NATIONAL AUDIT OFFICE REPORT BY THE COMPTROLLER AND AUDITOR GENERAL Department of Transport: Freight Facilities Grants in England ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 18 JULY 1996 LONDON: HMSO HC 632 Session 1995-96 Published 2 August 1996 E8.15 DEPARTMENT OF TWSPORT: FREIGHT FACILITIES GWTS IN ENGLAND This report has been prepared under Section 6 of the National Au&t Act, 1983 for presentation to the House of Commons in accordance tith Section 9 of the Act. John Bourn National Audit Office Comp&oUer and Auditor General 16 Jtiy 1996 The ComptroUer and Auditor General is the head of the National Audit Office employing some 750 staff. He, and the NAO, are totaUy independent of Government. He certifies the accounts of all Government departments and a wide range of other pubhc sector bodies; and he has statutory autiori@ to report to Parhament on the economy, efficiency and effectiveness tith which departments and other bodies have used their resources. DEPWTMENT OF TWSPORT: FREIGHT FACILITIES GWTS IN ENGWD Contents Page S-ary and conclusions 1 Part 1: htroduction 6 Background 6 Freight facfities grant 7 Other measures 8 Targets 11 Scope of the National Audit Office examination 13 Part 2: The performance of schemes awarded grant 15 Assessment of traffic forecasts 15 Freight carried by grant-aided schemes 16 Part 3: Valuing the benefits of transferring freight from roads 22 Values attrtiuted to lorry ties 22 Impact of lorry tie values 24 Part 4: The potential for achieving greater impact 26 Interest in the grants 26 Reasons why grant is not taken up 27 Appendices 1. An overtiew of the rafl height industry in England 34 2. An example Nustrating the key elements in the Department’s 35 assessment of the eHgibfi@ of an apphcation for freight facfities grant 3. Examples of measures to encourage the use of rafl or water freight 38 transport in other European Union countries 4. Company interviews 39 DEPARTMENT OF TRANSPORT: FREIGHT FACIUTIES GWTS IN ENGWD Photograph1: Railfreight alongside ihe Oxford canal Source:Dave McA/orre Frtightfati[fiesgrantsareintendedtoencouragefreighttramcofiroadsandontortilorinland watemayswhere this is in the public interest. DEP~TMENT OF TRANSPORT: FREIGHT FACILITIES GWTS IN ENGLAND Summary and conclusions 1 Freight facihties grant was introduced tn the Railways Act 1974 to encourage the transfer of freight traffic off roads and onto railways, where this was in the interests of the locah~ or its inhabitants. The grant was extended to inland watemay schemes by the Transport Act 1981. Both these provisions were re-enacted with amendments in the Railways Act 1993. The grants meet part of the capital costs of providing rail and inland watemay freight facihties. The Department of Transport administer the grants in England, and have made 155 awards tota~ng E72.3 mi~on since the grants were estabhshed. BeWeen April 1985 and March 1996 the Department paid grants totaMng E32 miWon, out of the E70 mi~on protided for them from monies voted by Parhament. 2 Freight traffic in the United Ringdom, measured in terms of tonnage and the distance over which it has been carried, has doubled in the last thirty years. But in 1994 rail and inland watemays together accounted for only seven per cent of aUfreight traffic. In that year freight carried in England using facihties funded by grants accounted for some 12 per cent by weight of aUrailway freight, and less than one per cent of inland wateway traffic. Construction aggregates have accounted for the majority of the traffic carried by schemes funded by grants. 3 The Department award grant after assessing a scheme’s ehgibihty and value for money using three criteria. These are the efigibihty of the capital items; a quantification of the environmental benefits gained from removing the freight from the roads; and an assessment of the amount of grant needed to make the scheme EnanciaUy viable compared to the cheaper road alternative. Out of 80 companies approaching the Department about the grants in the three years to September 1995, nine per cent pursued an apphcation through to the award of grant, 4 The National Audit Office examined the Department of Transport’s appraisal and award of freight facihties grants in England, and their impact on the freight industry. The report considers: . whether the grants have secured the anticipated traffic flows on rail or inland wateways (Part 2); . whether the Department have adopted a dependable and consistent approach to val~ng the environmental benefits of proposed schemes (Part 3); and . whether there is potential for the grants to have greater impact (Part 4), This summary draws together the findings and makes recommendations for enhancing the administration and effectiveness of the grants. 