Conclusions and recommendations
1. The Department has planned earlier than
other departments, but it has still to articulate a comprehensive
long-term strategy against which to judge the relative economic
and social impacts of its decisions in the 2010 Spending Review
and the 2011 Autumn Statement.
Longer term planning is essential for making sound investment
decisions and prioritising resources, and is particularly important
where the majority of spending is for long-term capital investment.
We do acknowledge that the Department is now improving it long-term
planning. The Department should finalise and publish its strategy
so that taxpayers can see how individual decisions relate to the
Department's overarching long-term objectives, and how investment
choices between alternative forms of transport are made.
2. There are weaknesses in the Department's
oversight of spending through third parties and a risk that it
will get worse with the Department's administrative budget being
cut by a third. 68% of the Department's
budget is spent by other organisations and it is therefore essential
that the Department is satisfied that these third parties are
providing value for money. We welcome steps taken by the Department
to improve its assurance over funding for Transport for London,
but the Department's intelligence on spending in other areas is
weaker. For example, it does not know where over £200 million
of planned efficiency savings through Local Authorities will come
from, and whether those cuts will lead to higher expenditure in
the medium to longer term. The Department's own resources for
oversight will also become more stretched with the 33% reductions
to its own administrative budget. The Department should set out
consistent principles for oversight of all third party spending
which enable it to identify where there is scope for reducing
costs further.
3. The Department provides over £3 billion
each year to Network Rail and underwrites its debt of over £25
billion yet cannot provide assurance that the taxpayer gets value
for money. Despite being the largest area
of its budget the Department's understanding of cost and benefits
is weakest in rail. Both the McNulty report and our recent report
on the Office of Rail Regulation have shown that significant potential
efficiencies could be secured. We are concerned that while contracts
across Government were renegotiated as part of spending reduction
plans, Network Rail's funding settlement to 2013-14 was left unchanged.
The Department should put in place new oversight arrangements
with the powers to interrogate information on Network Rail's efficiency
and to make changes to its funding at short notice, and should
set out what more it will do to hold Network Rail accountable
for delivering efficiency improvements.
4. It is unacceptable that Network Rail is
not directly accountable to Parliament and not subject to National
Audit Office scrutiny. Network Rail spends
billions of pounds of public money each year, , its debt of over
£25 billion is underwritten by the taxpayer and international
accounting conventions show that it should be considered as part
of the public sector. Yet the Department continues to hide behind
the Office for National Statistics classification of Network Rail
as a private company which keeps Network Rail's debt off the public
balance sheet and its spending from direct NAO scrutiny. We also
note that an additional £950 million borrowing through Network
Rail formed part of the Government's plans in the Autumn Statement,
further undermining the Department's argument that it is an "essentially
private sector" company. As we have previously recommended
the Department should provide the Comptroller and Auditor General
with full access to Network Rail so that Parliament can scrutinise
Network Rail's value for money.
5. The Department does not have a full understanding
of the likely impact of reducing road maintenance budgets. The
Department aims to make cost savings through better procurement,
reducing road maintenance standards and replacing routine maintenance
with less frequent but more intensive work. But the overall costs
will not reduce in the long term if deterioration of the road
network results in higher costs repairs in future, and there are
more claims on the Department and local authorities for vehicle
damage. For example, we are concerned that the Department has
not estimated the costs of meeting potential extra claims. The
Department should monitor road conditions closely with a view
to avoiding increased future costs; and it should publish regular
assessments which detail where it sees particular risks and how
it plans to mitigate them.
6. The Department has inadequate contingency
plans for how it will deal with potential threats to its plans
for cost reduction. The Department faces
a range of risks to delivering its plans. For example, each 1%
increase in inflation results in an approximately £35 million
increase in the financing requirement for Network Rail. We are
concerned that the Department's inflation forecasts may prove
to be too optimistic and that it could not provide specific details
of how it would respond to a budget shortfall, should one occur.
The Department should develop contingency plans for how it will
respond to a range of potential risk scenarios, including fluctuating
inflation and failure of parts of the business to deliver their
share of efficiency savings.
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