Written evidence submitted by the Office of Rail and Road (SRI0030)

Introduction

1. ORR was established as the Office of Rail Regulation in 2004, replacing the Rail Regulator. It became the Office of Rail and Road in 2015, following its appointment as the independent Monitor of National Highways under the Infrastructure Act 2015. This was part of the UK Government’s roads reform programme, in which it also created National Highways (then Highways England) as a new arms-length company to plan, design, build, operate and maintain England’s strategic road network (SRN), and appointed Transport Focus as the statutory Watchdog on behalf of road users.
2. ORR has an annual budget of £41.8m. Its road budget is funded by a Department for Transport grant of £3.5m, while its rail budget of £38.3m is funded by industry levies.
3. ORR has approximately 350 staff across the UK, of whom 24 (22.89 FTE) work in the Highways Monitor. This resource is split across four teams: safety and performance; asset management; economics, finance and efficiency; and strategy and policy.
4. ORR holds National Highways to account for the management of the SRN – the motorways and main ‘A’ roads in England. There are five main aspects to our role:
1. holding National Highways to account for how it exercises its functions, publicly reporting our findings and advising the Secretary of State for Transport (SofS);
2. reporting the company’s efficiency performance;
3. seeking improvements from the company and levelling fines where appropriate (together, escalation and enforcement);
4. advising the SofS on the development of the next road investment strategy (RIS), including advice on setting challenging and deliverable efficiencies; and
5. advising the SofS on any other relevant issues.
5. In holding National Highways to account we are forward-looking in our approach, seeking to identify and resolve risks early rather than waiting until things go wrong to take action. We set this out more fully in our Holding to Account policy (March 2020).
6. ORR annually publishes its:
1. assessment of National Highways’ performance;
2. assessment of safety performance; and
3. benchmarking report, comparing performance across England’s regions.

1. How effectively the RIS2 enhancements portfolio has been managed to date.

1.1.     National Highways learned lessons from the first road period (RP1) and it took positive measures to improve its performance for the second road period (RP2), for example the introduction of a central risk reserve (CRR). However, this has been counteracted by the increased complexity of RIS2 schemes compared to RIS1. This has introduced delays that have been mitigated through changes to the portfolio.

1.2.     National Highways’ original construction commitments for RIS2 were to achieve start of work (SOW) on 43 schemes and open for traffic (OFT) 52 schemes.

1.3.     DfT is the client sponsor for the enhancements portfolio. National Highways is the delivery agent. DfT and National Highways agree any changes to schedule, cost or outputs via change control. ORR provides additional review, challenge and advice to DfT on each change control submission. This change is then approved by the Secretary of State (SofS). As of October 2022, RIS2 commitments have been reduced via change control to achieve SOW on 32 schemes and achieve OFT on 38 schemes. The changes agreed with DfT have predominately been because of Development Consent Orders (DCOs)/planning issues and the pause of the smart motorways programme.

Revised RIS2 enhancements schemes SOW commitments as at Q3 2022-23

Revised RIS2 enhancements schemes OFT commitments as at Q3 2022-23

1.4.     There were two Tier 1 schemes (defined as being large and complex, valued at over £500m or novel/contentious) that started work in RP1. There are seven Tier 1 schemes scheduled to start works in RP2. There is a further Tier 1 scheme funded for development that is due to start work in RP3. These ten Tier 1 schemes used 44% of capital funding in RP2.

1.5.     In RIS2, National Highways has a total of 33 schemes that require a DCO. There were seven schemes that required a DCO in RP1. As of December 2022, nine RIS2 schemes have had a change control agreed due to DCO or planning issues, with seven of these related to deferral of a decision by the SofS to allow more time to consider recommendations. The adequacy of preapplication discussions and the quality of the submission is within the control of the company.

1.6.     In 2021-22, National Highways proposed that it had missed two delivery commitments on enhancements schemes. Government agreed that both commitments had been missed. As at Q3 2022-23, a further two missed commitments have been agreed. There is not a common single reason for these missed commitments.

