Select Committee on Environment, Food and Rural Affairs Eighth Report


2  BW's relationship with Defra and other Government departments

The new "Strategic Steer" from Defra to BW and the "Deal" between them

16.  Last year we expressed concern about BW's tense relationship with Defra after Barry Gardiner MP, the then Minister for Biodiversity, Landscape and Rural Affairs, strongly criticised the actions of senior British Waterways management on two occasions, including for a lack of transparency with the Department and for not providing information he had requested. Although we believed that BW had provided information to Defra, we did not think it had done so clearly enough. We concluded that communication between Defra and BW had to be improved, and that the appointment of a new Minister was an opportunity for a fresh start in this relationship.

17.  The Committee's recommendations appear to have had beneficial effects. BW said that there had been a "real improvement" in their relations:

The improved relationship between Defra officials and ministers and BW, which the Committee recommended in its last enquiry, has come about and the clarity of the Department's guidance is of great assistance to the BW Board and senior management team in reaching decisions on competing priorities.[7]

This improvement has partly been as a result of BW obtaining higher level access to Defra officials and of ministerial engagement.[8]

18.  The Minister responsible for British Waterways, Jonathan Shaw MP, told us that Defra and BW had acknowledged in 2007 that they could not carry on as they were and that what he called "a period of conflict" was in the past. He was satisfied that the new arrangements were working well.[9]

DEFRA'S PRIORITIES FOR BW

19.  In February 2008, following discussions from the end of 2007, Defra issued a "Strategic Steer" for BW which recognises BW has to balance a very wide range of interests and competing priorities. The three areas for Government priority in England and Wales are:

20.  The Government "broadly favours" maintaining the network in satisfactory order as the foremost priority, in order to sustain the delivery of many public benefits, such as regeneration, which are dependent on a vibrant canal network. Defra looks to the BW Board "to strike a balance between the objectives, taking account of the costs and benefits in deciding what BW can reasonably achieve against all three".[10] The Steer, Defra says, "will give Defra Ministers an assurance that the Government's priorities will be taken into account in decision making by the BW Board".[11]

21.  The Strategic Steer is accompanied by a "Deal" signed by Defra and BW setting out how they have agreed to work with one other. The emphasis is on cooperation, transparency and communication. Among other things, Defra undertakes not to try to micromanage BW, and BW undertakes to "achieve clarity for Defra in BW decision making and outputs given the complexity of the BW business".[12]

22.  We welcome the improved relationship between Defra and British Waterways since our Report in 2007. Their commitment to improved communication is very helpful, as is the greater clarity about Defra's priorities for the network and the extent of BW's autonomy to manage itself.

BW'S CORPORATE PLAN

23.  BW's decisions on the balance it strikes between the objectives it has been set will be reflected in a Corporate Plan for each rolling three year period. Defra says that:

We would like the rationale behind the Plan to be sufficiently articulated for Defra to have clarity on what is being planned and why, including the trade offs that have been considered. This should set out the link to the Government's strategic objectives as reflected in its PSAs, which would be helpful to Ministers in endorsing the Plan. It should also have good indicators of projected achievement which can be monitored. Every time the Corporate Plan is signed off by Ministers they can then consider if they agree with the balance that has been struck by the Board or if they would prefer some adjustment. We can also then consider if there are additional benefits which Government might wish to buy, engaging OGDs [other Government departments] in the IDG [Interdepartmental Working Group]. It will probably be necessary to see some updated longer term projections, e.g. of commercial income, to give context to the Plan period and to help the assessment of risk.[13]

INTERDEPARTMENTAL WORKING GROUP

24.  Last year we concluded that "there is a strong case for other Government departments—such as Culture, Media and Sport, Transport and Communities and Local Government—to make a direct contribution to BW's funding, to reflect the contribution BW makes to the agendas of those departments. We recommend that Government prepare proposals to ensure this is achieved, as part of the next CSR review".[14]

25.  The Government responded positively:

Defra will set up an Interdepartmental Working Group to formalise and strengthen its contact with other Departments and make sure that the potential benefits of waterways are understood. Other Government Departments have the flexibility to fund the inland waterways sector direct where it can help deliver specific policy requirements, for example through grants for regeneration and freight projects where funds are provided to reflect the contribution of inland waterways to Departmental objectives.[15]

The Group is expected to meet three or four times a year. It met for the first time in December 2007 and we were told it would meet again during Spring 2008. Its terms of reference are to provide a focal point for:

  • more effective cross-government coordination on inland waterways matters;
  • a fuller understanding and recognition of the contribution that the inland waterways can make to government policies for climate change, environmental improvement, public health, recreation, regeneration, heritage, planning, transport and community cohesion;
  • discussion on proposed research into the social and economic value of the waterways and undertake a refresh of government policy for the waterways; and
  • discussion on key strategic issues.[16]

BW hoped that the Group would give them an understanding, for example, of how the waterways could contribute to the achievement of the Department for Transport's public service agreement objectives.[17] Defra told us that the Group's creation reflected the fact that although Defra was BW's sponsoring Department, Defra fulfilled that function on behalf of the whole of government.[18] The Minister told us that he regarded the Interdepartmental Working Group as "absolutely vital", and that it would help him in refreshing the policy document Waterways for Tomorrow on behalf of the Government.[19]

26.  We welcome the formation of the Interdepartmental Working Group, and expect Defra to ensure that other Departments send appropriately high level representatives to its meetings. We look forward to receiving a report from Defra on its work and achievements before Parliament rises for the summer recess.

