Reducing costs in the Department for Transport - Public Accounts Committee Contents

2  Oversight of spending through third parties

5. The Department works with a wide range of third parties, over whom it has limited direct control, to provide transport infrastructure and services, with 68% of its budget spent through Network Rail, Transport for London and local authorities.[11] It is also responsible for effective oversight of its contracts with private companies, which include train franchise agreements and road maintenance and PFI contracts let through the Highways Agency. The Department's assurance over cost reduction measures through third parties varies according to the particular control and oversight arrangements in place.[12]

6. The Department explained to us how it had taken steps to improve oversight of its funding for Transport for London, which it does not control directly. Prior to 2010, the Department gave Transport for London one overall grant, but as part of the Spending Review 2010, it split this grant in two, giving around one third of it in the form of an investment grant. The Department and Transport for London agreed a list of specific milestones for the investment grant, and the Department now receives regular reports on progress, providing a higher degree of assurance than previously.[13]

7. Weaknesses in oversight of front-line spending mean the Department cannot always judge the potential for efficiency savings. The Department expects local authorities to make efficiency savings in road maintenance, but it is not clear how local authorities will find £223 million (40%) of the savings required.[14] There is a risk that these short-term cuts could lead to increased expenditure over the medium to long term if roads deteriorate and insurance claims increase. Similarly, driving down routine costs requires detailed scrutiny of processes, combined with clear targets and accountabilities. Yet there remain significant costs for routine works, such as road signs provided under Highways Agency contracts.[15]

8. Rail is the largest area of the Department's budget, with Network Rail receiving over £3 billion a year of taxpayer funding as well as a Departmental guarantee for its debts, which amount to over £25 billion.[16] The Department accepted that its information on cost and value continues to be weakest in rail, and also acknowledged the findings of the McNulty report that there is scope for efficiency savings in the region of 30%.[17]

9. The Department did not attempt to secure significant cost reductions from Network Rail prior to 2014-15, effectively excluding the Network Rail grant from consideration until the last year of the Spending Review. The Department considered that it was not worth reopening the existing settlement as the renegotiation would have taken a long time and there was no certainty that savings would have been made. Instead, the Department confirmed that it had accepted budget reductions of £100 million in 2010-11 and £150 million over 2011-12 to 2013-14. We find it remarkable that, in view of its significant public subsidy, Network Rail was not subject to more challenge given that the Government tried to renegotiate a range of private sector contracts during this period and that Network Rail had the impetus of a new Chief Executive.[18]

10. The Department continues to maintain that it is inappropriate for the National Audit Office to audit Network Rail on the grounds that it is an "essentially private sector" company. [19] In support of its stance it cited the Office for National Statistics' classification but it could not provide any convincing evidence as to what characteristics Network Rail shares with other private companies, only that the Government does not control it. The effect of this classification is to keep Network Rail off balance-sheet, even though international accounting conventions show it should be considered as part of the public sector.[20] In the Autumn Statement the Government was able to announce £950 million of new investment financed through Network Rail taxpayer-guaranteed borrowing, suggesting a closer relationship than would be normal with a private company.[21] We do not agree that Network Rail is an essentially private company and reiterate our position, made clear in our report of 2011 on the Office of Rail Regulation, that it is unacceptable that Network Rail is not subject to National Audit Office scrutiny and direct accountability to Parliament.[22]

11. The Department is reducing its administration budget of £295 million by one third over the Spending Review period to 2014-15, raising the risk that its capacity to exercise effective oversight and secure good value for money through third parties will be more stretched in the future. The Department did not disagree that there would be fewer staff and resources for auditing and supervising organisations which receive its funding. However it argued that there had been success in using techniques which needed less central resources such as asking local authorities to publicise the potholes it had repaired when extra funding had been supplied for this purpose.[23]

11   Q 125; C&AG's Report, key facts, para 3.4 Back

12   C&AG's Report, paras 1.2, 1.6, 3.4 Back

13   Qq 125, 126 Back

14   Qq 34, 50; C&AG's Report, Figure 7 Back

15   Qq 123-124 Back

16   Q 70; Department for Transport, Annual Report and Accounts 2010-11, page 35-36, 142 Back

17   Qq 51-56 Back

18   Qq 143-154 Back

19   Q 60 Back

20   Qq 61-72, 76-77 Back

21   Qq 73-75; C&AG's report, para 4 Back

22   Qq 58-73; Committee of Public Accounts 41st report, Office of Rail Regulation: Regulating Network Rail's Efficiency, session 2010-12,HC 1036 Back

23   Qq 127-128; C&AG's Report, para 1.7 Back

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Prepared 13 March 2012