1.7.     In 2020-21, we conducted a review of National Highways’ capability to deliver its RIS2 enhancements programme, with a focus on the capabilities required in project development and an emphasis on projects that are classified below Tier 1. The review recognised that generally the company’s approach was good. However, it identified several high-level areas for improvement:

• competence of the integrated teams with supply chain;
• ineffective sharing of lessons learned; and
• the time taken to make clear decisions about changes to projects.

1.8.     The company reacted positively and initiated work to improve in these areas. We are monitoring its actions. It has made good progress against the review’s recommendations. This will help it to mitigate the portfolio’s delivery challenges.

1.9.     In January 2022 government accepted the Transport Select Committee’s (TSC) recommendations on the roll-out and safety of smart motorways. It paused 11 RIS2 enhancements schemes and delayed four schemes to allow for stopped vehicle detection (SVD) radar technology to be fitted.

1.10.     Government reduced National Highways’ RIS2 funding from £27,505m to £24,009m in the October 2021 Spending Review. This was mainly due to the delay to several schemes requiring DCOs. The pause in smart motorway roll-out did not result in a funding reduction as it was reallocated to other priorities on the SRN.

2. Whether risks to the enhancements portfolio for the remainder of the RIS2 period are being well managed.

2.1.     National Highways has met its post-change control RIS2 delivery commitments. The company is progressing its more complex schemes through the planning process and has mitigated risk by learning lessons from applications that did not progress at the start of RP2. The company has utilised its risk reserve funding to manage change. However, given significant financial uncertainties beyond the company’s control the fund is fully allocated.

2.2.     The RIS2 enhancements portfolio is more complex than RIS1.The key risks to National Highways’ successful delivery of its remaining RIS2 enhancements portfolio commitments are achieving DCO planning consents and maintaining funding.

2.3.     In early 2021, four schemes were subject to DCO planning consent related delays. This was in part due to a greater focus on climate change and environmental protection and ensuring that planning applications properly took account of legal duties and government policy. National Highways responded to our concerns about its development of DCO applications by working with DfT as client to identify and mitigate risks in the DCO process.

2.4.     Recently, National Highways has had its DCO applications move through government’s planning process in a timely manner, gaining necessary approvals from the Planning Inspectorate and the SofS. However, at the time of writing five schemes have been legally challenged and are within the judicial review process, primarily in relation to the assessment of cumulative carbon and the impact of schemes on national carbon budgets. Until the outcomes of these reviews are known we cannot fully assess whether the company’s actions have had the intended positive effect. Whether successful or not, these legal challenges are adding to delivery delays.

2.5.     National Highways is facing inflation driven cost pressures above its RIS2 funding and is forecasting an overspend to deliver the currently agreed RIS2 outputs. The level of inflationary risk was unexpected and not wholly within the company’s powers to mitigate.

2.6.     In 2022, ORR reviewed National Highways’ management of its central risk reserve (CRR). This is a specifically defined contingency fund, held at portfolio level to manage risk. This represents the degree of capital portfolio deliverability risk agreed with government that National Highways holds within its approved funding. The review identified areas for improvement on governance, forecasting and external reporting. National Highways has made some improvements in these areas and has agreed a plan with us for further changes. As at Q2 2022-23, the company had allocated all the CRR funding it had earmarked for RIS2 enhancements.

2.7.     In November 2021, TSC published its report on the roll-out and safety of smart motorways, highlighting safety risks and suggesting mitigations. As a result, DfT required National Highways to install SVD technology on smart motorway schemes in construction. The company has experienced delays in installing and assuring the operation of the technology. In our first annual assessment of safety performance on the strategic road network we said that SVD performance is falling short of the performance requirements that the company had set itself for a number of measures. The company must take urgent action to achieve the performance levels it has set by the end of June 2023.

3. What the impacts of delays and cost overruns are on the overall programme, and whether the revised programme can be delivered to schedule and on budget.

