intention
to become "largely self-sufficient"—and operate
on a "Steady State" basis—by 2012 will now not
be met? Can British Waterways confirm that it now aims to achieve
Steady State status by 2016?
See Summary point B above. This question repeats the confusion
that elimination of arrears by 2012 and "steady state"
are the same. They are not.
This question brings together three related but different
topics. Please refer to our previously submitted paper Network
and Asset Management for a detailed explanation of "Steady
State" and "Arrears" (ref. Sections 3 and 4). We
explain each in turn.
LARGELY SELF
SUFFICIENT
It is BW's intention to become largely self sufficient.
The phrase "largely self sufficient" is a relative
term so it means that the proportion of grant funding should become
a smaller percentage of total income over time. Hence the comment
that, "in an ideal world… in 2012 we would like to have
only 25% of our money coming from Government."
Generally, the 25% target can only be achieved if BW can grow
commercial income at a faster rate than the growth in operating
costs.
Our Plan for the period 2007-08 to 2010-11 sees self sufficiency
increase with government grant decreasing from 44% of income in
2006-07 to 36% in 2010-11.(It was 60% in 2002).
BW has set stretching targets for commercial income growth.
In our Plan for the period 2006-07 to 2010-11 commercial income
grows by 29% from £88 million to £114 million. The strategy
includes the growth of joint ventures to maximise returns from
the development for its property assets. All available sources
of commercial income are being sought from the waterways and the
estate is managed in the most commercial manner possible, as is
consistent with BW's values and standards. The Plan also includes
a 30% plus inflation increase in boat licence prices spread over
three years.
Reducing costs and operating more efficiently will also help
to achieve greater self sufficiency.
Operating expenditure comprises routine waterway maintenance,
expenditure on Major Works as well as routine administration and
management costs. We have already delivered phase 1 of a continual
efficiency programme to reduce costs. Circa 150 staff left BW
in 2006-07 which will yield an annual payroll saving of around
£5 million from 2007-08 onwards. Further reorganisation of
the Business Units (particularly the operational bank staff) now
underway will yield more efficiency savings and these are built
into our Plan for 2007-08 to 2010-11.
STEADY STATE
The term Steady State should not be confused with either
the original 2012 target for the elimination of Arrears nor the
"largely self sufficient" aspiration. It is a new model
which BW has developed progressively since 2004. It allows BW
to assess the ideal spend on the waterways taking account of a
wider range of assets than simply the principal assets included
in the original 2012 arrears target.
Steady State is the estimated cost of maintaining the waterways
in a constant condition under a planned maintenance regime. It
assumes that there are no longer arrears of any type. BW's current
estimate of the Steady State budget is £124 million per annum
at 2006-07 prices. The Steady State concept has been developed
over the last three years but only fully integrated into our planning
for 2007-08 and beyond in the current CSR discussion. The latest
BW business plan does not achieve Steady State at any point. Based
on the levels of funding available in the Plan, general maintenance
has been planned at 85% of the Steady State budget and major works
expenditure has been planned at 80% of the Steady State budget.
The consequence of this is that the general maintenance standards
of the waterways remain below the desired customer service standards
and that all the major assets are in gradual decline. The longer
term projections show that there is not sufficient funding or
commercial income to achieve Steady State at any point in the
foreseeable future, which includes 2016 and beyond.
THE 2012 ARREARS
ELIMINATION TARGET
The 2012 Arrears elimination target was an estimate of the
cost to bring the percentage of principal assets with condition
grade D&E from around 30% in 2002 to 10% by 2012. At the time
it was made (2002) principal assets were still seen as the priority
for repair. The steady state model has now replaced this target
in our thinking.
Arrears are a tightly defined group of Principal Assets that
have significant operational implications or high consequences
of failure. The term Arrears specifically excludes all other non
principal assets and other major liabilities.
The achievement of the 2012 Arrears target will not achieve
Steady State and will not make BW largely self sufficient.
