Holding Highways England to account Impact assessments March 2020 

## Contents

1. Introduction 
3 
2. Policy area: ORR hearings 
4 
Objective 
4 
Background 
4 
Options under consideration 
5 
Preferred option 
10 
3. Policy area: ORR's approach to fining Highways England 
11 
Objective 
11 
Background 
11 
Options under consideration 
13 
Preferred option 
19 
Appendix 1 - Public Sector Equality Duty (PSED) consideration 
20 
 

## 1. Introduction

1.1 This document sets out our assessment of the impacts of two changes to how we 
hold Highways England to account in our monitoring framework and enforcement 
policy, *Holding Highways England to account.* These changes are: 
 
introducing ORR hearings as an option in our regulatory toolkit; and 
 
removing indicative scales for fines, and instead proposing to limit fines to avoid 
taking money out of the business that could otherwise be spent on managing the network. 
1.2 The impact assessments should be read alongside the revised policy and our 
covering decision letter. They provide more context on how we have considered the 
changes in the final version of the Holding Highways England to account policy 
1.3 We consulted on these changes to gather views from our stakeholders. The 
responses we received covered a wide range of issues and are discussed in more detail, along with a description of the changes we made to our policy, in the covering decision letter.  
1.4 The points raised that most closely related to the areas and options covered in these 
impact assessments related to: 
 
specifics in how we would undertake hearings, at a level of detail beyond what is covered in the options set out here; 
 
proposals around how the monies levied from any fines we impose should be 
invested - this goes beyond the powers we have under the Infrastructure Act 
2015 so we have not considered it as an option here; and 
 
Highways England's preference to remove an explicit link to management 
remuneration in the policy when considering the size of a fine. We have considered this as a hybrid between the two options we originally set out. It maintains the intent of option 2 to protect the funding for Highways England's day-to-day operations. However, without a specific alternative mechanism for sizing fines, it reflects the open-ended flexibility of option 1. 

## 2. Policy Area: Orr Hearings Objective

2.1 Our objective is to provide strong incentives for Highways England to take prompt 
action to address performance concerns, promoting early resolution and avoiding the need to escalate issues further.  
2.2 This part of the impact assessment considers the addition of ORR hearings as a new 
tool in our enforcement policy, and should be read in conjunction with the final version of our *Holding Highways England to account* document.  

## Background

2.3 Highways England is a government-owned company, responsible for operating, 
maintaining and improving the strategic road network - the motorways and main A-
roads in England. Highways England's funding and what it is required to deliver are set in five-year road investment strategies, and it operates under a Licence that sets 
out additional requirements. 
2.4 As Highways Monitor, ORR holds Highways England to account for how it manages 
the strategic road network (SRN). We monitor Highways England's performance and 
efficiency and, if necessary, can take enforcement action. There are some similarities 
between our role and that of regulators in privatised, regulated utilities. But there are also important differences, which mainly arise from Highways England's status as a public sector body and how it is funded by taxpayers. 
2.5 As a public sector body, Highways England has no private capital at risk and no 
traditional shareholders to satisfy. Therefore financial penalties or fines are less likely 
to be an effective deterrent or incentive for Highways England as they would for 
private companies. (We assess the impact of our revised policy on fines later in this document.) In this context it is important that we consider a wide range of alternative mechanisms, including options that operate through more reputational incentives. 
2.6 In this impact assessment we consider the impacts of holding ORR hearings at 
different stages of our process, which is summarised below.  
2.7 Stage 1 of our process - routine monitoring and assessment, involves assessing 
Highways England's performance. As well as determining how Highways England is performing, our activities in this stage may alert us to where obligations and commitments may be at risk. Stage 2 - investigation and early resolution, is where we escalate performance concerns that are identified through our routine monitoring and assessment. Stage 3 - enforcement, would involve the use of our statutory enforcement powers. Further information about our activities in each stage is set out in our *Holding Highways England to account* policy. 
2.8 ORR hearings could provide a useful tool to collect information and allow different 
parties to present their positions, and provide an incentive for Highways England to 
resolve issues quickly, to avoid the need for a hearing. It will be for ORR to determine 
the timing, scope and format of a hearing, and the parties involved, depending on the 
issue under consideration. We expect to publish a written record of proceedings (respecting commercial confidentiality).  

