Gerry Steinberg MPIn the House...

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Highways Agency: Maintaining England's Motorways and Trunk Roads (HC 431)

Public Accounts Committee 19 Mar 2003

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SIR JOHN BOURN KCB, Comptroller and Auditor General, and MR KEITH HOLDEN, Director, National Audit Office, further examined.
MR BRIAN GLICKSMAN, Treasury Officer of Accounts, HM Treasury, further examined.
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
Highways Agency: Maintaining England's Motorways and Trunk Roads (HC 431)
Examination of Witnesses
MR TIM MATTHEWS, Chief Executive, Highways Agency; and MR DENNIS ROBERTS, Director of Road Transport Directorate, Department for Transport, examined.

Mr Steinberg

Mr. Gerry Steinberg (City of Durham): I have to say when I went through the Report and particularly read paragraph 2.10 on page 15, I was not really impressed by the way - and I think the Chairman has touched on this - you decide what the targets are for maintenance throughout the whole of the country. It seems to me that you do it on a national average and therefore according to the diagram on page 6, there are huge regional difference. Can you explain to me the significance there will be to the regions themselves by doing it this way? What effect does it have on the regions by doing it this way? Does it mean, for example, some regions get more resources than other regions?

Mr Matthews: Certainly as we have moved over the last two years, as I said earlier, to a system which gives our regions indicative allocations, that has led to quite significant different levels of investment.

Mr. Gerry Steinberg (City of Durham): In different areas?

Mr Matthews: In order, as I said, to try and narrow the difference at the end of each year in road maintenance. That is what we are aiming to do now. It is not to try and get every region precisely to the same point because it is too sensitive to small changes to do that.

Mr. Gerry Steinberg (City of Durham): What is the comparison between the North East of England, who appear to be doing reasonably well, and the North West, who appear to be doing reasonably badly? In what terms does that affect resources? Does it mean because the North West are not doing very well they get more resources at the expense of the regions who have got a good record and who have presumably got a good record because they put more money into it originally before there was a Highways Agency?

Mr Matthews: In part that is right but these figures are based on a number of historic factors. As I said, they are quite sensitive to quite small changes in road condition so I think one has got to bear in mind that these are quite small variations potentially.

Mr. Gerry Steinberg (City of Durham): Are regions dealt with on their own merits? For example, if there is a bad stretch of road in the North East, because it has a reasonably good record generally speaking, will it definitely get that money or will it go to the North West who have not got good roads and you are putting more money in?

Mr Matthews: What we are now doing is shifting resource, as we have done over the last couple of years, to those regions where there is a greater deficit.

Mr. Gerry Steinberg (City of Durham): At the expense of other regions?

Mr Matthews: It will still allow us to keep all of those regions within what we consider to be a reasonable band.

Mr. Gerry Steinberg (City of Durham): Is it a fair share of the pot?

Mr Matthews: What we are now moving towards is, I think, a fairer share of the pot but one which is sensitive to the reasons that give rise to this, and some of this will be due to historical patterns of when a particularly large investment has taken place because, as I said, it is quite small changes in the condition of one significant stretch of network in a region, and a soon as that starts falling into the category of needing to be repaired it will swing that proportion quite significantly. So this is sensitive not just to previous resource allocation for maintenance but the historic pattern of investment in the building and subsequent maintenance.

Mr. Gerry Steinberg (City of Durham): The historic pattern of investment in the North East, for example, is nowhere near as good as historic pattern of investment elsewhere. If we look at the motorway system, we have not got a motorway in the region, it stops and peters out, so historically we did not do very well in the original investment. I hope you are not saying that on the basis of historical investment we are not doing very well now.

Mr Matthews: Sorry, this does not reflect judgments made about how much a new motorway or trunk road will be needed but at what time in its life cycle it needs maintenance, and what this table shows is that there are ---

Mr. Gerry Steinberg (City of Durham): The point I am making is if we have not got trunk roads then they cannot be maintained.

Mr Matthews: That is a separate point. If you will allow me, what this illustrates is that the motorway and trunk road network which there is in the North East is relatively less in need of major repair than, for example, the North West. It does not say anything about the historic capital investment.

Mr. Gerry Steinberg (City of Durham): Let's move on because I am running out of time. I found paragraph 2.11 a little confusing as well. We are told : "The indicator does not assess directly the condition of the network, measuring only the amount of work required on the network." If it does not assess the condition of the network, how does it calculate the amount of work required, or am I misunderstanding?

Mr Matthews: No, on the current information that we have our judgment until now has been that we can only reliably have an indicator which reflects work that is likely to be needed to be done on the network. We are, as the Report identifies, working on a new indicator which will give us a more robust ---

Mr. Gerry Steinberg (City of Durham): I want to come on to that. It continues: "The Agency has recognised that network condition should be reported on directly and plans to do this from 2003-04." So how will you actually do that?

Mr Matthews: We are working on the new information that we now have on network condition to allow us to do that. It does give me an opportunity to update both the NAO and the Committee on this because since this Report went to bed we have been discussing this indicator with our ministers and we do not feel we are yet in a position for next year to move to this new indicator so we will be maintaining the existing 7% to 8% indicator for 2003-04.