Based on the assumed level of funding and income, BW has
reassessed its arrears elimination strategy and redefined the
target as the number of assets in D&E condition of no greater
than 15%. The projections show that this may be achieved by 2016.
This does not mean that the state of the waterways has in any
way worsened, simply that with a more sophisticated assessment
technique than was available in 2002 and in order to achieve best
value, BW is now recommending that the available money be spent
in a different way ie with some greater spend on Non-principal
assets and slightly less spend on arrears of principal assets.
8. Is the current maintenance back-log £97 million
or £107 million?
The figure of £97 million given in BW's submission to
the Committee was the figure we had planned to achieve when we
created the business plan for 2006-07.
The figure of around £107m provided to the Minister
on 20 April was BW's latest estimate based on year end asset management
assessment, a process explained below. It should be noted that
if the figure is confirmed at £107 million, it will be very
close to the target set for 2006-7 in our Annual Report &
Accounts for 2001-02—see also answer to Committee question
9.
Each year following the year end BW re-assesses the arrears
based on an analysis of the actual impact of the works carried
out in year, an adjustment for continuing asset deterioration,
additional assets, and an assessment of construction cost inflation.
This is done by our asset management teams and takes some time.
Indeed the exercise is not yet complete and the estimate is still
subject to change.
This is a process we follow every year prior to the finalisation
of our Annual Report and Accounts.
The asset management assessment is normally different from
the expenditure shown in the management accounts. This is because
all the costs allocated to a project involving a principal asset
will not necessarily be associated with improving its condition
grade. An example would be a project to refurbish a lock. The
costs associated with the structure itself are those which are
truly associated with the arrears as it is the structural condition
which is important. More money may be spent on non structural
issues for good sensible value for money reasons. For example
the lock approaches may be improved and some additional mooring
points added. These latter costs are properly posted through the
management accounts against the project, but do not finally impact
on the arrears backlog.
When BW provided the £97m figure to the Committee, we
were aware that, due to our broader asset management approach,
grant cuts, and emergency works arising in the year such as two
canal breaches, we were expecting to spend less than originally
planned on our principal assets (arrears). We therefore checked
the best information we had at that time—our forecast spend
on Arrears at that time. Our management accounts forecast predicted
a year end spend on arrears of £22 million. Since the outstanding
Arrears at the start of 2006-07 was £119 million, this seemed
to confirm that the £97 million was a reasonable out-turn
figure.
What we were not able to do at that time was make the assessment
of the split of expenditure from a strictly asset management view.
In the run up to the year end we are extremely busy in actually
completing projects and working hard to have the network available
for the new cruising season. There were 91 major works projects
that both started and were completed in the financial year 2006-07.
However, many projects run over two or three financial years.
The total number of projects that had an expenditure greater than
£20,000 during 2006-07 was 190.
The difference between our management accounts and our asset
management assessment is larger than normal this year. This largely
arises from our progressive shift of spending almost exclusively
on arrears in the past to a broader range of projects under the
general heading of major works.
The headline arrears figure is now less important to us under
steady state than the annual major works expenditure.
9. Why was £25 million not spent in 2006-07 on
the maintenance arrears back-log as expected, and why? How much
was spent on the back-log during this period?
In our 2006-07 Business Plan we planned to spend a total
of £25.4 million (excluding externally funded works) on Arrears
and other Major Works, £25.2 million of which was allocated
to Arrears.
The estimated final expenditure on Arrears and other Major
Works is £22 million (excluding externally funded works),
of which around £15.5 million was spent on Arrears.
The overall reduction in expenditure results firstly from
our decision to defer £5.6 million of expenditure as a response
to the grant cuts made by Defra in late 2005-06 and "in year"
in 2006-07. With such short notice, this is the only significant
change in expenditure BW can make. Due to our success in earning
more commercial income than expected, we were able late in the
year, to allocate £2.2 million back into Arrears and Major
Works, resulting in a final overall reduction of £3.4 million.
The reduction in Arrears spending of around £9.9 million
is greater than the overall reduction in expenditure for a number
of reasons.