## Options Under Consideration

2.9 We consider two options, based around the different stages in our process when we 
could hold hearings. We also considered an option 0, which would not see hearings introduced. We have not included this in the table below as it would have no impact relative to the status quo, but we discuss it underneath the table. The options are assessed qualitatively against each other, and a 'do nothing' option of not having 
hearings as part of our toolkit. The options are:  
Option 1 - retaining flexibility to use hearings at any point in our process; and 
 
Option 2 - focusing hearings in stage 2 (investigation and early resolution). 
2.10 The table below summarises the key impacts of each option and the following section 
assesses the pros and cons of options 1 and 2 relative to the 'do nothing' option. 

|                                      | Option 1    |
|--------------------------------------|-------------|
| Low-medium                           | Medium      |
| Impact on                            |             |
| performance                          |             |
| (relating to the                     |             |
| topic of the                         |             |
| hearing)                             |             |
| Having latitude to use hearings      |             |
| at any point in the process gives    |             |
| ORR maximum flexibility, which       |             |
| may create strong compliance         |             |
| incentives for Highways              |             |
| England. But this may go too far     |             |
| and incentivise risk-aversion.       |             |
| Focusing hearings in stage 2         |             |
| gives appropriate emphasis to        |             |
| the compliance issue, and an         |             |
| opportunity for Highways             |             |
| England to resolve the issue         |             |
| before ORR decides whether to        |             |
| take statutory action.               |             |
| Retaining some flexibility to        |             |
| potentially use hearings in stage    |             |
| 3 may be a useful addition to        |             |
| our toolkit, particularly where we   |             |
| need more information to             |             |
| determine the appropriate            |             |
| enforcement action.                  |             |
| Low-medium                           | Medium-high |
| Impact on future                     |             |
| performance (for                     |             |
| similar issues)                      |             |
| Having the ability to use            |             |
| hearings at any stage in the         |             |
| process undermines their             |             |
| deterrent effect and potentially     |             |
| reduces their impact at later        |             |
| stages in the process.               |             |
| Hearings may incentivise             |             |
| Highways England to resolve          |             |
| issues early. The strength of the    |             |
| incentive/deterrent effect is likely |             |
| to reflect the prominence given      |             |
| to a hearing (and its related        |             |
| issue), which is likely to be        |             |
| greater for hearings in stage 2,     |             |
| as they are likely to be important   |             |
| factors when determining             |             |
| whether or not to take statutory     |             |
| action.                              |             |
| Medium                               | High        |

## Reputational Impact

The reputational impact of having a hearing predominantly in stage 2 will be more significant. As we expect to publish a written record of a hearing, stakeholders will have some visibility of the relevant non-compliance issue. If this is seen as rare and serious it will have a more significant impact on the company than if it were seen as "business as usual". 

The reputational impact of a hearing is likely to be affected by two key considerations: the prominence given to the hearing and severity of the issue. Both are likely to increase the later in the process a hearing is held. However, the impact of a hearing at the enforcement stage is moderated by the fact that other enforcement action we might take at that stage would also have a reputational impact, reducing the impact of the hearing alone. 

| Low-medium     |
|----------------|
| Net            |
| administrative |
| costs          |

While having a hearing will always impose some costs, they are unlikely to be significant, particularly as they are most likely to be used later in stage 2 when significant evidence gathering has already taken place. Targeting them at stage 2 as part of an investigation will mean that they should be used infrequently. 

A hearing at any stage would involve costs for ORR, Highways England and any other attendees. Hearings at an earlier stage could find an early resolution and reduce the need for further action (and related costs). Later stage hearings might involve higher costs as more thorough preparation is required. As part of any decision to hold a hearing, it will be important for ORR to assess whether the potential benefits outweigh the administrative costs. 