Mr. Gerry Steinberg (City of Durham): I suggest perhaps you write to us on that. It is complicated. I want to change to a different subject and quickly turn to paragraphs 3.11 and 3.12 and paragraphs 1.8 and 1.9 which explain the new arrangements for the managing agents and contractors. Looking at appendix 2, which shows that there is virtually no local authority involvement whatsoever, it is all the private sector which has taken over the maintenance of our major roads, it leaves me very uneasy, to be quite honest, because I think the roads system without local authority involvement is open to all sorts of abuses. Looking at this Report, how do we know that the agents, for example, do the right jobs? To whom are they accountable? Small projects under 100,000 do not appear to need to have any evidence of need and the Agency just pays out regardless. You do not check the schemes, so what is to stop the agents over charging you or ripping you off? In paragraph 3.7, page 21, it shows us that many of the proposals that have been put forward by these agents are deficient, it says, and the information given is poor. So how do we know that these proposals are actually the correct ones for these roads? How do you know you are not being ripped off by small contracts? It also tells us they keep the profit they make if they undercut and do a job more cheaply. Seven out of eight projects by a company in one area achieved 10% savings which they put in their back pocket. Is the taxpayer not being ripped off here?

Mr Matthews: There are a number of points you raised. On the last one, no, I do not think so because the obverse we have been looking at previously on previous forms of contract is where you potentially pay more because you do not have a proper contract with proper incentives from the start so you end up paying, as we have seen on a lot of major schemes, for claims and disputes rather than having a proper incentive structure at the start. With proper transparent targets and costs which we can analysis against quantities and inputs but where there is an incentive on the contractor to finish early, I actually regard those schemes to which you refer as successes because what it means is that the contractor has performed.

Mr. Gerry Steinberg (City of Durham): If you had a success with, let's say for example, the local authority or the county councils carrying out your work and they did the job 10% cheaper than they said they would, that money would then go back and do more work. In this case it goes in the back pockets of the contractors. How much do you get out of it? Do they share the savings with you? Do they come along and suggest, "We made 10% savings, we will do 10% more work for you"? Do they do that or do they just take the money home and bank it?

Mr Matthews: On a number of our contracts now, the larger contracts, part of the arrangement with target price is that there is a shared risk in overrun and there is a shared benefit in underspend so, yes, we do get a benefit but the issue on local authorities ---

Mr. Gerry Steinberg (City of Durham): For a contract of less than 100,000 you do not check them, you do not take any evidence, you do not check whether it has been done properly, you do not know whether they have carried the jobs out. It seems so lackadaisical, everything seems to be on the side of the contractors and, frankly, the taxpayer seems to be getting ripped off here. How much more work could be done if you were checking the situation, having a look at the costs to begin with and seeing that the contracts are not coming in? It seems pretty clear to me that if I know for a certain fact I can do a job for a million quid, but I say 1.5 million and I keep the rest in my back pocket, it is a hell of a game to be on, and you seem to be just going along with it.

Mr Matthews: Can I answer the point both about large and small contracts. The one you just referred to there will be a very large contract and even before now a contract of that order would be subject to very detailed scrutiny and investigation. As I have said, we are moving towards contract arrangements on some of those contracts where there is a risk and reward both for us as a client and for the contractor in under or over-performance, so it would be difficult to have circumstances in which somebody overpriced a bid by 50%.

Mr. Gerry Steinberg (City of Durham): Okay, that was an exaggeration but certainly 10% and they have still got the money on a 1 million contract or a 5 million contract because some of them are 5 million and 10% of 5 million is quite a considerable amount to bank.

Mr Matthews: There is a balance of risk we have to manage here. Historically, as I have said, when we have contracts for lowest price without regard for quality or without regard for incentives, what we have seen and Sir John Egan and others have found, is that you pay more but you pay later through the claims courts. Having contracts which are transparent in terms of the target price and all the materials and labour costs that go into that, it is more difficult ---

Mr. Gerry Steinberg (City of Durham): Do they keep the 10% if they save it?

Mr Matthews: On contracts that we are working with now, as I said, we are sharing risks, particularly where that is a risk that we are in control of or if they are external risks we share those.

Mr. Gerry Steinberg (City of Durham): I have sat here, Mr Matthews, for three or four years and I have heard that we are sharing risks. Every organisation that comes into us tells us they are sharing risks but at the end of the day the only risks that ever get shared are when it goes wrong and the taxpayer puts his hand in his pocket to pay it. Where there is a risk and there is a profit made it never ever comes back.

Mr Matthews: I cannot gainsay your wider experience but that is not the way in which we are trying to construct our contracts. On the smaller bids, it is true on the one hand that we have not given sufficient attention to the detail of agents' proposals. That is not to say, and I do not think this Report is saying that there was no scrutiny or management of those contracts but I accept that it has not been as strong and systematic as it should have been and we have now put in place processes within our areas and within our regions to ensure that there is better and stricter control and monitoring of these smaller schemes.

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