10 To identify and prioritise cost reductions departments need a detailed knowledge of where costs are incurred, the factors driving costs, and the value of activities. Departments should understand the distribution of costs and the links between choices about what to stop, what to change and what to continue. Without this information, cost reductions are less likely to lead to sustainable savings.
11 The Department followed a structured process to identify potential areas for budget reductions. It had a good understanding of costs and values in some areas. Its understanding was limited in others:
• The Department had a generally good understanding of the relationships between costs and benefits on specific transport projects, such as Crossrail and national roads schemes, because it had economic appraisals to test various options for reductions.
• The Department commissioned a bespoke analysis of the relative benefits and costs of national highways maintenance, as information here was weaker (as previously identified in our 2009 report on Contracting for Highways Maintenance).
• Apart from specific stand alone schemes, the Department had more limited information on its spending through third parties:
• For its block grants to Transport for London and local authorities, the Department commissioned work that helped to indicate broadly the costs and benefits of devolved spending.
• The Department's understanding of the relationship between cost and value was weakest in rail, where there was no analysis of the relative benefits and costs of reductions in the scope of rail franchises or increases in passenger rail fares. There was also limited evidence on the potential for efficiencies by Network Rail from 2014-15, and no analysis on the potential efficiency savings prior to this as the Department and the Treasury excluded the current Network Rail grant from the spending review. A lack of transparency on Network Rail's costs is consistent with our past reports on the Department and the Office of Rail Regulation.
12 Using a sample of 73 per cent of the Department's budget we compared the spending review settlement to its spending plans for 2011-12 to 2014-15 that existed in June 2010. We found that over half of the reductions are the result of cuts or deferrals to new investment and higher fares, rather than new approaches to delivering the same for less. One fifth of the reductions come from efficiencies. Continuing to meet its objectives (for example, for its road schemes to support economic growth, relieve congestion and improve safety) within lower budgets will depend on the Department finding new ways to deliver them.
13 At the time of the spending review decisions, it was uncertain whether budget reductions in road maintenance and rail were financially sustainable.
Budget reductions of £1,229 million will be made to national and local road maintenance. This includes £435 million from reducing road condition standards and cutting routine maintenance and unspecified efficiencies of £223 million, risking a deterioration in road quality and higher long-term costs to the Department or local authorities. The Department is also estimating £298 million efficiencies to the Network Rail grant in 2014-15, which depends on the outcome of negotiations on the next five-year rail settlement. The Department is now taking action to identify efficiency savings, including supporting local authorities to identify sustainable budget reductions in road maintenance.