3.1.     National Highways has met the revised construction commitments it has agreed with DfT for each year of RP2 so far. Delays and cost pressures have created negative impacts on the overall programme. The original RIS2 programme can no longer be delivered.

3.2.     National Highways is forecasting delays to 11 projects, with two SOW commitments and six OFT commitments moving to 2025-30 (RP3). One scheme had its SOW accelerated and one scheme was stopped for value for money reasons. These changes have been agreed with DfT.

3.3.     Across the remainder of RP2, National Highways is planning to achieve SOW on 21 schemes and OFT 21 schemes.

3.4.     There have been cost increases (above 5%) on 42 projects out of the 69 original RIS2 projects. The principal causes were the additional costs related to delays in achieving DCO planning consent and the impacts of inflation. There have been cost decreases (above 5%) on 15 projects, including nine paused smart motorway schemes.

3.5.     The delays and cost pressures mean that RIS2 enhancements are forecast to cost more to complete than originally planned. The most recent inflation modelling indicates a potential substantial cost pressure within RP2. The cost of delivering the RIS2 schemes within RP3 and beyond is much greater than originally anticipated. This outlook does not include the cost of completing the paused smart motorway schemes or the A1 Morpeth to Ellingham scheme.

3.6.     National Highways has a RIS2 untargeted ‘earned value’ performance indicator that focuses on the cost and schedule data for schemes currently in construction. This uses the company’s supply chain data that does not necessarily align to National Highways’ own cost and schedule programme commitments. It shows a consistent picture of the supply chain’s delivery of the enhancements portfolio generally being behind schedule and overspent. This suggests a risk to the company’s delivery of its RIS2 commitments. We are using this intelligence to help direct our scrutiny of specific schemes, for example by conducting site visits.

3.7.     National Highways measures the overall impact on road users, communities, the environment, key performance indicators and outcomes through post opening projects evaluation (POPE) reports. There have been delays to the publication of POPE reports, largely due to being unable to assess scheme impact because of reduced traffic flows during the coronavirus (COVID-19) pandemic. However, this has introduced a risk to the adoption of good practice and improvements to design/benefits realisation. If the company does not apply this learning in a timely manner it could impact safety, environmental, customer experience and value for money outcomes on future schemes.

3.8.     There are three outstanding judicial reviews to be determined in the High Court and two quashed DCOs still to be redetermined by the SofS. The impact of these legal challenges, along with the deferral of SofS decisions for seven other schemes during RP2, is affecting those schemes’ schedules and delaying National Highways’ delivery commitments. We expect more challenges during the remainder of RP2, with two recent additional challenges currently being considered by the High Court.

3.9.     Note: we have taken 'revised programme' to refer to the Delivery Plan following Spending Review 2021 and the pause to the Smart Motorway Programme as a result of the TSC’s report.

4. What progress is being made on planning for the next Road Investment Strategy.

4.1.     The programme for RIS development is formed by several milestones related to the publication of key documents. The forthcoming consultation on the SRN Initial Report is a few months later than the equivalent stage for RIS2.

4.2.     Our main responsibilities in the RIS development process are to:

• support the setting of the RIS, by providing advice on what the SofS can expect to achieve with the funds identified. This advice is intended to ascertain whether the developing proposition is both challenging and deliverable, particularly in terms of efficiency; and
• ensure that National Highways meets the conditions in its licence that relate to the setting of the RIS.

4.3.     ORR provides advice or input at several key stages in the RIS development process. These include advice to inform the setting of the government’s draft RIS and National Highways’ draft strategic business plan, and we undertake an efficiency review to assess how challenging and deliverable the RIS, and National Highways’ proposition, are.

4.4.     In May 2022 we published our proposed approach to fulfilling our role in the RIS development process. We have also provided government with additional advice on specific aspects of National Highways’ early plans to aid discussions on the next RIS.

