MR TONY HALES, MR ROBIN EVANS, MR JIM STIRLING AND MR NIGEL JOHNSON

18 MARCH 2008

  Q20  Sir Peter Soulsby: One of the other things we talked about was the specific bid you were going to put in for five million for capital. What happened to that? Was that accepted? How was it responded to?

  Mr Evans: It was responded to favourably, and capital is within that grant, but it did not make a difference to the total amount. So we did raid the Defra capital pot, but it probably softened the blow of having less of what they call "resource grant".

  Q21  Sir Peter Soulsby: What has been said to you about the future levels of funding?

  Mr Evans: That we should expect no better than what we have got, and my understanding is that the pressures on government finance are still considerable and that there is still pressure downwards.

  Q22  Paddy Tipping: Flooding caused problems for you last summer and increased your costs. I understand that the Government bid for European funding and it has just been announced at £120 million. How much of that are you going to get?

  Mr Evans: We put in a bid for eight million. I know that that was only a small part of the total bid. It is very interesting, because I asked the department only three days ago whether they had heard and they had not, so you are up on me on that. Now I know, I will go and fight for eight million. I have no idea quite how much I will get, but we shall certainly get some.

  Q23  Paddy Tipping: What will you use that money for?

  Mr Evans: The vast majority of the costs that we incurred or the liability that we have are dredging a huge amount of silt on the River Don, the River Rother in and around Sheffield, contaminated material in the river. It is very expensive to get out. If we get that money we will be dredging, because at the moment some of the commercial traffic is having difficulty getting through, it is hitting the propellers and damaging them and they are not happy.

  Q24  Chairman: Can we just explore the purchasing power of the settlement that you have received, because in the Committee's inquiry on flooding it certainly is apparent that construction industry inflation is running at possibly up to eight per cent, depending on the type of works. Obviously you have got some things that are in the pipeline, projects where you have got a fixed price and agreed formula, but moving forward, your purchasing power, by definition, is going to be diminished. Have you now put in train plans to take into account this inflation in terms of both your continuing maintenance programme and, secondly, the new investment programmes? How are they going to be affected by inflation at that level?

  Mr Stirling: I would agree that we see construction inflation as probably around seven per cent for the next little while. That does affect the number of projects you can do for a given amount of money, obviously, and the other thing we are doing is constantly looking at better procurement, longer term relationships with both suppliers and contractors and seeking to get better value through the way we do things. We are a very geographically dispersed organisation. You can find that the procurement costs for buying locally are considerable, and one of the things we have done a lot of over the last few years, and continue to do, is draw procurement into a much more programmed approach so that we get much better value for money.

  Q25  Chairman: Mr Stirling, that was a delightful set of words, but you did not actually answer the question. Perhaps I did not put the question as clearly as I should have done, so let me try and restate it. You have got a given sum of money from Defra for each of the next three years and, by virtue of what you have said, in purchasing power terms, successively it is going to be worth less, so I am trying to get some indication from you. Inevitably there is going to be a deficit between what you would like to be able to buy and what you can buy.

  Mr Stirling: Yes, we will do less.

  Q26  Chairman: You will do less. Could you give us some indication annually as to what "do less" means in money terms?

  Mr Stirling: I cannot actually. We would do it in number of project terms, and even that is difficult because each year we have a different mix of projects. There is no doubt we will do less than we would like to do.

  Q27  Chairman: When you made your bid as British Waterways to the Department for the money in the first place, you must have had a list of things you wanted to do, both from the maintenance and the new investment stand point, you had some benchmark by which to determine how much to ask for. Is that not the case, or did you just pluck a number out of the ether?

  Mr Stirling: No, our own models tell us that we should be spending about £35 million a year on major works.

  Q28  Chairman: If you should be spending £35 million, how much, if you like, is the inflationary effect? I suppose the answer is eight per cent less.

  Mr Stirling: Yes; and our current plans are to spend around thirty.

  Q29  Chairman: So, in terms of all those people who want to know from you about what you are going to spend your money on in the future, if I came along and said, "Give me the pre and post CSR list of activity that you were going to spend money on", would I find some projects missing between the pre list and the post list?

  Mr Stirling: Yes, you would.

  Q30  Chairman: What kind of things have had to be scratched out? Give us some for instances.