The costs of having a hearing are unlikely to be significant. 
Medium 
Medium-high 
Behavioural impact 
If appropriately targeted as being a pre-enforcement tool that is a serious issue, we expect hearings will have a strong deterrent effect and incentivise Highways England to resolve issues and engage with us fully prior to our decision on whether or not to take enforcement action. 
Highways England's management is likely to want to avoid the reputational impact of a hearing being held, so will take steps to ensure one is not needed. The size of this incentive/deterrent is linked to the size of the reputational impact. If hearings can be used at any point in our 3 stages, Highways England may see them potentially as more "business as usual" activities. This may mean their behavioural impact is lessened. 

## Option 0 - Do Nothing

2.11 Under the 'do nothing' option, we would not have the option of holding "on the record" 
hearings into Highways England's performance as part of our regulatory toolkit. We would still be able to use our existing methods and statutory powers to require Highways England to provide us with information. And we would still have other reputational tools available to us, for example by making public comment on performance issues. As option 0 is the counterfactual, we have not assessed it in the 
table above. 

## Option 1 - Retaining Flexibility To Use Hearings At Any Point In The Process

2.12 Being able to use hearings at any stage in the process would provide ORR with 
maximum flexibility. ORR would be able to bring Highways England, and potentially 
other stakeholders, together to gather information and try to find early solutions to a potential issue. This is most likely to be effective where other routes to gather information have not been successful. 
2.13 There would be cost and resource implications for ORR, Highways England and any 
other attendees. It will be important for ORR to assess whether the potential benefits of a hearing at this stage outweigh the administrative costs. And those potential benefits include the early resolution of an issue that could reduce the need for further 
escalation, and associated costs. 
2.14 In this option, we would not state our intent to focus hearings at a specific stage in 
the process. Because of this, it may create stronger incentives on Highways England 
to avoid non-compliance for the smallest of issues, which may impose additional compliance costs on the company. It may also mean that Highways England is more reluctant to be open and transparent with us for fear that a minor issue may be the subject of a hearing. While we would still need to act proportionately, Highways England may perceive that we would not be, and this may impact on our working relationship with the company.  

## Option 2 - Focusing Hearings In Stage 2

2.15 Using hearings predominantly in stage 2 and potentially in stage 3 is more 
proportionate than option 1. Hearings are most likely to be effective where we have already identified a concern with some aspect of Highways England's performance and are failing to gain traction to resolve the issue. So the focus at this stage would 
likely be more on gathering information to determine whether statutory action is required, than on identifying preventative action. 
2.16 As such, hearings at stage 2 would have a stronger reputational impact because it 
would be clear that we are investigating an issue with Highways England's performance and there is the opportunity to deal with the issue prior to the consideration of statutory enforcement action. And, in turn, hearings at this stage 
would create a stronger behavioural incentive or deterrent for Highways England's management to avoid the need for a hearing by finding an early resolution to the problem. This obviously does not rule out us taking statutory enforcement action following a hearing if so warranted. 
2.17 A hearing at stage 2 would be before the ORR Board's decision about whether 
statutory enforcement action, in the form of an improvement notice or a fine, is appropriate. So it could also help ensure we can collect the relevant information that 
would be needed for the ORR Board to make that decision.  
2.18 As hearings would be most likely to come before any decisions about escalating 
further to statutory enforcement action, hearings at this stage are likely to attract the largest administrative costs, due to the strong incentives for thorough preparation. 
However, we expect a hearing is most useful at a relatively late point in stage 2 when there will already have been significant evidence gathering. So the marginal cost of holding a hearing may not be large. We would consider the cost of a hearing when deciding whether to have one. 
2.19 But this option does not rule out the use of a hearing once non-compliance has been 
found and the need for statutory enforcement decided upon. Although it is unlikely 
many situations would warrant a hearing in stage 3, this option retains flexibility to 
use hearings to gather further information to determine the appropriate enforcement action in response to non-compliance.  

2.20 We would make public any statutory enforcement action we take and, given the 
stage of the process, would likely make some public comment on the issue at the appropriate time and via the appropriate channel, even if we do not proceed with statutory enforcement action. This means there would already be a reputational impact on Highways England, which would offset the impact of holding a hearing in stage 3 and reduce the behavioural incentives it creates. 

