Memorandum submitted by Sir Adrian Stott
Bt
BRITISH WATERWAYS
SUMMARY
1. British Waterways (BW) has withdrawn
from the Cotswold Canals Partnership with respect to the restoration
to navigation of the Stroudwater and Thames & Severn navigations.
2. This action was taken due to funding
constraints on BW, aggravated if not fundamentally caused by unexpected
reductions by DEFRA in BW's annual grant.
3. This withdrawal has done significant
damage to the restoration projects, and to BW's relationship with
voluntary waterways organisations in general.
4. Two lessons should be learned from this
episode:
5. (a) By government, that it is essential
that BW have a source of funding for the gap between the revenue
it can obtain directly from users and the cost of running the
waterways, that is secure, sufficient, and consistent every year.
This cannot be provided by a variable annual grant. The most appropriate
alternative funding is a substantial one-time capital endowment,
to allow BW to enlarge the investment real estate portfolio from
which it now gains significant income.
6. (b) By BW, that it needs a better method
of ranking the capital projects it participates in, so that it
can rationally cut from the bottom of the list when cuts are necessary,
in a manner that will not surprise its partners.
INTRODUCTION
7. The following discussion is organised
under the following headings:
8. The cancellation of BW's participation
in the Cotswold Canals Partnership
— The cause of the cancellation
— Issues raised by the cancellation
— Lessons to be learned from this episode
1. THE CANCELLATION
OF BW'S
PARTICIPATION IN
THE COTSWOLD
CANALS PARTNERSHIP
9. BW has often become involved in projects
to restore derelict navigations. These are always long-term (multi-year)
schemes, requiring the application of substantial capital, much
of which must generally be raised by third parties. The lead in
such projects is generally taken by parties other than BW, typically
nowadays a partnership of public, private, and charitable organisations.
10. BW was a member of the Cotswold Canals
Partnership on this basis, with the aim of restoring two waterways.
Not only was the Partnership depending on BW's financial (and
other) contributions to the scheme, but also BW's contribution
was key to securing other funding.
11. BW abruptly withdrew from the project,
cancelling its commitment to provide further funding.
2. THE CAUSE
OF THE
CANCELLATION
12. BW has made it clear that it would have
preferred not to withdraw. However, it feels that the decision
was forced on it due to its own financial situation.
13. BW had been presented by DEFRA with
an unexpected, significant, and ongoing reduction in its annual
grant. This had already reduced its net revenue to a level some
£25 million/year below its estimate of the cost of maintaining
its waterways in a steady state, and placing a substantial strain
on its ability to provide financial support to waterway restoration
projects.
14. A significant breach on the Brecknock
& Abergavenny canal, which itself may be attributable to maintenance
arrears, resulted in the need for BW to allocate capital to repairs.
BW felt that the most appropriate source of that capital was money
it had previously earmarked for the Cotswold projects.
15. It is clear that BW's withdrawal is
a direct result of the grant reductions. Without them, it could,
although with difficulty, have handled the Welsh breach without
the need to pull money back from the Cotswolds.
3. ISSUES RAISED
BY THE
CANCELLATION
16. Two principal issues are raised by this
cancellation.
17. First, BW does not have the financial
resources even to maintain its assets. It certainly does not have
sufficient or secure enough financing to make long-term capital
commitments to external parties.
18. If BW's financial support cannot be
remedied, the obvious conclusion is that it should enter no more
such commitments. Although BW has the potential, and the history,
of being of major benefit as a participant in restoration projects,
the current incident shows that being an unreliable partner is
worse than not being a partner at all.
19. Second, the shock caused to the Partnership
by BW's abrupt departure shows that the partners were unaware
of the fragility of BW's funding, and of how BW would act in a
financial crisis.
20. This is unfair and damaging to such
partners, and to BW's reputation.
4. LESSONS TO
BE LEARNED
4.1 Funding
21. Operating, maintaining, and restoring
waterways are long-term liabilities.
22. It is a core principle of finance that
income should match liabilities. Yet the government is keeping
BW in a mismatch.
23. BW cannot cover its costs through charges
on its users. It must have funding to close the gap between the
revenue obtainable from those charges and the cost of its waterways
maintenance and operation. The public benefits that the waterways
provide are very much larger than their fully-funded costs, so
the provision of this funding by government is justified. The
amount required is known, despite the government appears reluctance
to acknowledge this.
24. The only question remaining is how best
to provide this funding. The method required must securely produce
sufficient revenue every year.
25. As I have discussed previously, the
most appropriate means of providing this funding is probably through
a capital endowment to BW. This would allow BW to increase substantially
its investment real estate portfolio, which already provides it
with significant income.
26. Replacing the fundamentally unsatisfactory
grant approach with real estate income would give BW the adequate
and long-term financial security it clearly requires, but currently
lacks.
4.2 Priorities
27. BW's reaction to its funding predicament
appears to have been ad hoc, with no plan for such an eventuality.
The path chosen may not have been optimum. It certainly caused
substantial, but avoidable, distress to the Partnership.
28. BW has on two occasions established
priorities among projects for restoring, enhancing, or creating
waterways. The more recent was the 2004 Waterways 2025
exercise. However, this document was based on a poor methodology,
and was produced with inadequate consultation. The priorisation
it produced was clearly not optimal.
29. Since then, BW has been reluctant to
update this "vision", or to remedy the serious flaws
in it. Now, it apparently has assigned no priorities among the
projects in which it participates.
30. This means that when cutting back becomes
unavoidable, there is no understanding as to which projects should
be cut, or how. There is thus no planning for minimising the damage
done by the cuts that may have to be made.
31. Moreover, in the absence of any understood
priorities, BW's Cotswold partners appear to have been unaware
that there was any significant risk of BW's withdrawal. This resulted
in unnecessary upset and damage to them, and represents unacceptable
disrespect and discourtesy to them on behalf of BW.
32. As a result, BW should immediately begin
work on a replacement for Waterways 2025. The process should
include open consultation with all interested parties. This should
first be with respect to the criteria to be used for evaluating
the priority of projects, and then, once a set of criteria has
been chosen, with respect to the application of these criteria
to each project to determine its priority.
33. Once this priorisation is complete,
BW should revisit it annually to update the evaluations where
characteristics of projects have changed.
34. It should be made clear to all those
with whom BW has commitments with respect to projects on the list
that, if funding to this aspect of BW's activities must be cut,
the cuts will be always be made from the bottom of the list.
35. This approach will provide a rational
scheme for allocation of the funds BW does have available for
such projects. It will allow BW, and those it works with, to plan
for the withdrawal of funds where this becomes necessary. And
it will give all concerned a clear understanding of the risk of
withdrawal for each project.
36. This is a relatively elementary approach,
and it is regrettable that BW has not been following it. To have
done so would have prevented a lot of heartache.
CONCLUSION
37. It has been clear for too long that
BW's current funding is inadequate in among and inappropriately
insecure for the task. It is therefore no surprise that an incident
such as the Cotswold withdrawal occurred.
38. The solution to providing appropriate
funding to BW is known. Despite some ill-advised comments with
respect to BW's attempts to generate more revenue, such as criticisms
of its move towards market pricing (which, ironically, is a requirement
of the government) and of its increased dependence on income from
real estate, such attempts are clearly a worthwhile path to follow,
as I explained in my previous submission.
39. The longer the government refuses to
acknowledge the problem, and to adopt the appropriate solution,
such problems are bound to arise.
40. How long does this have to be?
Sir Adrian Stott Bt
March 2008
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