The first reason is that as a result of the move during the
year to a broader approach looking at all our assets, principal
and non principal, we decided to reduce the amount of expenditure
on arrears and allocate some funding to projects involving non
principal assets. This amount is estimated to be around £2.2
million.
The second reason is that during the year we also allocated
funds to some of our reservoirs to complete works which were required
as a result of inspections by Independent Statutory Reservoir
Engineers. These works were required under the Reservoirs Act
1974 . The cost of these works was £2.8 million.
The third reason is that we had some asset failures and emergency
works during the year which required funds totaling around £1.5
million.
In our 2001-02 Annual Report we predicted that the outstanding
Arrears liability at March 2007 would be in the region of £110
million. We expect the current figure, once we have completed
the year end assessments, to be in the region of £110 million.
This shows that despite our decision to reduce spending on arrears
in the last year we are actually on plan re the original 2012
target. It is our clearly stated intention to take a different
approach from now on looking at all our assets together while
ensuring public safety.
10. When did British Waterways first confirm to the
Department that it would not meet its 2012 maintenance arrears
target, and what did it say were the reasons for this? Did British
Waterways previously tell Defra about the need to take account
of new non-principal assets? If so, when?
(a) June 2006 Quarterly Shareholder Meeting
The first recorded mention of 2012 Arrears target not being
met was in the minutes of a Quarterly Shareholder Meeting with
Defra and the Shareholder Executive on 22 June 2006. Paragraph
7 of those minutes records that "The current level of grant
(pre-any cuts) would lead to a `steady state' but any reduction
would mean that the target date of 2012 for the elimination of
the statutory maintenance arrears would not be achievable, with
knock on consequences for steady state."
(b) July 2006 CSR07 Submission
BW submitted its first CSR07 paper in late July 2006. That
paper included an explanation of the new Steady State approach.
Annex D to that paper includes a detailed description of Steady
State, Customer Standards and the new Asset Management Strategy
and notes in section 1.4 that:
"To date we concentrated on our Arrears programme,
on dredging and on lock gate replacement. We believe that the
risks posed by our principal assets allow us to move away from
the concept of Arrears. We have a backlog of non arrears major
works required on our infrastructure. We need to balance this
demand against our previous determination to focus on Arrears.
It is now our view that we should consider both aspects as a single
issue."
Section 1.4 goes on to provide greater detail.
The CSR07 submission was discussed in subsequent correspondence
and telephone conferences and is evidenced by an email from Robin
Evans to Sabine Mosner (the senior official in the Department
then responsible for British Waterways) dated 14th August 2006
which includes the statement:
"Our submission suggests that it is wrong to seek
elimination of arrears before tackling other major works. Now
that the worst arrears projects have been dealt with, it is more
sustainable to look at principal assets and other major works
together and prioritise using our business criticality index."
(c) November 2006 Briefing to Minister
On 27 November 2006, The BW Chairman and Chief Executive
met the Minister and (amongst other things) explained the "steady
state" and major works concept and the forward funding issues
that arose. This was a prelude to BW's second CSR submission—see
below.
(d) December 2006 CSR07 submission
BWs second CSR submission was made on 22nd December 2006
by letter and supporting schedules to Sabine Mosner. This is a
comprehensive document and includes clear references to major
works underspends in the Summary and in section 8, particularly
paragraph 8.3.9 which says,
"Following our analysis under Steady State, we concluded
that we could not afford to reduce D and E assets to these levels
[8% plus 2%] if we are also to keep on top of other major works
of repair and renewal to non principal assets."
Paragraph 8.3.10 also clarifies that the revised approach
is to aim for D assets of 12% and E assets of 3%. Annex J to that
letter shows Arrears expenditure profiles extending out to 2015-16.
(e) January 2007 Arrears schedules
BW submitted a schedule of planned arrears expenditure and
principal asset condition profiles to Sabine Mosner on the 19
January 2007. The schedule shows that the 2012 target will not
be met and that by 2015-2016 15% of Principal Assets will be in
condition D&E.