  Mr Stirling: I can probably do it a different way round, and I hope it is answering your question. We have been very clear on priorities. Our priorities going forward are works in the interest of safety, that is both customer safety as in improving customer standards—works in the interest of safety which is a legal term arising from reservoir inspections—so we must do those and we must do those within a reasonable period, and, thereafter, to be focused on using our asset management information at the assets in poorest condition with the highest consequence. Therefore, it is a much more focused programme. That comes first. Therefore, projects which we would have done which do not fall into that category have automatically fallen back in the list; so you would notice a difference that only those that fell into that category would remain on the current list.

  Mr Evans: I think quite a good example would be dredging. There would be less dredging than we would like to do. It is a very expensive part of maintaining the functionality of the waterways, and it is something that we will not---. We have a national dredging contract, we allocate a certain amount for that contract and, if the inflation element does not match the inflation increase, then we will get less dredged as a consequence.

  Q31  David Taylor: If you do X pounds less dredging, in five years' time or two years' time is it going to cost double X? What is the scale of increase of cost if dredging is neglected for too long a period? It is a general question.

  Mr Evans: There is danger of getting too complicated. It matters on river navigations where dredging builds up quite quickly and, therefore, there is a bigger amount of silt you have to take away, but on canals the main function is a reduction in functionality, a reduction in how good it is to cruise on them, so there will be more of the network in a poorer state of cruising than there would have been.

  Q32  David Taylor: But when it is eventually done, it will cost. A stitch in time saves nine.

  Mr Evans: Inevitably, what you do not spend is going to cost more later as an inflation element, and the regulations are getting much tighter.

  Q33  David Taylor: It could be more than an inflation element.

  Mr Evans: It could be more than inflation because the regulation is getting forever tighter. It is much more difficult to dispose of dredging these days than it was a few years ago, and it is only going to get more difficult. There is a limited number of tips you can take contaminated waste to and there are very much bigger restrictions on where you can dredge, from canal to farm land, so regulation will be a big factor.

  Q34  Mr Drew: Can we look at the issue of the Options Review. This was thrust upon us the last time we had you before us. We were a little bit disappointed that we could not see more than the outline process paper that came from KPMG Merrill Lynch. Can we be clear when this is going to be published, and is this going to be for public consumption or is this a purely internal paper?

  Mr Hales: The state of play at the moment is what KPMG have done has certainly validated both the cost and the income models that BW have. They have validated that our forecast expenditure on maintaining the waterways is a reasonable forecast and they have validated that we are not an inefficient organisation and that we are utilising our assets, our property assets in particular, in an effective manner. That has, if you like, given us a bedrock and that has certainly been helpful in discussions and building that trust with the department over the fact-base that we have already presented in the past. I think, with regard to the options, we are quite along way away from that. The Board has not yet seen a full list of options. I think we are probably convinced that there is no magic bullet in here. There are advantages in improving our borrowing powers and giving us certain other powers, but we are quite a long way away from coming up with a recommendation for the Board, let alone for public consultation, and for the department.

  Q35  Mr Drew: What has this all cost then? That is the outline figure?

  Mr Hales: The cost so far has been £300,000.

  Q36  Mr Drew: What is the totality cost: double that?

  Mr Hales: It could be. We are taking a rain check at the moment.

  Q37  Mr Drew: What about the spectrum of ideas that we were thrusting before you? Are there elements of privatisation, because that was one option that led to the Minister throwing his toys out of the pram?

  Mr Hales: I think it is quite clear that neither the department, nor the Board, nor this Committee wants to see privatisation, and that was made very clear to the consultants.

  Q38  Mr Drew: Totality: no privatisation at all?

  Mr Hales: No privatisation of the waterway assets at all. There are ways of looking at things. For example, I do not want to kind of start floating off down a route, but to give you an idea, a community interest company is in the public ownership but it is not owned by the state. There may be some attraction in having some of the operating parts of the business in a community interest company while the waterway assets themselves remain in full public ownership. That is one concept, which is only a matter of discussion. It is one of a number of concepts.

  Q39  Mr Drew: Do you share this analysis of the options with Defra on an on-going basis or is it your "options" and you will share it with Defra at the end of the process?

  Mr Hales: They know how we are getting on, but I think the consultants are being employed by the Board to work for the Board, and it is for the Board to get itself clear as to what its preferred option is and then to present that to the department for them to take a view.