4.5.     We are currently preparing advice to inform the development of the draft RIS. We have also gathered evidence on the topics listed below. We will publish this evidence, along with our advice to government, alongside the final RIS3:

• National Highways’ asset management and procurement/project management capabilities, and the scope for efficiency improvements from increased capability during RP3; and
• the deliverability and cost of its carbon reduction plans.

4.6.     Over the coming months we will advise DfT on the challenge and deliverability of the proposals in its draft RIS. The first stage of our advice will likely focus on:

• the high-level scope for efficiency improvements;
• National Highways’ inflation assumptions;
• the costs related to carbon reduction activities; and
• National Highways’ operational expenditure plans and any updates to its renewals plans.

5. What lessons from RIS2 need to be incorporated into RIS3 to ensure it is achievable and delivers on policy objectives.

5.1.     The key lesson has been the impact of planning issues in delaying the delivery of projects. Appropriate benchmarking is required from National Highways when project programmes are developed and more effective assessment of potential risks and contingency needs to take place.

5.2.     Improvements National Highways could make include applying quantified risk analysis (QRA) tools that the company uses when estimating costs, to project schedules and milestones, particularly around the risks relating to achieving planning consent. Relatedly, schemes need to be consistent with the policy framework in which they are developed. This will reduce the likelihood of projects being subject to protracted and successful legal challenge.

5.3.     Other lessons include the need for:

1. clear objectives and understanding of where these are complementary or potentially opposing, for example increasing maintenance leading to more roadworks that in turn impacts on user satisfaction in the short term;
2. a performance framework with specific, measurable, attainable, realistic, time-bound, targets that can be evaluated and reviewed (SMARTER). Targets need to be consistent with National Highways’ funding and take account of any potential trade-offs between different areas of performance. So ideally this would be agreed during the development of RIS3, and not once delivery is underway;
3. a clear baseline to monitor progress against, at a more disaggregated level across the full breadth of National Highways’ activities;
4. more effective recognition and mitigation of risk in portfolio and project development (using QRA tools), particularly around project schedules, milestones and achieving planning consent;
5. more explicit consideration of financial headwinds and tailwinds, in line with the approach we use effectively with Network Rail, including clarity on the value of deliverable efficiencies; and
6. the importance of clarity and stability for the supply chain.

6. Whether the Government’s current and forthcoming roads investment programme is meeting the current and future needs of consumers and business.

6.1.     Research by Transport Focus, of users’ needs, has consistently shown that journey time reliability is the key attribute that is valued the most. Many of the projects in the current RIS contribute to maintaining or improving reliability. Work is still ongoing, for example through National Highways’ route strategy development, to assess current and future needs.

7. Whether the Government’s roads investment programme aligns with other policy priorities, such as decarbonisation, levelling up, productivity and growth.

7.1.     There is some alignment between RIS2 and other policy priorities.

7.2.     The national economic, environmental and transport policy framework has evolved over the last four years as the government’s priorities have changed in response to new opportunities and challenges.

7.3.     There is inevitably a tension between the aspiration for stability that the RIS seeks to provide and a constantly evolving macro socio-economic context. On the one hand, there is a long development process for road schemes and the need to provide, via the RIS, stability and clarity for the highways sector supply chain. On the other hand, wider spatial and economic development plans, and macro socio-economic changes lead to evolving policy priorities. However, within the RIS delivery process there is a change control procedure in place to manage amendments to the RIS or National Highways’ portfolio of projects.

7.4.     We measure the delivery of RIS2 against performance specification focused on the following six outcome themes. These represent, at a broad level, the policy priorities:

• improving safety for all;
• fast and reliable journeys;
• a well maintained and resilient network;
• being environmentally responsible;
• meeting the needs of all users; and
• achieving real efficiency.