(f) February 2007 Capital grant submission
BW submitted a letter to Sabine Mosner on 9 February 2007
in respect of an application for a further capital grant allocation
from Defra. The letter explains again the new Asset Management
Strategy. In particular paragraph 4.3 states:
"Our original asset management target was to have
no more than 8% in condition D and 2% in condition E by 2012."
and paragraph 4.4 states:
"Following all our analysis under the reduced funding
scenarios proposed in CSR07, we have concluded that BW will not
be able to afford to reduce D and E assets to the levels in 4.3
above."
Paragraph 4.5 goes on to explain that BW's revised approach
is to aim for 12% in condition D and 3% in condition E by the
time all repair arrears have been eliminated.
In addition to the above documentary evidence there have
been extensive discussions of these subjects in meetings between
Defra, the Shareholder Executive and BW.
(g) March 2007 EFRA Committee submission
BW submitted a paper to EFRA Committee on 8 March 2007 titled
Network and Asset Management.[1]
This clearly sets out the relationship between Principal Assets,
Non Principal Assets, Arrears and Steady State.
In paragraph 4.7 it states, "Because we have tackled
the worst of the Principal Asset arrears, we believe we can now
reduce our targets for reduction of arrears and reallocate funds
to non-principal assets and day to day maintenance".
In paragraph 4.8 it states, "Our previous target of
removing outstanding arrears by 2012 will, therefore, not now
be met."
11. When did British Waterways first inform the Department
about the new 2016 maintenance arrears target date?
See above answer.
12. How significant were (a) funding pressures (b)
non-principal assets and (c) other factors in the decision to
move back the maintenance arrears target by 2016? Please quantify
each factor by cost.
As explained in the answer to Question 10 and in the paper
titled Network and Asset Management, the decision to plan
to change the arrears target was the result of a reassessment
of how to obtain best value for money in maintaining the whole
of the network.
The revised targets are clearly influenced by the level of
grant we receive as the more resources available to us the more
major works we can undertake.
It is important to recognise that if it wished BW could still
achieve the original 2012 target of 8% D and 2% E. We just do
not consider this to deliver best value for our customers and
stakeholders.
In oral evidence to the Sub-committee, the Minister said:
"...every time [British Waterways] expanded the network...
there were new principal assets which they had to maintain and
the maintenance of those had not been factored into the [Asset
Management] programme; a very simple error in the calculations".
13. How many new principal assets have been added
by restoration of the network since 2002?
As restorations or additions to the network are completed
the assets are added to the asset management system. The principal
assets are graded and any in condition D and E would be considered
in the year end assessment of the outstanding arrears. The new
or restored canals are also added to our Steady State cost model,
but as previously explained, the model assumes that the additions
have no backlogs of maintenance.
Therefore, the year end arrears figure (see answers to Q8
and Q9 above) will include all the restorations or additions except
the Stroudwater Canal (Cotswolds). Our Steady State estimate of
£124 million per annum also includes all except the Stroudwater.
The Minister's assertion (Q453) that the principal assets
arising from restorations are not included in BW figures is therefore
not correct.
Not all restorations add significantly to principal asset
numbers. The restoration of the Lowland Canals in Scotland and
the Huddersfield Narrow Canal in England, for example, were largely
already included within our asset register before restoration
because we already owned and managed them albeit in a non navigable
state. Some new assets were added where new structures or new
lengths of canal were built, but most existing assets were improved
or brought back into active use. The number of new assets added
in these type of restorations, all in condition A or B, was 44.
Some restorations did add additional assets some of which
were in condition D or E. The Rochdale Canal is the major example.
The total number of principal assets added was 216 of which 48
are in condition D or E, and 19 are currently ungraded.
BW has not yet fully assessed the asset grades on the Stroudwater
Canal which is subject to a current restoration project as the
grades will change through restoration.
In total we estimate (assuming the 19 ungraded assets to
be in categories D or E) that the restorations have added 68 assets
in category D or E—approximately 0.6% of all principal assets.
