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Expect delays: What highways cuts mean for contractors

Councils have been on the frontline of the government’s austerity drive. They have endured cuts in the money they get from Whitehall for several years and many have had to make reductions in services to balance the books.

The next financial year, which is just weeks away, is set to be similarly challenging.

So what can contractors expect from the next round of budgets?

Many councils have announced cutbacks and in some areas highways is one of the services that will lose out.

Reasons to be fearful

One reason for the belt tightening is that the average council’s central government grant to run services will fall by 8.5 per cent in 2014/15 according to the Local Government Association - or 15.9 per cent for those that do not get an NHS grant towards adult social care. Caps on council tax increases have also contributed to the spending restrictions.

DfT maintenance capital block grant for England

Source: DfT

At the same time, demand for some services that councils have a legal obligation to provide, such as adult social care, has risen as the population ages.

Consequently, cuts may fall harder on other areas, including highways.

A paper by the LGA in 2013 found that a hypothetical council dealing with a 10 per cent cut in its central government grant overall might end up cutting its highways budget by 15 per cent in 2015/16 as it contends with increased demand for adult social care, children’s and waste services.

Falling grants

This is bad news for contractors and road users alike.

DfT total integrated transport and maintenance block capital grants

Source: DfT

This money pays for the revenue side of highways services, which includes drainage maintenance, staff costs, winter gritting, grass cutting and reactive repairs such as pothole fixing.

Planned maintenance is not immune, either. This is funded by the maintenance block capital grant from the Department for Transport, and the maintenance grant for England has been falling - from £806m in 2011/12 to £707m in 2014/15.

The total funding, made up of the maintenance block capital grant and integrated transport block grant, fell to £1.07bn in 2013/14, but rose to £1.2bn for the following year.

This pays for small transport improvement projects such as road safety schemes, bus priority, cycling schemes and transport information.

In numbers

£5.8bn Road maintenance capital funding 2015/16 to 2020/21 (DfT)

£300m Annual rise in roads capital funding from 2015/16 (LGA)

8.5% Average fall in a council’s grant from Whitehall to run all its services in 2014/15 (LGA)

1 in 5 roads have a residual life of less than five years (ALARM survey)

£200m Pothole fund announced in the 2014 Budget


How councils deal with funding cuts varies; some make small or temporary cuts, while others find extra money for roads elsewhere.

Some plan to reduce the amount they spend on winter maintenance such as gritting, do less drainage upkeep such as clearing gullies, or cut staff, says Association of Directors of Environment, Economy, Planning & Transport (ADEPT) president Steve Kent.

For contractors bidding for work, the only certainty is that every council will take a different approach to roads funding.

Council case study

One council with big cuts to make is Norfolk County Council, which will reduce its overall council spending by £66m in 2014/15. Its highways seem to have done well, then, to have escaped with a £1m cut, especially since budgets will go back up again by £1m the following year.

“It will take some money from its integrated transport block grant to supplement maintenance, but the cuts leave councils such as Norfolk facing extremely difficult decisions”

This cut is in addition to a £5m saving the council made when it negotiated three highways contracts. The council’s interim director of environment, transport and development Tom McCabe says it made the savings on maintenance with Lafarge Tarmac, professional services and design with Mouchel, and traffic signals with Imtech.

Mr McCabe says the council can make the £1m cut by rescheduling work into 2015/16. “It is about deferring some expenditure rather than stopping it,” he says.

The council’s maintenance block capital grant fell, too - from £22.5m in 2011/12 to £19.3m in 2014/15.

It will take some money from its integrated transport block grant to supplement maintenance, but the cuts leave councils such as Norfolk facing extremely difficult decisions.

Flooding response

In response to specific problems such as the severe flooding experienced in areas of the UK earlier this year, the DfT often announces one-off extra funding for maintenance.

A total of £183.5m of extra funding was announced for flood-hit roads following the recent floods. This included £103.5m for English councils, a £36.5m fund for which councils could bid and £10m for Somerset’s roads.

The LGA welcomed the funding, but noted extreme rainfall in 2012 caused an estimated £338m of damage to roads.

Although the extra funds are undoubtedly welcome, it is an tiny percentage of what is needed to bring the country’s roads back up to scratch.