## Preferred Option

2.21 There are benefits to having hearings available as part of our regulatory toolkit. 
Hearings have costs and so we need to consider on a case-by-case basis whether 
the potential benefits outweigh them. Option 1, retaining flexibility to use hearings at 
any point in the process, has advantages, but risks creating unintended 
consequences that may work against us in future, for example because it changes how open Highways England is with us. Therefore option 2, focusing hearings in 
stage 2, is our preferred option. Hearings are most likely to be an effective way of gathering information during an investigation, and serve as an effective deterrent to ensure issues are resolved in stage 1 and do not proceed to stage 2. 
2.22 While there may be few circumstances in which holding a hearing at stage 3 is 
appropriate, we are not ruling it out. Holding a hearing to gather further information 
on the appropriate enforcement action once ORR has determined there has been a significant non-compliance issue, could be beneficial. This may allow us to gain 
further information from stakeholders on what course of action is most likely to be effective. 

## 3. Policy Area: Orr'S Approach To Fining Highways England Objective

3.1 Our objective is to make sure that we have a credible policy on fines which supports 
and incentivises improved performance from Highways England in its management 
of the strategic road network. 

## Background

3.2 This impact assessment looks at the impact of changing our approach to levying 
fines on Highways England in light of the changes that will take place when the second road investment strategy (RIS2) comes into effect. 
3.3 The 2015 Infrastructure Act gives us the power to levy fines on Highways England if 
it is not complying (or has not complied) with the RIS or its Licence. So fines form an 
important part of how we hold Highways England to account, including through a deterrent effect. We consider fines to be a last resort, and have not issued one to 
date. But it is important that we set out how and when this power may be used. It is 
also important that our approach reflects Highways England's status as a public sector body, with no private capital at risk. As such, our approach to monitoring and enforcing Highways England focuses on early resolution of issues and reputational incentives.  
3.4 Under the enforcement policy in place during the first road period (RP1)1, we set out 
the likely maximum amount we would fine Highways England at 1% of Highways England's average annual funding, around £25m. We set this significantly below the 10% of turnover limit that is typical in other regulated sectors to reflect Highways 
England's status as a public sector body. 
3.5 However, given the increase in funding announced for the second road period (RP2), 
there could be a perception that we want to increase the magnitude of any fines we impose, because of the link between funding and fines in our policy. Without changes, our policy could create an impression we could fine Highways England around £50m for the most serious instance of non-compliance. A fine of this size could significantly affect Highways England's ability to fulfil its obligations under the RIS and its Licence to operate and maintain the SRN. In turn, this could affect the credibility of our approach to fines and reduce its effectiveness in incentivising performance. Because of this, we need to change how this works in our policy. 3.6 The options we assess below include removing indicative fine levels and considering 
setting fines so that they could be paid whilst protecting the funding for Highways 
England's day job. How payment of a fine is funded is for Highways England to decide, but, we consider a fine is most likely to have the desired effect if it is set at a level that does not remove funding that would otherwise be spent on operating the SRN. Before assessing those options it is helpful to set out some background on the potential links between fines and management remuneration. 
3.7 We assume that both fines and management remuneration would be payable from 
Highways England's resource (or opex) budget. This is set for five-year periods as part of the road investment strategy process but with annual budgets that follow government departmental expenditure limit rules. Highways England only has limited financial flexibility and there is uncertainty about the arrangements for the second road period and beyond. In this analysis we have assumed that the company is not 
able to carry or transfer resource funding between years. So if it underspends its resource funding, this is returned to HM Treasury and essentially 'lost' from Highways 
England's budgets. 
3.8 Highways England has discretion over its management remuneration system and 
how this works could change over time. Its current system includes the potential for Highways England to reduce management remuneration through its performance 
related pay arrangements.2 If this were to occur, it would be likely to lead to an 
underspend that would be returned to HM Treasury. 
3.9 For example, imagine Highways England is initially planning management 
remuneration of £Xm but decides to halve this in light of a serious incident. Remuneration decisions are typically taken late in (or after the end of) the financial year so this would likely result in an underspend of £½Xm that Highways England would be unable to carry over to the next financial year, and would return to HM Treasury. It is only if an incident (and the associated remuneration decision) happens early enough in the year that the company would be able to redirect the £½Xm to alternative/additional operations or maintenance activities. 
3.10 In this context, if we were to levy a fine of £½Xm it would clearly not affect the 
funding available for operations or maintenance. Rather, it would convert the underspend (which goes to HM Treasury) into a fine (which is paid to HM Treasury) with the primary impact being reputational, rather than financial. 
3.11 There are two potential complications to this example. First, the time taken to 
investigate an issue and decide to fine the company could mean that we levy a fine in the financial year after the related incident (or non-compliance, more broadly) took 
place. And Highways England could already have decided, the previous year, to reduce its management remuneration. In this instance, a fine could either mean that management remuneration is reduced twice in relation to the same incident, or that funding would be taken out of operations and maintenance (if Highways England decided not to reduce management remuneration a second time). So it would be important for us to consider decisions that Highways England had already taken regarding management remuneration when considering whether and at what level to impose a fine. We have made this clearer in our final policy. 