1 DEPARTMENT OF TWSPORT: FREIGHT FACIUTIES GWTS IN ENGWD g;g:tig 5 Since 1974 the Department have taken action to recover grant in three cases, where the facilities have been closed or sold. The Department have not sought forecasts repayment where they considered that traff]c had fallen short of forecast levels, due to events beyond the company’s control. With the most recent grants awarded at more than 50 per cent of the cost of the facihties the Department have borne an increased share of the risk of forecast benefits not being achieved. To reduce tbe risk, the Department have scrutinised applicants’ traffic forecasts and sought confirmation of tbe proposed freight movements from their customers and, where practicable, the rail freight operating companies (paragraphs 2.1, 2.3, 2.7, 2.12 and 4.11). 6 The Railways Act 1993 enables the Department to require evidence from the apphcant on, amongst other things, the amount and destination of goods which are to use the facilities. The Department normally use a five to ten year period to assess traffic forecasts in grant apphcations but companies have found it difficult in a number of cases to provide the Department with the assurance they required. Companies considered that forecasting traffic flows over a long period was not appropriate to the nature of their business, and many had been holding back from entering into contracts with the rail freight operating companies pending their privatisation (paragraphs 2.4 and 2.6). 7 Some potential applicants have found it particdarly difficult to specify traffic flows where they have proposals to build inland waterway or rail freight terminals, which would be used by many companies. The Department have generally encouraged combined road and rail transport (intermodal freight), but they have reservations about apphcations for grant for vehicles capable of use on road and rail. This is because of the risk that such vehicles might he used primarily for road trafic (paragraphs 1.9, 2.6 and 4.12-4.14). 8 Thirty schemes, 79 per cent of the 38 schemes awarded grant since 1985 and operational in the period up to the end of 1995, have carried less traff]c than forecast for that period. In total the 38 schemes carried 72 per cent of the traffic forecast. A few schemes involving the movement of bulk freight within the company have been particularly successful and carried up to 156 per cent of forecast traffic. Companies cited business downturn and the withdrawal of British Rail services as the principal reasons for traffic shortfalls (paragraphs 2.9-2.11). 9 The Department should clarify the circumstances in which they will re@re repayment of grant due to shortfalls in traffic. Greater clarity should enable companies to take more account of this in their plans, and reduce the risk of non-recovery of grant where “trafficis below expectations. The Department might also consider accepting, so far as this is consistent with the legislation, evidence of estimated future traffic flows, based on an appraisal of the atip~cant’s business case for the investment. This may encourage apphcations from more flexible and less predictable areas of the freight market which may be deterred, currently, by the requirement to provide detailed evidence of committed traffic flows. To have confidence in companies’ figures for actual 2 DEPARTMENT OF TMNSPORT: FREIGHT FACILITIES GWS IN ENGLAND traffic flows, for the purposes of recovering grant, the Department would need more comprehensive information on the sources of the data; and access to these records for the purpose of checking them on a sample basis. 10 In some cases, however, re~ance on later repayment of grant might represent an undue risk to public funds, especially where future traffic flows could be more than usua~y affected by circumstances beyond tbe apphcant’s control. As an alternative to payment of grant as construction of the facilities progresses or as equipment is purchased, the Department might consider offering a proportion of the eligible grant in this way and tbe remainder in annual instahnents. The payment of annual inslahueuts could be according to actual traffic flows, as confirmed by the Department. Again, this may diminish tbe need to obtain detailed evidence on committed future traffic flows, thus speeding up the award of grant and making it more responsive to the freight market. Valtig 11 The Department pay grant up to an amount not exceeding the projected value of environmental environmental benefits offered by the scheme. The value is calculated using benefits rates for each lorry mile removed from different classes of ro~d. The rates have been changed up and down over time, and have been extended to cover more classes of road. The Department reco~ised in their 1990 review of the grants that there has been no rigorous justification for the various rates. But the level of the lorry mile rate may significantly affect whether the grant will make a scheme financially viable, compared to the alternative of using road transport (paragraphs 3.1, and 3.4-3.12).