Sustainability

2.15 Of the spending areas we examined, we identified that the Department's cost reduction plans fall into three broad areas:

• where the Department accepted a straightforward cut or deferral in spending and reduced activity during the spending review period;

• where the Department transferred costs on to passengers; and

• where the Department intends to deliver the same level of service for less money - in other words, efficiency savings. At the time of the spending review, plans for achieving these efficiencies ranged from fully developed to aspirational.

2.16 Figure 7 overleaf summarises the planned reductions in each category from our sample, and includes our judgement on whether plans for efficiency measures had been specified at the time of the spending review. The reductions are compared to spending plans for 2011-12 to 2014-15 that existed at June 2010. In some cases these spending plans had changed since the Department's last review in March 2010, whilst in other cases, such as the Highways Agency, previous spending plans were taken as the starting position, pending the zero-based capital process in the spending review. Of the budget lines we examined, £5.4 billion of the cost reduction measures represent cuts or deferrals in activity or the transfer of costs to passengers (see 2.17), £1.9 billion are intended as efficiency measures. A further £1.7 billion of reductions to the planned Transport for London budget are unclear. This is because, although the Department made assumptions about how Transport for London would carry out the reductions in its budget, it has no powers to specify the exact use of resources.

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Figure 7 The composition of reductions to planned budgets over the spending review period (NAO sample)

NOTES

1 Efficiencies 'specified' = the Department had identified specific c source and means of efficiency savings.

2 Efficiencies 'not specified' comprises £298 million reductions to the Network Rail grant in 2014-15 that depend on negotiations with third parties and £223 million reductions to local authority road maintenance for which there was no evidence to show how it could be achieved.

Source: National Audit Office analysis of departmental spending data and spending plans at June 2010
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2.17 Not all of the budget reductions are automatic:

• For example, £298 million of rail efficiencies in 2014-15 are dependent on the outcome of negotiations on the next five-year rail settlement.

• A portion of the £759 million budget reductions in passenger rail services (paragraph 2.13) is dependent on commercial negotiations with Train Operating Companies over the amount of additional revenue raised by increasing the cap on passenger rail fares to 3 per cent above inflation. There is a risk that the benefit of the resulting increase in passenger revenues will not be passed on to taxpayers fully, but will also result in increased Train Operating Company profits. The Department's negotiations are ongoing, although the Government announced in the Autumn Statement that it would keep the cap on passenger rail increases at 1 per cent in 2012, which is expected to cost £345 million which includes the impact on Transport for London.

2.18 At the time of the spending review, the Department had only identified £571 million potential efficiency savings of £1,229 million budget reductions in national and local highways maintenance. Of the remainder: £435 million comes from reducing standards and cutting routine maintenance on the national road network; and £223 million is from unspecified efficiency savings to local road maintenance. The Department's internal assessments were explicit that any actual reduction in road maintenance would be likely to incur higher costs in the future. (Figure 8)

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Figure 8 The sustainability of reductions to highways maintenance spending

On local highways maintenance, the Department reduced budgets by 23 per cent by 2014-15, a £557 million reduction in planned spend over the four-year period. It took the view that though ambitious, this could be achieved through efficiency savings. The Department drew on advice from local authorities and the Chartered Institute of Public Finance and Accountancy that improved procurement and asset management planning could yield three-fifths of the required savings. However, there was no information to suggest how the remainder of the savings could be achieved. Recognising the significant challenge faced by local authorities, the Department set up a £6 million programme to help them identify and realise efficiency savings. The Department is now working with local authorities to develop and spread best practice guidance, such as by developing standard specifications for procuring maintenance services.

On national highways maintenance, the outcome of the spending review was to reduce spending by 20 per cent by 2014-15, equivalent to a £672 million reduction in planned maintenance over the four-year period. The Department recognises that risks remain to the sustainability of these reductions. Its plans included:

• cutting routine maintenance by £310 million, with a corresponding increase of £150 million in capital spending to move to an annual cycle of maintenance with managed degradation and much slower response times. This was described in an internal document as likely to result in 'a backlog of maintenance that will require additional spend in future years'. The Department and the Agency told us that they agreed at the time that this risk was manageable and would not be likely to lead to increasing future maintenance costs;

• reducing the standards and specifications for road maintenance while meeting legal obligations for the safety and serviceability of the road network, reducing budgets by £275 million;

• Efficiency savings of £237 million from smarter contracting, described as 'challenging'.

The Department and Highways Agency recognised that the overall impact would include slower repair of damage, uncollected litter, fewer inspections of routes and structures and increases in claims on the Department for vehicle damage. The Highways Agency's advice to the Department also contained the caveat that 'there is a material risk in this rapid and top-down assessment that we have simply been too optimistic in what can be achieved and how soon'. The Department put forward these budget reductions in its submission to the Treasury but confirmed that 'reductions will lead to planned and managed, but nevertheless obvious, deterioration in the network'.

Source: National Audit Office review of documents and spending data
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