3.12 Second, Highways England could choose to fund fines (partly or wholly) by reducing 
management remuneration, regardless of the intent in our policy. And, again regardless of the intent in our policy, Highways England could choose not to fund a fine through reduced management remuneration. However, considering setting fines so they could be payable from management remuneration would put the onus on Highways England and protect the funding for operations and maintenance. 

## Options Under Consideration

3.13 We consider three options in this impact assessment. 
 
Option 0 - do nothing (maintain the current approach to fines - we have chosen 
to assess this in the table below because, in the absence of changes, our policy would continue to link fine levels to funding. This would mean that 'do nothing' would have an impact);  
 
Option 1 - remove the indicative scales for fines in different categories of 
seriousness3; and 
 
Option 2 - remove indicative scales for fines in different categories of 
seriousness and consider setting fines so they are capable of being paid from 
Highways England management remuneration. 
3.14 The table below summarises the key impacts of each option and the following section 
assesses the pros and cons of options 1 and 2 relative to the 'do nothing' option. 

## 

|                         | Option 0    | Option 1    |
|-------------------------|-------------|-------------|
| Up to Medium/high       | Up to High  | Low         |
| Fines could reduce      |             |             |
| the available funding.  |             |             |
| Fines could reduce      |             |             |
| the available funding.  |             |             |
| Impact on               |             |             |
| funding                 |             |             |
| available to            |             |             |
| operate and             |             |             |
| maintain the            |             |             |
| SRN                     |             |             |
|                         |             |             |
|                         |             |             |
|                         |             |             |
| It would be less likely |             |             |
| that there would be a   |             |             |
| reduction in funding    |             |             |
| to operate and          |             |             |
| maintain the SRN as     |             |             |
| we would consider       |             |             |
| setting the fine so it  |             |             |
| could be fundable       |             |             |
| from management         |             |             |
| remuneration. This      |             |             |
| would ultimately be     |             |             |
| Highways England's      |             |             |
| choice.                 |             |             |
| The amount would        |             |             |
| depend on the           |             |             |
| severity of the issue - |             |             |
| £5m-£50m in the         |             |             |
| most serious            |             |             |
| category (where fines   |             |             |
| might be more likely    |             |             |
| to be deemed            |             |             |
| appropriate) - and      |             |             |
| Highways England's      |             |             |
| decisions around        |             |             |
| management              |             |             |
| remuneration.           |             |             |
| The size of fines       |             |             |
| would be considered     |             |             |
| on a case-by-case       |             |             |
| basis. There would      |             |             |
| be more uncertainty     |             |             |
| around the size of      |             |             |
| fines but we would      |             |             |
| not expect to levy      |             |             |
| fines that would risk   |             |             |
| delivery of the RIS.    |             |             |
| The impact on           |             |             |
| funding available for   |             |             |
| operations and          |             |             |
| maintenance might       |             |             |
| depend on Highways      |             |             |
| England's choices       |             |             |
| around management       |             |             |
| remuneration.           |             |             |
| Up to Medium            | Up to High  | Low         |
| Financial               |             |             |
| impact on HM            |             |             |
| Treasury                |             |             |
| Fines would be paid     |             |             |
| to HMT. The amount      |             |             |
| would depend on the     |             |             |
| severity of the issue.  |             |             |
| Fines would be paid     |             |             |
| to HMT. The amount      |             |             |
| would be considered     |             |             |
| on a case-by-case       |             |             |
| basis.                  |             |             |
| Fines would be paid     |             |             |
| to HMT, with the        |             |             |
| amount set so it        |             |             |
| could be funded from    |             |             |
| Highways England        |             |             |
| management              |             |             |
| remuneration, and       |             |             |
| set on a case-by-       |             |             |
| case basis.             |             |             |
| Medium                  | Medium    | Medium    |
|-------------------------|-----------|-----------|
| Financial               |           |           |
| impact on               |           |           |
| Highways                |           |           |
| England                 |           |           |
| management              |           |           |
