2 Oversight of spending through third
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.
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.
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
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.
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
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.
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%.
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.
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.  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.
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.
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.
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.
11 Q 125; C&AG's Report, key facts, para 3.4 Back
C&AG's Report, paras 1.2, 1.6, 3.4 Back
Qq 125, 126 Back
Qq 34, 50; C&AG's Report, Figure 7 Back
Qq 123-124 Back
Q 70; Department for Transport, Annual Report and Accounts
2010-11, page 35-36, 142 Back
Qq 51-56 Back
Qq 143-154 Back
Q 60 Back
Qq 61-72, 76-77 Back
Qq 73-75; C&AG's report, para 4 Back
Qq 58-73; Committee of Public Accounts 41st report,
Office of Rail Regulation: Regulating Network Rail's Efficiency,
session 2010-12,HC 1036 Back
Qq 127-128; C&AG's Report, para 1.7 Back