7.5.     DfT set its priorities for RIS2 in March 2020. There have been significant developments in wider policy since then, including around decarbonisation, levelling up and productivity and growth. Despite these developments coming after its publication, there is alignment between the requirements of RIS2 and these wider policy objectives, with potential to strengthen the links in RIS3. For example:

1. In July 2021, DfT published its Transport Decarbonisation Plan and National Highways published its Net Zero Highways strategy for reducing greenhouse gas emissions from its operations, maintenance construction, and road users. In RIS2, the company has commitments to baseline its emissions and to reduce its corporate carbon emissions by 75% in 2025 compared to 2017-18. This target is a stretch target of the Greening Government commitments. Net Zero Highways goes beyond, setting targets for achieving net zero for corporate emissions by 2030, for construction and maintenance emissions by 2040 and for road user emissions by 2050. These ambitions could form the basis of targets for RIS3.
2. Levelling up – the SRN plays a role in supporting this policy priority. The development of the RIS2 investment portfolio was informed by route strategies that consider local and sub-national needs. National Highways is repeating and enhancing the route strategies process for RIS3, including strengthening its engagement with sub-national transport bodies. As well as local and sub-national impacts, regardless of the location of an investment, it will impact on national connectivity. In addition, the supply chain benefits will be felt across several regions.
3. Productivity and growth – developing ‘a network that supports the economy’ was part of the strategic vision for the SRN described in RIS2. The SRN is important for the efficient functioning of the UK economy. Two thirds of all freight movement is on the SRN. Improvements to connectivity and information provided to freight users could enhance productivity.
4. Active Travel – the publication of Gear Change in July 2020 raised the priority of walking and cycling. Active travel can help tackle a number of wider policy priorities – decarbonising transport, improving air quality, achieving health and wellbeing benefits and boosting local economies.

7.6.     National Highways has four designated funds that it uses to address issues that are of particular importance to road users and stakeholders, beyond the traditional focus of roads investment. The funds also align with other policy priorities. For example, they can be targeted to fund interventions that reduce the severance caused by the SRN or provide new connections for those walking and cycling. The funds are:

• environment and wellbeing;
• users and communities;
• safety and congestion; and
• innovation and modernisation.

7.7.     The designated funds have a RP2 ring-fenced total of £936m. The company is over-programming its designated funds spend in 2022-23 to ensure that it uses its total budget. ORR is holding the company to account for its progress in delivering its designed funds projects across the remainder of RP2.

7.8.     We hold National Highways to account for its environmental outcomes. This links into Government’s environment plan. The company has a performance target for no net loss of biodiversity by 2025. We also hold National Highways to account for improving air quality on the SRN for roads in exceedance of legal nitrogen dioxide (NO2) levels in the shortest time possible.

8. How RIS3 should take account of technological developments, and evidence on ways of increasing capacity on the Strategic Road Network (such as smart motorways and potential alternatives to them).

8.1.     Technology plays an increasingly critical role in the safe management of the SRN. National Highways’ utilisation of technology to manage its network is now widespread, and embedded in most aspects of operation, monitoring and communications. It is important that RIS3 takes account of it.

8.2.     In our first annual assessment of safety performance on the strategic road network, we reported early findings from our work relating to the TSC’s recommendations from its 2021 inquiry into the roll-out and safety of smart motorways. We found that stopped vehicle detection (SVD) technology, while in place across the ALR smart motorway network by the September 2022 milestone, is not yet performing to the required levels. Urgent action is needed to improve performance and National Highways is working to achieve the required levels by the end of June 2023. The scope of our review goes beyond SVD, to consider the whole end-to-end safety system on smart motorways. We also found issues with the performance of some of the other elements of this system, notably CCTV and message signs. The company has committed funding to improve the performance of its wider operational technology assets. We will closely scrutinise its plans and will consider taking action in line with our Holding to Account policy, if necessary.

8.3.     An important consideration in the development of RIS3 will be to build on the work National Highways is doing in RP2, to secure sufficient funding for the operation, maintenance and renewal of technology. This is especially important for safety related technology. It is also important that the company updates its evidence of smart motorway safety and develops its risk assessment techniques to inform decisions in this area. This would be in line with recommendations we made as part of our review of all lane running safety data in 2021.

February 2023