British Waterways budget for 2008-09

27.  For 2008-09, Defra has given BW a grant of £56.624 million. BW says that the comparable figure for 2007-08 is £56.4m, so it has effectively received "flat cash". When the grant was announced British Waterways' Chief executive Robin Evans expressed satisfaction with the amount:

In the current difficult government funding climate this is a reasonable settlement and in line with our expectations. It shows that Defra has listened to the arguments that further funding cuts would be very damaging. I would like to thank our minister, Jonathan Shaw, and his team of officials, for all the hard work they have put in to protect waterways funding. I know they recognise the value of maintaining the integrity of the canal network for delivery of a wide range of public benefits, including regeneration and public enjoyment of the environment. This can only be a positive development as Defra completes its planning for the remaining two years of the Comprehensive Spending Review.[20]

28.  Last year BW told us that it expected a CSR settlement of RPI-5% (it assumed RPI to be 2.5%). It warned 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 the table below): the under-spend would "accumulate to such a level that assets in poor condition with high consequence of failure will remain un-repaired".

Figure 3: 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 27.535.0 7.5
2008-09 29.137.3 8.2

(cumulative, 15.7)

2009-10 30.039.7 9.7

(25.4)

2010-11 32.742.3 9.6

(35)

* £35m at 2007 prices increased by construction price inflation at 6.5% pa

29.  BW told us that the CSR settlement, though "better than we anticipated", would not make much impact on closing the gap between the money required for major works and the money available.[21] Construction industry inflation also added to the pressure on the major works programme, which ideally ought to be about £35 million but would in fact be around £30 million.[22] BW would have to prioritise its spending on "works in the interests of safety", those assets in the poorest condition, and the 80% of waterways that constituted its "classified waterways" which they had a statutory obligation to maintain for public use. It would be unable to spend as much as it like on dredging, for example.[23]

30.  Defra's Strategic Steer says that:

Defra recognises that its sponsorship of British Waterways enables BW to discharge its duties in England and Wales as the custodian of the canal network for posterity on behalf of the Government and reflecting statutory obligations. For Defra this is one of our "Licence To Operate" areas (LTO) which needs to be got right in the public interest and for the reputation of the Department. Realistically, BW will not be central to the delivery of the two key outcomes for the Department captured in its PSAs on climate change and the natural environment; but Ministers are committed to recognising the importance of the LTO areas (egs of others are flood risk management and animal health) in their decision making on allocations in what is a very tough CSR period.[24]

31.  Defra says of its funding for 2008-09:

We have maintained investment in the canal network at broadly flat cash which reflects Defra's commitment to the waterways and recognises the value of maintaining the integrity of the existing BW canal network for delivery of a wide range of public benefits including regeneration. This is the best that could be realistically achieved for the waterways within a tight spending review and competing priorities. We shall be finalising the position for 2009/10 and 2010/11 over the coming weeks.[25]

32.  On funding for the CSR period, the Strategic Steer adds:

The allocation for the CSR period will reflect an increased injection of capital reflecting the importance of maintaining the network to us and to help secure immediate and longer term reduction in taxpayer support for ongoing operations. It will also seek a BW commitment to help fund the Government's priorities from its commercial capital pot over the 3 years of the CSR period whilst plans are developed to increase BW's self sufficiency in the longer term.[26]

33.  BW's stated vision has been to be "largely self sufficient". Defra says that this has "imprecise meaning", and that BW is working on a revision. But Defra says that it wants:

BW to grow its commercial business and alternative sources of funding so it can both invest more in the network and reduce central government's commitment over time. There is a critical balance here between the short and longer term—prioritising self sufficiency for the future might not deliver as many benefits as improved investment in the network in the shorter term; maximising the quantifiable best economic return from investment might therefore not always be the Government's priority if e.g. it resulted in a loss of confidence in the waterways because of a shortage of immediate investment.[27]

Defra explained that the short term in this context meant the three year CSR period, whereas the "longer term" meant the next ten or 15 years. Defra was urging BW not always to seek the quantifiable best economic return for its investment, because this might mean that it did not spend enough on the network; hence Defra asking BW to strike a balance.[28]

34.  BW's grant under the CSR settlement is not enough to prevent continued underspending on its major works programme, but the CSR round was a tight one. In the circumstances a "flat cash" settlement for BW is acceptable. However, given the gains that have already been made in improving the condition of the canal network, Defra and BW should now jointly produce a strategy indicating how the improvements will be sustained against a background where current property market trends will make it more difficult for BW fully to realise its income potential from waterside developments.

