Memorandum submitted by KPMG
ENVIRONMENT, FOOD & RURAL AFFAIRS COMMITTEE
KPMG WRITTEN SUBMISSION CONCERNING BRITISH WATERWAYS STATUS OPTIONS
REVIEW
INTRODUCTION AND
CONTEXT
This short paper provides a summary of the basis
for the current Status Options Review of British Waterways (the
Review). This written submission has been prepared by KPMG LLP
(KPMG) at the request of the Environment, Food & Rural Affairs
Committee of the UK House of Commons (the Committee). The Review
was undertaken by KPMG, with input from Merrill Lynch on investment
banking and capital markets issues where appropriate.
SCOPE OF
THIS SUBMISSION
This submission is necessarily at a high level
and is intended solely for the purposes of providing the Committee
with summary information about the Review. The draft findings
of the Review are currently being considered by British Waterways
(BW) and no decision has yet been taken by BW as to its preferred
way forward (for discussion with Government and other interested
parties). For these reasons the submission does not cover the
draft findings of the Review. However, it does address the following
specific questions put to us by the Inquiry Manager, each of which
is considered in turn below:
(a) KPMG's remit/the options we
are considering
(b) the timescale of the review
(c) the consultation process
(d) How the final review will
be structured/results presented
(e) If the various options are
set to be prioritised, how will this be decided and by whom
(f) How this work compares to
previous reviews KPMG has undertaken on similarly-structured organisations
to BW (if at all).
KPMG'S REMIT/THE
OPTIONS UNDER
CONSIDERATION
The Terms of Reference for the Review were published
by BW in September 2007 (a copy is attached). These set out the
framework within which the Review has been conducted and limits
to the topics considered in the Review. We understand from BW
that DEFRA and the Scottish Government provided input to the drafting
of the Terms of Reference and agreed the final version.
With regard to the options under consideration,
the intention has been to consider all feasible options, but bearing
in mind the specific requirements in the Terms of Reference that:
"any option must maintain the core waterway assets of British
Waterways in long term public ownership" and "recommendations
arising from the review must be acceptable to BW's key stakeholders
and have a realistic prospect of implementation". Some options
have been identified but not pursued in detail as they do not
satisfy one or more of the goals for BW set out in the Terms of
Reference. The options considered include the scope to modify
BW's current governance arrangements as a Public Corporation,
and a number of options where 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.
THE TIMESCALE
FOR THE
REVIEW
Work on the review began in September 2007.
Our detailed fieldwork was completed during December 2007. Initial
draft output from this completed fieldwork was presented to a
Project Board (a committee of Board members, senior management
and an external independent person, having oversight of the Review)
in Mid January 2008. Further work has since been undertaken to
refine the analysis and conclusions of the Review. Refined draft
conclusions have now been submitted to BW for consideration, first
at a Board meeting on 19th March. Output from this Project Board
discussion may involve further discussion and analysis prior to
an initial consideration of the Review's conclusions by the BW
Board at its meeting in May 2008.
THE WORK
KPMG HAS BEEN
UNDERTAKING
Our approach to the Review has been to carry
out the work in three stages:
(1) Analysis of the current, recent and
projected financial and operational performance of BW, including
projected levels of maintenance expenditure and commercial
income generation, to identify any key
issues facing the business that could influence the
optimal institutional model
(2) A review of the current institutional
model and its governance structures, to identify any limitations
affecting BW's ability to achieve its objectives
(3) Identification and assessment of feasible
alternative institutional models and their ability to deal with
any issues identified in 1) and 2) above.
THE CONSULTATION
PROCESS
As part of our work we have carried out confidential
consultation with a range of key BW stakeholders in order to understand
the issues of importance to them, and to test emerging concepts
form the Review process. Consultees with whom we have held discussions
include: DEFRA, Scottish Government, HM Treasury, The Shareholder
Executive, Partnerships UK and the British Waterways Advisory
Forum. We have also held discussion s with a number of the senior
management and Board members of BW.
HOW THE
FINAL REVIEW
WILL BE
STRUCTURED AND
RESULTS PRESENTED
The review has been structured using the approach
summarised above. The output will be in the form of a report to
the Board of BW structured as follows:
(a) Executive Summary, highlighting
the key findings from the entire Review and our conclusions and
recommendations
(b) Business analysis
(c) Institutional Models and Funding
Options analysis.
The report will include KPMG's views on the
issues facing the business, how these might be addressed within
the current structure and alternative institutional structures,
the potential merits of such alternative structures and whether
any alternative structures could (as required in the Terms of
Reference): "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".
We will include recommendations where we believe
these are appropriate, including identification of any relevant
issues for further consideration, but it will be for the Board
of BW to assess our findings, analysis and any recommendation
we make and determine its preferred course of action prior to
formal discussions with DEFRA, Scottish Government, HM Treasury
and others.
PRIORITISATION OF
OPTIONS
Our work has included a critical review of options
and our final report will include a suggested prioritisation of
those which we believe have the best prospects of delivering the
objectives as set out in the Terms of Reference. However it will
be for BW to decide whether it wishes to pursue any alternative
institutional model and take one or more models forward into discussion
with Government and any wider consultation.
HOW
THE
WORK
COMPARES
TO
PREVIOUS
REVIEWS
KPMG HAS
UNDERTAKEN
ON
SIMILARLY
STRUCTURED
ORGANISATIONS
The general principles of the Review are very
similar to those which we have encountered on other similar exercises,
although inevitably the specific requirements and circumstances
of each study are different.
Annex 1
British Waterways Status Review
TERMS OF REFERENCE
1 Purpose of Review
1.1 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
1.2 to make recommendations supported by
comparative analysis and rationale.
2 Principal factors to be considered in
assessing options
Desired Outcomes- in assessing the merits of
various alternative institutional structures, the ability to deliver
or enhance the following capabilities or characteristics shall
be key considerations:
2.1 Capability for delivering long term
enhancement of infrastructure condition, improved operational
delivery and certainty in asset maintenance (stewardship);
2.2 Capability for enhancing the contribution
from commercial activities and other methods of achieving greater
financial independence;
2.3 Potential for improving the efficiency
of BW's capital structure;
2.4 Ability to raise debt/equity in support
of business objectives;
2.5 Capacity (within each nation considered
separately) for improving clarity on grant funding through medium
to long term contracting arrangements;
2.6 Capability to maintain and develop the
integrated business model in order to optimise the synergies available
from it; and
2.7 Capacity to deliver improved accountability
and transparency for governance.
Additional key considerations- in addition to the
above desired outcomes, alternative structures must be assessed
as to their respective merits in addressing the following other
key considerations:
2.8 Impact on public/stakeholder confidence
in the protection of the waterways as national assets (custodianship);
2.9 Ensuring sufficient institutional flexibility
to meet differential needs of two governments, including their
ability to "buy" additional public policy benefits;
2.10 Impact on access to third party, lottery,
local government, EU and other public or community funds;
2.11 Taxation (including Rates) and accounting
impacts;
2.12 Impact of statutory and regulatory
framework; and
2.13 Pension fund implications.
3 Scope of the Review
BW does not wish to be prescriptive as to the
range of options to be considered (which must include the `no
change' option, tested for its capacity to deliver the outcomes
described above). However, it is a requirement 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.
Subject to this, any option that has a clear
potential to deliver much improved economic sustainability for
the waterways as national assets should be considered. Recommendations
arising from the review must be acceptable to BW's `shareholders'
(the respective governments) and have a realistic prospect of
implementation.
KPMG
March 2008
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