| Highways England        |           |           |
| could decide to         |           |           |
| reduce management       |           |           |
| remuneration in light   |           |           |
| of poor performance /   |           |           |
| our decision to levy a  |           |           |
| fine.                   |           |           |
|                         |           |           |
| Where appropriate,      |           |           |
| fines would be set so   |           |           |
| they could be funded    |           |           |
| from management         |           |           |
| remuneration. In        |           |           |
| practice this is likely |           |           |
| to have no more         |           |           |
| material impact than    |           |           |
| option 0.               |           |           |
|                         |           |           |
| At Highways             |           |           |
| England's discretion.   |           |           |
| Highways England        |           |           |
| could decide to         |           |           |
| reduce management       |           |           |
| remuneration in light   |           |           |
| of poor performance /   |           |           |
| our decision to levy a  |           |           |
| fine, but the fines we  |           |           |
| set could be smaller    |           |           |
| or larger than the      |           |           |
| other two options       |           |           |
| without having clear    |           |           |
| principles on which to  |           |           |
| base the level of fine. |           |           |
|                         |           |           |
| At Highways             |           |           |
| England's discretion.   |           |           |
|                         |           |           |
| At Highways             |           |           |
| England's discretion.   |           |           |
| Low/Medium              | Medium    | Low       |
| Financial               |           |           |
| impact on               |           |           |
| other                   |           |           |
| Highways                |           |           |
| England staff           |           |           |
| Highways England        |           |           |
| could decide to         |           |           |
| reduce management       |           |           |
| remuneration in light   |           |           |
| of poor performance /   |           |           |
| our decision to levy a  |           |           |
| fine. No limits on      |           |           |
| fines may mean that     |           |           |
| Highways England        |           |           |
| needs to find other     |           |           |
| sources of funding to   |           |           |
| pay and restricts       |           |           |
| remuneration to other   |           |           |
| members of staff.       |           |           |
| Highways England        |           |           |
| could decide to         |           |           |
| reduce management       |           |           |
| remuneration in light   |           |           |
| of poor performance /   |           |           |
| our decision to levy a  |           |           |
| fine. The impact may    |           |           |
| be lower than the       |           |           |
| other two options as    |           |           |
| we are more likely to   |           |           |
| set fines at a level    |           |           |
| that could be funded    |           |           |
| from management         |           |           |
| remuneration than       |           |           |
| the other two options.  |           |           |
| Highways England        |           |           |
| could decide to         |           |           |
| reduce management       |           |           |
| remuneration in light   |           |           |
| of poor performance /   |           |           |
| our decision to levy a  |           |           |
| fine. Relatively high   |           |           |
| limits on fines may     |           |           |
| mean that Highways      |           |           |
| England needs to find   |           |           |
| other sources of        |           |           |
| funding to pay and      |           |           |
| restricts remuneration  |           |           |
| to other members of     |           |           |
| staff.                  |           |           |
|                         |           |           |
|                         |           |           |
|                         |           |           |
At Highways England's discretion. 
At Highways England's discretion. 
At Highways England's discretion. 
Medium 
Up to High 
Medium-High 
Reputational and behavioural impact 
Fines would be more explicitly set at a level to create a financial and reputational incentive for Highways England's management's performance and actions. 
Our powers to levy fines have a deterrent effect to incentivise Highways England to deliver the RIS and Licence. Through the company's management remuneration system, this could cascade to management and staff. But the upper limit on the size of fines could make this less effective, as the fines potentially become too large to be credible. 
If Highways England chose to reduce management remuneration before 
year-end it could 
reduce incentives for the rest of the year. This applies for all options but is most relevant to option 2, where fines are more closely related to management remuneration.  
Our powers to levy fines have a deterrent effect to incentivise Highways England to deliver the RIS and Licence. Through the company's management remuneration system 
this could cascade to management and staff. But the openended nature of any fine limits could create uncertainty and a disproportionate response from Highways England. It could become riskaverse and unwilling to innovate for fear of having a fine imposed, the size of which could be unlimited. 
Similarly, applying a fine for a preceding year may reduce incentives for the year in operation, and may not impact on those who were 