A stark indicator of the scale of the problem comes from the Asphalt Industry Alliance’s Annual Local Authority Road Maintenance (ALARM) survey for 2013, which says it would cost £10.5bn to fix England and Wales’ roads.

Click on graphic to enlarge

Asphalt Industry Alliance Annual Local Authority Road Maintenance survey 2013

Source: ALARM

Potential positives

But there is some potentially good news for roads, with changes to funding coming into force next year. In the June 2013 spending review, the government promised £5.8bn for maintenance between 2015/16 and 2020/21.

This is contingent on the government being re-elected next year.

“We have to welcome what the DfT has managed to achieve in getting the money. But we should not kid ourselves that this will reverse the problem”

Steve Kent, ADEPT

The LGA says it amounts to an increase of about £300m a year beyond the funding they had been expecting. But in light of the £10.5bn repairs backlog, the scale of the challenge is clear.

“We have to welcome what the DfT has managed to achieve in getting the money,” ADEPT president Steve Kent says. “But we should not kid ourselves that this will reverse the problem.

“It should halt the decline in road condition and, if spent effectively, it might even slightly reverse it to a slight improvement.

“But it won’t suddenly mean that in five to six years’ time the local road network is in fully serviceable condition.”

New approach to funding

Further change is ahead, with the DfT mooting the idea of changing the way this capital funding will be handed out from 2015/16 to 2020/21.

”If the DfT can begin to move towards a five-year settlement, it enables the supply chain to gear up and give me better prices”

Tom McCabe, Norfolk County Council

It suggested £1.2bn should be top-sliced from the £5.8bn six-year maintenance fund to go into a competitive pot for councils to bid for.

It also asked whether a further amount, perhaps 10 per cent, should only go to councils with an up-to-date asset management plan.

The DfT requested comments on these suggestions at events in January and February and will carry out a formal consultation in the summer.

Worries raised

But some councils voice concerns over the proposals.

Both Mr McCabe and Mr Kent raise the point that bidding for the competitive part of the fund would use up resources they could be spending on highways.

Similarly, the prospect of a 10 per cent cut might not be the best way to ensure councils have good-quality plans for their assets.

“The local authorities sector would rather see a phased move working with government, so within five years all councils have and use robust asset management plans”

Steve Kent, ADEPT

There may be political or other reasons why some councils do not have a comprehensive asset management plan, and the DfT might achieve a better result by helping councils to develop a plan, rather than taking money away.

“It could exacerbate the gap between the haves and have-nots in asset management terms,” Mr Kent says.

“My personal view is the local authorities sector would rather see a phased move working with government, so within five years all councils have and use robust asset management plans.”

David Binding, group commercial director at contractor Eurovia UK, says it will take some councils “many years” to survey and accurately measure the condition of unclassified roads, and recommends the DfT provides funding to help councils do so.

Demand for more certainty

The proposals also suggested linking a proportion of funding, again perhaps 10 per cent, to the adoption of efficiency principles.

But what some councils would like to see is some certainty from the government so they can plan and budget effectively.

Mr McCabe says he would like the DfT to reinstate three or even five-year indications of how much funding councils will receive. ”If the DfT can begin to move towards a five-year settlement, it enables the supply chain to gear up and give me better prices,” he says.

“If you plough millions into a good road surface while the drainage system falls into disrepair, that will negate the benefits of the capital funding”

Steve Kent, ADEPT

While more capital funding may be on the way, the councils’ revenue grants are set to fall again in 2015/16, which could create another set of problems for highways departments. “By 2015/16, some will be revenue poor but cash rich,” Mr Kent says.

“The revenue cuts could prompt some councils to shed staff, leaving them short of the skills needed to deliver the increased capital programmes when the money comes in 2015/16.”

Similarly, maintenance work that will help to keep the new roads in good condition and prevent water damage, such as drainage upkeep, is paid for from squeezed revenue funds.

“To put it crudely, if you plough millions into a good road surface while the drainage system falls into disrepair because of lack of maintenance revenue, that will negate the benefits of the capital funding we spend on road structure,” Mr Kent says.

Capital funds rise

A DfT spokeswoman says it is providing increased capital funding to local authorities, including more than £1bn this year for highways maintenance.

