However, delays of more than three years in agreeing the contract to buy new trains mean that delivering value for money from the Programme as a whole is at greater risk than the National Audit Office would have expected at this stage.

According to today’s report, there continues to be a robust transport case for the £3.552 billion (at 2006 prices) Programme. Thameslink services have consistently been among the most crowded London routes with passengers amongst the least satisfied with space on trains; and demand is forecast to increase. The Department estimates that the Programme will make net present benefits of £2.9 billion through reduced journey times, reduced overcrowding on trains and quicker interchanges between services.

The Department needs to manage a complex interaction between completing the infrastructure project; buying new trains; and letting a new franchise. Delays to any of these projects can delay significantly or complicate delivery of other parts of the Programme. The award of the estimated £1.6 billion contract to buy new trains is currently delayed by over three years and this has implications for the rest of the programme and also plans for electrification of other parts of the rail network.

The delay raises questions about whether the Department underestimated the scale of the work, time and skills and resources it needed to negotiate a PFI deal of this complexity. And until the contract is let it will not be clear whether delivery of the whole Programme by 2018 is still feasible.

As work begins on phase two of the Programme, the Department needs to ensure it has the necessary capacity and skills to keep it on course alongside other rail projects it manages, such as Crossrail and High Speed 2.

According to today’s report, the Department’s methodology for appraising the project puts a high emphasis on journey-time savings, from faster and more reliable journeys. However, the relationship between these savings and the strategic reasons for doing the project, such as rebalancing regional economies, is unclear.

It is also unclear to the NAO whether the business case covers just the route between London and the West Midlands (phase one, due to open in 2026) or the full Y-shaped network with lines from Birmingham to Manchester and Leeds respectively (phase two, due to open in 2032). The Y-network has a stronger economic case but this is much less certain as route designs are less well-developed.

The benefit-cost ratio calculated for phase one has twice contained errors and the Department has been slow to carry out its own assurance of the underlying analysis. The NAO’s opinion is that the Department and its advisers HS2 Limited should update the data underpinning some key assumptions in the ratio.

The most recent benefit-cost ratio (published in August 2012) is 1.4 to 1 but is likely to change. This to be expected as the ratio is sensitive to changes in data underpinning assumptions, such as GDP growth forecasts. It does not, however, reflect the Department’s current assumption on the relationship between passenger numbers and GDP growth. The Department now expects passenger numbers to grow more slowly when GDP increases. It should also carry out research into how business travellers use their time on trains. HS2 Limited has also not yet analysed the effect on passenger demand, revenues and the benefit-cost ratio of charging passengers premium prices.

The report notes that the estimated cost of phase one will change as costs become firmer. In some documents, the estimated cost is between £15.4 billion and £17.3 billion but a new estimate is being developed based on a clearer route and more information. The NAO estimates that there is a £3.3 billion funding gap over four years (2017-18 to 2020-21) which the government has yet to decide how to fill.

The Department for Transport competition to let the Intercity West Coast franchise lacked management oversight and the governance of the project was confused, according to the National Audit Office. The spending watchdog has concluded that the full cost to the taxpayer is unknown but likely to be significant, with at least £1.9 million in staff and adviser costs, £2.7 million in legal costs and £4.3 million on external advisers for the reviews that it has commissioned.

The report identifies five essential safeguards against poor decision making in major projects. These are necessary to enable officials to assure Ministers and Parliament that decisions are sound and are value for money. However, in the case of the Intercity West Coast competition, none of these lines of defence operated effectively.

The refranchising process was a major endeavour, with considerable complexity and uncertainty. Nevertheless, the objectives of the Department for Transport were insufficiently clear during the franchise competition. The Department delayed the issuing of the invitation to tender by eight months because it had not finalized how it would implement recent policy changes, such as operators being responsible for stations. There was also confusion among Department staff about some aspects of the process.

The subordinated loan facility was a particular area of confusion. A subordinated loan is capital provided by the parent company which guarantees franchise payments will be made to the Department should the franchisee get less passenger revenue than expected. However, there were significant errors in the tool the Department used to calculate how big a loan it would require bidders to have. The model had been designed to inform internal discussions and received no extra quality assurance once the Department decided to use it to calculate the loan, a key commercial decision.

The competition lacked strong project management and there was no clear route for the project team to get approval for major issues in the project. No one person oversaw the whole process or could see patterns of emerging problems. In addition, there has been considerable turnover in senior positions in the Department. It has had four permanent secretaries in two years and changes of Directors General.

The National Audit Office has today published a report identifying issues and risks which may arise as the Department for Transport devolves more control over funding and delivery of transport services to local bodies.

The Department has recently announced proposals to devolve funding for major transport schemes to new local transport bodies and is also consulting on devolving bus funding and some responsibilities for rail services to local authorities. The spending watchdog is calling on the Department to clarify its approach as it implements these changes and moves into the new ways of working. This includes being clearer on who is accountable for local transport funding and how they will be held to account.

