191209 Letter From NAO re ‘No Schedule of DCP Rates’

09/12/2019 from NAO Reference GF 1231 19

I note and am responding to your correspondence of 11 and 18 November, as well as your request to treat our handling of your correspondence as a formal complaint of 5 December.

Clarification of the record on ‘schedule of rates’

You refer in your e-mail of the 11 November to a matter on which I and Highways England have already clarified the record. I will set out the chronology here but propose to draw a line under this particular issue here.

The minute of my original meeting of 14 May 2019 with a Highways England official, which you included in your correspondence, said that ‘ASCs include a schedule of rates’. This might have been taken to imply, in the context, that a schedule of pre-defined rates existed for the settlement of DCP cases.

My previous response to you of 4 September set out in detail the clarified position I subsequently received from Highways England, clarifying that the ‘schedule of rates’ referred to in my letter to you does not exist in respect of the prices chargeable for unscheduled strategic road network repairs. The letter further clarified the existence of another rate schedule, the purpose of which is to support agreement of prices for other (non DCP) work within the ASC contracts. I understand Highways England considers these rates to be commercially sensitive.

As per my earlier communication, this set of rates appears to have been the source of the ambiguous wording in our 14 May 2019 minute quoted above. I apologise for any misunderstanding which has arisen, but I have nothing to add to my email of 4 September on this matter. You have had visibility of my exchanges with Highways England on this matter including through the FOI process. I am mindful of your belief outlined in multiple correspondences that a set of DCP rates existed prior to the National Schedule of Repair Costs (‘NSORC’) established on June 24. Taking into account the content of the exchanges with Highways
England, as well as my accumulated audit knowledge, the evidence in my possession does not support your belief.

Your e-mail includes a question about how the National Audit Office (NAO) ‘were able to perform their task’. In this respect I have nothing to add to my letter of 3 June where I stated the following.

Regarding your comments on our audit work, I remain confident – having reviewed your concerns – in the quality of support for the C&AG’s annual opinions on Highways England’s financial statements. The scope of our financial audit is set out in detail ahead of the financial statements in each of Highways England’s set of accounts, including the application of materiality.

On your broader concern, I noted in my original response of 16 May, and subsequent correspondence on 3 June, 4 September, and 3 October, that the NAO has made enquiries and raised questions with Highways England. However, we do not intend to perform detailed investigation on the issues you have raised. As per my previous correspondence, I have been mindful of the extent of taxpayer funding involved in the matter, and our limited resources in prioritising discretionary work.

Inquiry with Highways England regarding NSORC

Notwithstanding this, I did opt – as I described in my 16 May letter – to follow up with Highways England regarding the planned move to create a single transparent schedule of rates, which was covered in the final paragraph of my minute of the 14 May 2019 meeting. This project became the NSORC, which as you know has now been withdrawn; Highways England describe the reasons for this on their website at http://www.highwaysengland.co.uk/thirdpartyclaims/ – I have reproduced the content (retrieved on 9 December 2019) at Annex 1.

While this announcement contains a significant amount of detail describing the current state of play, I have also met with a senior official at Highways England to discuss the progress towards a more transparent schedule of rates. I note the difficulties described in the note, and Highways England’s openness that consensus for the proposed Schedule has not been reached with the insurance industry. It seems a reasonable course of action in the circumstances for Highways England to perform further work to see if consensus can be achieved on a more granular schedule which better reflects market and recognised industry benchmark rates.

Evaluation of further NAO action required

While I will keep in touch with this area to the extent required by financial audit standards, I do not propose to perform further discretionary work in this area following our correspondence. By virtue of their respective roles, Highways England (and its contractors) clearly have a distinct duty of care from the insurers of drivers who have caused damage (and the loss adjusters they may contract with). Where agreement on individual cases or points of principle prove elusive, I am conscious that such disagreements are ultimately liable to settlement in court, if necessary.

In this environment, it is neither the NAO’s role nor intention to interpose itself in exchanges between Highways England and its stakeholders on what constitute reasonable rates supporting settlement.

In line with our statutory role, however, I have laid out to Highways England that from a public value for money point of view the NAO supports the principle of a scheme which, properly tested and based on more granular data if judged necessary, could provide confidence on standard rates in the service of reducing administration and costs around green claims, while preserving financially equitable outcomes both for Highways England, insurers and insured drivers. With that, I intend to leave this matter closed.

Dissatisfaction with NAO response

Finally, I note the dissatisfaction you expressed regarding my response on this matter in your emails of 18 November and 5 December.

I read your principal heads of complaint as relating to the need to clarify the record in respect of the existence or otherwise of the pre-NSORC ‘schedule of rates’. I have covered this point above and it was covered in detail in my reply of 4 September. You also raised your concern about what you considered my limited response to your original concerns. I have explained our decision in the context of our discretion to determine the nature and extent of our work above.

In respect of your comments in your e-mail of 5 December regarding Highway England, your first and third bullet point relate to matters on which the NAO has determined not to perform further investigation, for the reasons set out above.