responsible for the issue at the time. There may be a small risk that this option impacts on management morale and recruitment, or leads to too much management focus on a single issue. This applies for all options but is most relevant to option 2, where fines are more closely related to management remuneration. 

## Option 0 - Do Nothing

3.15 While this option would not involve any changes to the policy, it would result in 
impacts because of the way indicative fine levels are linked to Highways England's 
average annual funding. While we would still have the discretion to set a fine at the appropriate level, the enforcement policy in place during RP1 includes statements 
that we would not normally levy a fine exceeding £25m, 1% of Highways England's 
average annual funding. In RIS2, 1% of funding would be about £50m. If we did not change this in the policy there is inconsistency, the risk of confusion, and a likelihood Highways England would consider we had increased the size of the fines we could impose. This could create inappropriate incentives or undermine the credibility of our enforcement tools.  

## Option 1 - Remove The Indicative Scales For Fines In Different Categories Of Seriousness

3.16 Compared to 'do nothing', this option reduces the perception that ORR would be 
likely to levy large fines (up to £50m) that would reduce the funding available to operate and maintain the SRN. In turn, this would ensure that our approach to fines remains credible and an effective deterrent to incentivise delivery of the RIS and Licence. 
3.17 This option gives ORR maximum flexibility to determine the appropriate level for a 
fine, on a case-by-case basis. But this flexibility creates uncertainty, particularly for 
Highways England, around the level of fine that we might decide to impose. This could include expectations of larger fines than under our current policy or the 'do nothing' option. 

3.18 Similarly to the 'do nothing' option it would be entirely at Highways England's 
discretion to decide whether any fines would be (partly or wholly) funded from management remuneration, or from funds to operate and maintain the SRN. 

## Option 2 - Remove Indicative Scales For Fines In Different Categories Of Seriousness And Consider Setting Them So They Are Capable Of Being Paid From Highways England Management Remuneration

3.19 This option maximises the likelihood that any fines would be funded from 
management remuneration, rather than funding to operate or maintain the SRN 
(although this would still ultimately remain an issue for Highways England to determine). This would avoid impacting on Highways England's ability to resource its RIS2 requirements, while maintaining fines as an appropriate and proportionate tool to incentivise the company. 
3.20 This option provides more direct reputational and financial incentives for Highways 
England's management, as the expectation is clear that it should take responsibility for significant issues of non-compliance. There could be an increased public 
expectation that ORR would levy fines, and that Highways England would then fund any fine through reduced management remuneration, which, if anything, would likely strengthen these incentives. 
3.21 Our policy that we expect the company to consider fines when determining senior 
management remuneration has been our position since the first enforcement policy was introduced. Setting out an approach whereby we may set fines so that they are 
capable of being funded from management remuneration means that we are not 
unduly limited in determining the size of a fine. 
3.22 There may be a small risk that this option may impact on Highways England's 
management morale and its ability to recruit and retain staff, or lead to too much 
management focus on a single issue.  However, decisions on how to fund any fine we impose are for Highways England. Our Holding Highways England to account 
policy also states that we will consider the impact of our course of action on the company when deciding on enforcement action. It also makes clear that we consider 
fines to be a last resort. 