The Department has already said it will assess whether local transport bodies have appropriate systems and processes in place. But it should clarify how it will check that these devolved arrangements continue to meet its standards and what action it will take if standards are not met.

In the context of increasing pressure on local budgets, the Department should clarify how local transport data can be better used to judge value for money and to compare performance between local areas. It also needs to identify areas and activities most at risk of a drop in performance and clarify under what circumstances it would expect to intervene.

• The department’s responsibilities and how it spends its money
• Financial management
• Reported performance
• Issues identified in NAO reports

September 2012

Our examination of the data systems used to report performance for this department involved a detailed review of the processes and controls governing:

• the selection, collection, processing and analysis of data;
• the match between the department’s stated objectives and the indicators it has chosen; and
• the reporting of results.

Our conclusions are summarised in the form of a score between 0 and 4. The ratings are based on the extent to which departments have:

• put in place and operated internal controls over the data systems that are effective and proportionate to the risks involved; and
• explained clearly any limitations in the quality of its data systems to Parliament and the public.

Our assessment does not provide a conclusion on the accuracy of the outturn figures included in the Department’s public performance statements. This is because sound data systems reduce but do not eliminate the possibility of error in reported data.

2011-12 is the first year in a rolling programme which will present a complete picture over the next three years.

September 2012

The National Audit Office has today published a report on the construction and sale of the high speed railway line linking the Channel Tunnel with central London. The High Speed 1 project has delivered a high performing line, which was subsequently sold in a well-managed way which removed the taxpayer’s open-ended support for the project. However, international passenger numbers are falling far short of original forecasts and the project costs exceed the value of journey time saving benefits.

The line was delivered within the overall funding and timescale available for the project. However, this was at a higher cost and later than its targets. Construction of the line cost £6,163 million,18 per cent higher than the target costs. Despite missing these targets, this performance compares well with other railway projects. The line has performed well since it opened, with only 0.43 per cent of services being delayed in 2010-11 by infrastructure incidents, such as track or signal failures.

However, the number of international passengers using the line is lower than originally forecast. Actual passenger numbers between 2007 and 2011 were, on average, two thirds of the level forecast when the Department guaranteed the project debt in 1998, to enable the line to be built. This left the taxpayer exposed to the risk of lower-than-expected passenger income, which had been expected to repay the project debt.

London & Continental Railways Ltd (LCR), which is owned by the Department, is in partnership with private sector developers at King’s Cross and Stratford where development is under way. The original business case in 1998 was based on benefits to transport users from faster journey times and increased rail capacity and regeneration benefits. According to today’s report, the total value of these benefits is not known as the Department has started to identify the methods it will use to evaluate the project’s costs and benefits. The Department has not reassessed these costs and benefits since 2001, despite assurances to the Public Accounts Committee that it would do so.

In restructuring LCR before the sale, the Department for Transport removed open-ended taxpayer support and made the line an attractive opportunity for investors. The Department handled the sale well and, at £2,048 million, the winning bid was higher than expected.

The National Audit Office has commended the Department for Transport for starting its preparations for the 2010 spending review early and taking steps to improve and challenge the evidence on which it based its decisions with a view to securing value for money. This was done within a short timescale and with limited flexibility over key areas of spending. At the time of the review, the Department had elements of a strategic vision but there was no comprehensive long-term plan against which to make decisions for the spending review period, 2011-12 to 2014-15. Spending decisions in transport often result in long-term commitments making it difficult to vary spending plans at short notice.

The 2010 spending review set a transport budget that is 15 per cent lower in 2014-15 compared with 2010-11. The Department conducted a structured process to identify potential areas for budget reductions informed by its high level objectives. All areas of spending were affected, but the Highways Agency sees the biggest reduction, with a budget falling from £3.2 billion in 2010-11 to £2.1 billion in 2014-15. The Department felt constrained in altering some areas of spending, most significantly excluding from consideration the current grant to Network Rail. In a sample of 73 per cent of the Department’s budget, over half of the reductions, compared to planned spending, are the result of cuts, delays to new investment or higher fares rather than new approaches to delivering the same services for less.

At the time of the spending review, the Department had a good understanding of the relationship between costs and benefits regarding specific transport projects such as Crossrail and national road schemes. Information was less good in other areas. The Department commissioned work to improve its information on the costs and benefits from grants to Transport for London and local authorities. The weakest understanding of the relationship between cost and value was 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 are risks to value for money in decisions taken by the Department to reduce costs following the 2010 spending review. There is a risk now that a proportion of the budget reductions in road maintenance and rail budgets may not be financially sustainable. Budget reductions of £1.23 billion will be made to national and local road maintenance; however, this includes £223 million of unspecified efficiencies, risking deterioration in road quality and higher long term costs to the Department or local authorities. Continuing to meet its objectives within lower budgets will depend on the Department’s finding new ways to deliver the objectives.

One year after the spending review, it is too early to assess with confidence progress on the major cost reduction measures, as most of the critical milestones against which progress can be judged lie ahead.

• The Agency’s responsibilities and how it spends its money
• Financial management

October 2011