BRITISH WATERWAYS STATUS OPTIONS REVIEW

35.  In our Report in 2007 we noted BW's then "strategic options review". Undertaken at Defra's request, this was to consider whether its institutional form and financial structure were optimal for the long term security and success of its waterways. BW's confidential brief to consultants revealed that privatisation was one of the options being considered as part of the review, which led to an angry response from the then minister, who said that he had said to BW that all options but privatisation could be reviewed.[29]

36.  The Minister, Jonathan Shaw, said on 18 February 2008 in answer to a Parliamentary Question from Mr David Drew MP that

While we do not anticipate a further review of BW funding at present, BW, with our support, is currently undertaking a review of its status as a public corporation to identify whether or not a different structure might be more beneficial, for example through enabling greater investment in the waterways.[30]

37.  It is not clear what relationship the current status review has to the strategic options review mooted last year, but the purpose of the exercise seems much the same. The consultants KPMG have been working on this status review since September 2007, with input from Merrill Lynch. KPMG's memorandum to us says that the terms of reference of the review (agreed with Defra and the devolved administrations) are:

  • to identify whether a different institutional structure for British Waterways could more effectively secure a sustainable long-term future for its inland waterways as valued national assets in each of the nations in which it operates; and
  • to make recommendations supported by comparative analysis and rationale.[31]

38.  The terms of reference require that "any option must maintain the waterway assets of British Waterways in long term public ownership in a manner that ensures their long term financial security", but KPMG said that in some of the options they are looking at "operational and commercial activities (but not core waterway assets) would be hived down to an entity positioned outside the public sector, to give BW greater commercial and financial freedom, whilst ensuring security of the core waterway assets in public ownership".[32] A possibility, BW told us, was having some of the operating parts of the business in a "community interest company" while the waterway assets themselves remained in full public ownership.[33]

39.  BW told us that it had already paid KPMG £300,000 for its work, and that it could cost about the same again when it was completed.[34] The Board had not yet seen a full list of options from the consultants, but it did not expect them to come up with a "magic bullet". It was likely to report in the second half of 2008.[35] This comes at a time when BW has made substantial cuts in staff, operational activities and minor repair work.

40.  The Minister told us that the status review was "necessary if we are going to be clear about what the possibilities are for the future of the organisation". Any greater flexibility for BW to borrow was dependent on the review.[36]

41.  We are unconvinced by the need for BW to spend up to £600,000 on a report by consultants on its future structure when it is by its own admission short of money. We find it hard to believe that analytical capability does not exist within BW, Defra or other public sector organisations that could have conducted this study at lower cost to public funds. BW should now explain why it was necessary to spend money of this order at a time when it was facing significant pressure on its finances sufficient for it to withdraw its support for the Cotswold Canals project.



7   Q 2; Ev 2 Back

8   Q 4 Back

9   Q 101 Back

10   Ev 23 Back

11   Ev 25 Back

12   Q 6 Back

13   Ev 26 Back

14   Environment, Food and Rural Affairs Committee, Seventh Report of Session 2006-07, British Waterways, HC 345-I, para 65 Back

15   Environment, Food and Rural Affairs Committee, Fifth Special Report of Session 2006-07, British Waterways: Government Response to the Committee's Seventh Report of Session 2006-07, HC 1059, page 5 Back

16   Ev 27-8 Back

17   Q 10. The Department for Transport leads on new PSA 5, Deliver reliable and efficient public transport networks that support economic growth. One of its indicators is "Expected benefits of approved investments". See H M Treasury, Meeting the aspirations of the British people: 2007 Pre-Budget Report and Comprehensive Spending Review, CM 7227, October 2007 Back

18   Q 130 Back

19   Q 133 Back

20   Defra announces British Waterways Grant for 2008/09, British Waterways press release, 21 February 2008 Back

21   QQ 18-19 Back

22   QQ 27-28 Back

23   QQ 30, 63 Back

24   Ev 25 Back

25   Ev 23 Back

26   Ev 25 Back

27   Ev 25 Back

28   Q 128 Back

29   Environment, Food and Rural Affairs Committee, Seventh Report of Session 2006-07, British Waterways, HC 345-I, pages 24-5 Back

30   HC Deb,18 February 2008, col 262W Back

31   Ev 159 Back

32   Ev 158 Back

33   Q 38 Back

34   Q 35 Back

35   QQ 40-41 Back

36   QQ 151-152 Back


 
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