I do, however, note your second bullet point where you say that you can assist in finding a post NSORC solution workable for all parties, and I would encourage you to continue to engage with Highways England on this.
Escalation and request for handling as a formal complaint

You asked for your email of the 5 December to be treated as a formal compliant and have previously asked how you can escalate you concerns. Any escalation of a concern would be considered under our complaints policy (you can read this at https://www.nao.org.uk/contact-us/complaints-about-the-nao/). I have aimed to cover in this response the issues you have raised in previous correspondence and the concerns you raised in your email of 5 December.

I hope this response taken with my previous responses does explain our position and explains how we have considered seriously your concerns. However, if you still wish for you correspondence to be treated as a formal complaint I will of course instigate that.

Matt Kay
Director, Transport Financial Audit

Annex 1
Highways England website extract on NSORC suspension (retrieved 5 Dec 2019)

National schedule of repair costs for network damage (Green Claims) – pilot outcome
Since 24 June this year (2019) Highways England has been assessing the benefits of utilising a national schedule of repair costs for claims against drivers or owners of vehicles who are liable for causing damage to our roads.
We have been engaging with the insurance industry through the Association of British Insurers and despite our best efforts, have been unable to reach a consensus for the National Schedule as it currently stands.
We are therefore suspending the use of the Schedule while we assess our options for a different set of repair costs that better reflect the open market and the needs of insurers.
We now have a greater understanding of the requirements which will need to be met to enable a National Schedule to be successfully implemented and used in the future, and we remain confident in the benefits this could provide to all interested parties.
Why did we introduce the National Schedule in the first place?
As owner of England’s motorways and major A roads we are legally entitled to recover from the driver/owner of the vehicle causing the damage (or more usually the relevant insurer) the reasonable cost of repair so as to restore the network to its state before it was damaged.
It has been apparent for some time that insurers consider the pricing of Green Claims in individual cases to lack transparency. The contractual arrangements between Highways England and its service providers, often containing separate regimes for claims above and below a £10,000 threshold, and different pricing methodologies, have led to varying labour and equipment rates and therefore significantly different repair costs being applied to similar repairs. Understandably, this has led to disputes over the reasonableness of individual claims (often of relatively low value), delays and underrecovery.
By introducing a national schedule, we had hoped to provide the insurance industry the benefit of the rates that we had been able to secure in a competitive market.
Our intention was to introduce a more consistent methodology for assessing claims, to create an environment where there was greater trust between Highways England and the insurance industry, and to reduce the number of claims being disputed.
This would have improved the rate of recovery and made the whole claims process less burdensome to all parties.
What was different?
Contracts between Highways England (and in the past the Highways Agency) and maintenance contractors have often referred to the basis of recovery as “actual” or “defined” costs. We do not have schedules of rates for the unplanned/emergency repairs specified in those contracts. This lack of transparency led to concerns in the insurance industry that drivers and insurers were not being correctly charged for repairs.
To address this, Highways England introduced a National Schedule of Repair Costs as a means to pursue typical claims on the basis of estimates rather than actuals. The National Schedule was introduced on 24 June this year.
The National Schedule does not purport to reflect or represent actual or defined costs on most occasions. The “actual” costs of repairing a specific item can, in practice, be difficult to isolate and quantify (hence the potential for inconsistency referred to above). Nor, in legal terms, is actual cost necessarily relevant: the asset owner is simply entitled to charge a reasonable cost of having the damage repaired.
The aim was (and remains) to bring much greater transparency and consistency to repair costs and thus provide confidence to the insurance industry that what is being charged is reasonable and therefore should not be the subject of further dispute.
We believe a National Schedule can achieve these aims and could lead to the earlier resolution of claims by narrowing the issues of dispute between the parties.
This in turn would lead to costs savings as claims could be settled more efficiently and amicably. The need for the parties to resort to litigation to progress or resolve claims would be reduced.
The National Schedule set out a range of typical repairs to the network. The repair costs were built up from contracted labour and equipment rates, shifts and materials rates. The labour and equipment rates were based on an average of rates submitted by successful tenderers for planned maintenance work.
However, it is apparent that these repair costs do not have the level of granularity required. It is also clear that the rates themselves need to be looked at. To address these issues, we have now instructed a Quantity Surveyor to review our proposals and to provide ongoing expert advice on what will be needed to ensure a revised National Schedule successfully meets industry requirements.
On what basis have we paused the introduction of the National Schedule of Repair Costs?
Successful implementation of the National Schedule could only be achieved through consensus with insurance companies, and a recognition that the repair costs were reasonable and supported through good evidence of damage.
We have been engaging with the insurance industry through the Association of British Insurers, but have been unable to reach a consensus for the proposed Schedule as it currently stands. Taking feedback on board we believe that the National Schedule of Repair Costs needs to be re-worked to a more granular level, and with rates which better reflect wider market rates. We have therefore suspended the pilot. We will be taking forward the lessons learned.
What happens next?
We will revert to pursuing claims based on the actual cost of carrying out the repairs and will continue to explore options for a transparent and equitable set of rates.
We will be actively pursuing the settlement of older claims too, as there has been a slowing of settled claims creating a sizeable a backlog of outstanding claims and monies owed to Highways England.
What will happen to claims that have already been submitted using the NSORC?
Any claims that have been priced under the National Schedule of Repair Costs will be re-priced using actuals and re-submitted.
Where a claim may have reached a point of litigation, the claim will not be litigated under the current National Schedule of Repair Costs. We will ensure that any legal proceedings already issued are amended to reflect this.