## Preferred Option

3.23 In the event that we did not make any changes to our policy, when RP2 starts our 
indicative fine levels would become inconsistent, as average annual funding for 
Highways England would change. Applying the percentage levels to the increased funding expected in RP2 could also create an expectation we would levy significant 
fines on Highways England in the event of severe non-compliance issues. This may 
cause Highways England to act in a strongly risk-averse manner, and result in additional costs or reduce the company's efficiency. 
3.24 We want our rules on fines to give us flexibility to respond in the appropriate manner 
at all times. But we also want to ensure that we lessen the likelihood of taking money 
out of Highways England's funding to manage the network. If we were to remove only 
the indicative levels for fines (as in option 1), this could give the impression we want 
to retain the ability to impose almost unlimited fines, which is not the case. 
3.25 Under Highways England's preferred approach, we could still be clear of our intent to 
protect the funding for its day-to-day operations, without specifying a link to 
management remuneration. While this would increase our flexibility, we want to 
ensure there are clearly understood principles that would underpin the level at which we set a fine. 
3.26 Option 2 would set a clearer expectation that we would consider whether it was 
appropriate to set fines at a level that enables Highways England to fund them from management remuneration so as to avoid a negative impact on funding for the network. This is our preferred option. Within this option, we are clear that the actual decision about how to fund any fine would be for Highways England to determine, and that we would take into account any action it has taken regarding its management remuneration when considering a fine. 

## Appendix 1 - Public Sector Equality Duty (Psed) Consideration

This appendix sets out how we have fulfilled the requirements placed on us as a public authority by the Public Sector Equality Duty as set out in *section 149* of the Equality Act 2010. In summary, the PSED requires the decision maker to pay due regard to the need to: 

- eliminate unlawful discrimination, harassment and victimisation and other 
conduct prohibited by the EA 2010; 
- advance equality of opportunity between people who share a relevant 
protected characteristic and those who do not share it; and 
- foster good relations between people who share a relevant protected 
characteristic and those who do not share it. 
In considering the extent to which our proposals contribute to the fulfilment of these duties, we have considered the equality impacts of our policy, primarily through the suggested questions set out in Equality and Human Rights Commission guidance.4 
The broad objective of our approach to monitoring and enforcement is to provide Highways England with the right incentives to deliver what is required, which will ultimately benefit all those who use, and are affected by, the strategic road network. Regarding the specific options in this impact assessment, the area where equality considerations are most relevant relates to our approach to fines, and how Highways England might fund them. Regardless of the intent in our policy, it is for the company to determine how it would fund any fine. 

1. Does the policy affect service users, employees or the wider community? 
The relevance of a policy to equality depends not just on the number of those affected but on the significance of the impact on them. 
As described above, our approach is intended to provide Highways England with the right incentives to deliver, to the benefit of its users and the wider community. But this impact is indirect. Similarly, our proposed approach to fines could affect Highways England employees by impacting management remuneration in the event of us levying a fine. But this impact would also be indirect as it would be for Highways England to determine how to fund a fine.  

2. Is it likely to affect people with particular protected characteristics 
differently?  
                                            
Our approach would not differentially affect people with particular protected characteristics. The *Equality Act 2010*, defined nine protected characteristics and prohibited conduct in relation to people sharing these characteristics: Age, Disability, Gender reassignment or gender identity, Marriage and civil partnership, Pregnant people and those on maternity leave, Race and ethnicity, Religion and belief, Sex, and Sexual orientation. If Highways England chose to fund a fine by reducing its management remuneration, the impact would reflect the representation of different groups in its management team. In the event of ORR holding a hearing, we would expect to make any necessary reasonable adjustments.  

3. Is it a major policy, significantly affecting how functions are delivered? 
This is a significant policy but the changes to how we will deliver our functions are relatively limited and there are no clear equality implications. Our proposed approach to fines would limit any impact on Highways England's core functions. 

4. Will the policy have a significant impact on how other organisations operate 
in terms of equality?  
No. 
5. Does the policy relate to functions that have been identified through 
engagement as being important to people with particular protected characteristics? 
No.  
6. Does the policy relate to an area with known inequalities? 
Highways England's 2019 gender pay gap report shows that it has a much smaller gender pay gap than the national and public sector averages, but that around three quarters of those in the top pay quartile are male. 

7. Does the policy relate to any equality objectives that have been set by your 
organisation? 
No.  

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