Capital funding now averages £950m per year from 2011/12 to 2014/15, compared with about £800m for 2007/08 to 2010/11, she adds.
From 2015/16 to 2020/21, the department will be providing almost £1bn a year, an increase on current spending, and is one of the few budgets in government to have long-term certainty.

The Highways Maintenance Efficiency Programme, which is funded by the DfT and includes representatives from councils, has suggested the highways maintenance sector could make efficiency savings of up to 30 per cent between 2010 and 2020.

As for declining revenue budgets, local government minister Brandon Lewis says the government has “tried to be fair to all parts of the country”.

Councils could retain extra business rates generated by attracting more companies to their areas, he says, and get the New Homes Bonus for approving the construction of more homes in order to “invest the rewards of growth in local services and in lower taxes”.

Examples of major shifts

Some councils are making big changes to save money. A few authorities are sharing services with neighbouring authorities to save money; those with a very small design team of two or three people might choose to pool resources, Mr Kent says.

“Innovation in technology and materials and in the way orders are placed and organised can make operation on the ground as efficient as possible”

David Binding, Eurovia UK

Similarly, specialist skills such as bridge design and traffic signal engineers lend themselves to shared teams, he adds. There could be further outsourcing to the private sector, particularly inspection of highways and street lighting, and possibly also design work.

Multi-authority frameworks are another way to share resources. Eurovia’s Mr Binding says regional frameworks can save money, such as the Midlands Highway Alliance, for which Eurovia subsidiary Ringway is a contractor.

“The savings can be on staff organisation on the client side by combining procurement and combining operation of the contract,” he says.

“Efficiency is only achieved if it is run in a collaborative way; innovation in technology and materials and in the way orders are placed and organised can make operation on the ground as efficient as possible,” he says.

Clever ways around

And there are ways councils can reclassify work so it is funded differently, while staying within the rules; by upgrading a repair so that it qualifies as an enhancement, for example, the work becomes eligible for capital funding rather than being funded from revenue.

They could also spend capital on projects that will save revenue such as installing LED street lighting to save energy and parts. But this capital-revenue switch only works for some schemes.

“The positives are completely undermined by the fact there isn’t enough money to bring the network into a state that is fit for purpose”

Andrew Hansen, FM Conway

“There comes a stage where you cannot capitalise anymore,” says Norfolk’s Mr McCabe. “Different authorities will be at different stages on the curve and, for some, capitalisation won’t be an option.”

Some councils such as Blackpool have developed their own solution and borrowed money for maintenance.

Authorities are also talking to residents about changes. Mr Binding says some councils are asking residents about gritting sections of road or about whether some minor roads could be left unmaintained if there are alternative routes.

Unexpected benefits

The funding squeeze has had a few benefits - albeit bittersweet. FM Conway chief operating officer Andrew Hansen says some councils have not been replacing retiring staff and have become more reliant on their contractors as a result.

“It has caused local authorities to become closer to their contractors and it is causing all of us to be more innovative on materials and methods,” he says.

“But the positives are completely undermined by the fact there isn’t enough money to bring the network into a state that is fit for purpose.”

Councils have warned cutting cannot continue much for longer as repeated reductions in maintenance budgets show up as deterioration of roads years later.

“We have to look at things on a 20 to 40-year lifespan,” Mr McCabe says.

“A £1m hit in one year does not concern me; over a 20-year lifespan, what concerns me is that the base funding allows us to look after the asset. There’s no point building new things if the fabric is not working.”

Budget unveils £200m pot for potholes

In last week’s Budget, George Osborne announced a £200m fund councils can bid for to repair potholes in 2014/15.

The Budget document said the potholes challenge fund in 2014/15 would enable councils to repair 3.2m potholes following severe weather. In his speech, Mr Osborne said councils could bid for the money.

ADEPT president Steve Kent said of the Budget’s plan: “It is welcome but it won’t address the fundamental road condition problem.”

The Department for Transport explained how the £183.5m pledged for repairs following the wettest winter on record would be split between different councils.

The money is made up of £103.5m split across English councils using a formula, and £80m for flood-hit areas, which included £10m for Somerset’s roads, £30m for councils in England affected by the weather announced in February, and £3.5m in January.

Somerset received the largest share of this money, its funding totalling £12.3m.

The government said it wanted the £103.5m to be used before the summer holidays and that councils must publish information on where the money was spent by August 2014 to qualify for it.

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