2.11 The Department's understanding of cost and value varied across its main spending areas. The Department's appraisal system for capital projects gave a sound evidence base for the majority of large transport projects. In other areas, especially where spending is devolved to local authorities and Transport for London, the Department had weaker evidence. However, it took steps to improve its knowledge of relative costs and benefits in time to influence spending review decisions. Where decisions were taken on spending through Network Rail and Train Operating Companies, these were poorly evidenced. Where it had already completed an economic appraisal, including for all national and local major projects and road building schemes, the Department generally had good evidence on the costs and value of its activities. It was, therefore, well placed in these cases to give the Treasury the evidence it needed to assess capital bids, for example, on the spending options for Crossrail (Figure 6). The Department's economic appraisal methodology assesses projects against 23 criteria: covering economic; environmental and accessibility impacts; and each appraisal is signed off by a departmental economist. Such appraisals are a good way of bringing together relevant information to appraise options objectively.
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Figure 6 Assessing the costs and benefits of Crossrail
Before the spending review, the Department already held a detailed assessment of the expected costs and benefits of Crossrail, as part of its project approval processes. This meant that the Department was able to assess quickly the impact on costs and benefits of two options for reducing the scope of the project, showing that these would reduce the benefit-cost ratio. These options were not taken.
Crossrail Limited also identified savings to total project costs through a combination of lower than expected market prices and changing the sequencing of engineering works. They proposed completing tunnelling before excavating two of the central stations to avoid the high costs of extracting waste soil through central London. While this would mean completing the project one year later, it was expected to reduce total costs, resulting in a £245 million reduction in the Department's contribution during the spending review.
To reflect these changes, the Department updated its assessment of the costs and benefits of Crossrail during the spending review. The updated assessment showed increased benefits relative to costs, although the calculations required by the Treasury did not take into account the cost of borrowing incurred by Transport for London or Network Rail, meaning costs could be underestimated.
NOTE
1 We have not examined the accuracy of the benefit-cost calculations.
Source: National Audit Office review of documents and spending data
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2.12 In other areas, where the Department had limited evidence to compare the costs and benefits of its programmes, it took action to deepen its knowledge to inform spending review decisions. These areas account for around 35 per cent of the Department's budget. They include spending devolved to Transport for London and local authorities, over which the Department has no direct control, as well as on national road maintenance by the Highways Agency, an Executive Agency of the Department:
• The Department carried out research into how Transport for London spent its money, the value delivered and the scope for further efficiencies. Transport for London provided most of this information, but departmental economists reviewed and challenged some of Transport for London's calculations. The Department also drew on independent research on the costs of the London Underground compared with other metro systems.
• For local highways maintenance, the Department holds very limited information on value for money because local authorities do not have to spend the Department's funding on maintenance or give an account to the Department for it. To improve the evidence base, the Department examined a sample of large maintenance schemes and also commissioned the University of Birmingham to assess the relative costs and benefits of local maintenance.
• The Highways Agency did not hold summary information to compare the costs and benefits of national highways maintenance, although it continues to develop a database of the costs of specific maintenance activities. As part of its normal processes, the Agency ranks and approves schemes on the basis that they enable the Secretary of State's obligations to ensure a safe and serviceable network to be met. The Department requested evidence from the Highways Agency on the ratio of benefits to costs of maintenance and renewals work and these estimates showed that benefits were ten times greater than costs.
2.13 Given that the current five-year settlement with Network Rail runs until the end of 2013-14 (paragraph 2.10), the Department took a range of alternative options to reduce rail spending from 2011-12, including:
• accepting a £150 million reduction in its grant over three years offered by Network Rail (described by Network Rail as an 'outperformance' of their income and expenditure projections); and
• changes to the scope of, and price charged for, passenger rail services expected to amount to a £759 million budget reduction over four years. This is through a combination of reducing the scope of existing franchise agreements with Train Operating Companies and increasing the cap on passenger rail fares to 3 per cent above inflation.
Whilst the cost savings from these measures were estimated, there was no assessment of the economic benefits foregone. In 2014-15, the start of the new settlement with Network Rail, the Department expects to save a further £298 million from new efficiencies at Network Rail, and £80 million from its new approach to rail franchising. These savings are based on the assumption that they can be negotiated as part of the regulatory process to determine the next five-year rail settlement for Network Rail, and in commercial negotiations with Train Operating Companies.
2.14 Prior to the spending review, the Department recognised that the factors driving the high cost of rail travel were poorly understood and co-commissioned the McNulty review to examine this, which published in May 2011. McNulty estimated that industry costs could be reduced by up to 30 per cent by 2018-19 if his recommendations were fully implemented. The recommendations focus on creating an industry environment which encourages cost reduction, changes which deliver new efficiencies, and mechanisms to drive implementation.