14. How do you react to the Minister's comments that
British Waterways has not been "transparent about their own
failure to properly assess the needs of the network"?
There has been no "failure to properly assess the needs
of the network". The answers to the question above and the
documents supplied to the Committee and referred to support this.
15. What formal reporting system is in place between
the Department and British Waterways? What is reported as part
of this system, and how often? What discussions regularly take
place as a result?
A new formal reporting system was put in place this year
under a revised Financial Memorandum. Annex C&D of the Financial
Memorandum is attached that sets out what reports are made and
when. Prior to this arrangement, the following arrangements were
in place:
— Quarterly Meetings between Chairman, Chief
Executive and Finance Director of BW with Defra and Shareholder
Executive—reporting on latest P&L position against plan,
network condition and current issues.
— Half yearly Estates Liaison Meetings between
BW (Commercial Director), Defra, Shareholder Executive and DCLG—comprehensive
update on property activities including full financial reporting
against plan.
— Submission of three yearly Corporate Plan
after Board approval in March each year.
— On average two meetings per annum with Minister
to report on end of year achievement and future plans.
— On average a diaried phone conversation between
BW Chief Executive and Defra once per week to cover any current
issues or information requirements.
16.
|
| Actuals/Business Plan 2007-08—2010-11
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 | 2010-11
|
|
| Net Interest | (1,052)
| (1,337) | (2,107)
| (1,998) | (2,208)
| (2,187) |
| CBT—Revenue after Contingency | 3,890
| (390) | (2,085)
| (3,006) | —
| — |
| CBT—Revenue after Contingency Check |
| | |
| | |
| Revenue after Contingency Check | 3,890
| (390) | (2,085)
| (3,006) | —
| — |
|
Please explain the significance of the above figures in
the table.
The figures in the above table were workings originally included
by the creator of the spreadsheet to ensure that the figures provided
to the Committee balanced correctly by reference to our management
accounts. The figures in the table provided to the Minister show
the net operating profit before interest. The figures above provide
a link to the figures in the management accounts and business
plan as shown in the table below. They were "workings"
rather than part of the final information. If you have further
questions please let us know.
|
| £000s | 2005-05
Actual
| 2006-07
F10
forecast
| 2007-08
Plan |
2008-09
Plan | 2009-10
Plan
| 2010-11
Plan |
|
| CBIT before contigency | 4,942
| 1,947 | 3,022
| 1,992 | 5,967
| 5,826 |
| Contingency in F10 forecast and Business Plan
| | (1,000) |
(3,000) | (3,000)
| (3,759) | (3,639)
|
|
| Actual CBIT shown in the Minister's table
| 4,942 | 947
| 22 | (1,008)
| 2,208 | 2,187
|
| Net interest payable | (1,052)
| (1,337) | (2,107)
| (1,998) | (2,208)
| (2,187) |
|
| Profit before tax | 3,890
| (390) | (2,085)
| (3,006) | 0
| 0 |
|
CBIT means Contribution before tax and interest
Contingencies are included in Forecasts and Business Plans
to allow for forecasting errors and unknown events.
SUPPLEMENTARY POINT
The Department provided a supplementary memorandum to the
Committee at its session on 23 April. It was produced without
checking with BW. Unfortunately, it therefore contains the erroneous
assertion that BW (along with IWA) held a meeting with Ed Balls
to discuss greater commercial freedoms for BW on 3 November 2006.
The memo implies that BW took this action "behind the Department's
back."
The Chair of IWA did indeed have a chance to discuss his
organisation's view on future funding, including greater commercial
freedom, when he sat next to Ed Balls at a strategy launch by
the Barnsley, Dearne and Dove Canal Society on 3 November 2006.
However, although local BW junior staff were also at the event,
they were not party to the IWA discussion with Ed Balls and the
event was not a meeting to discuss BW. The IWA Chair is prepared
to confirm this if the Committee so requires.
British Waterways
May 2007
1
Ev 74. Back
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