Select Committee on Agriculture Sixth Report

APPENDIX 20

Memorandum submitted by Ernst & Young (F31)

INTRODUCTION

  1.1  Ernst & Young is currently advising the Environment Agency on the procurement of two flood defence schemes. Necessarily, this work requires an understanding of:

—  the overall framework for the approval of flood defence schemes and their subsequent management;

—  the nature and extent of the powers of the Environment Agency in respect of flood defences;

—  the structure of the funding arrangements for flood defence schemes.

  1.2  Accordingly, we consider that we are in an informed position to make a submission to the Agriculture Committee Inquiry relating to some of the current issues in respect of flood and coastal defence. This submission addresses the focus of the Agriculture Committee's inquiry from two perspectives. These are:

—  achieving value for money: in the context of this submission value for money is viewed as achieving optimal value for the total spend on flood defences in England and Wales unconstrained by the divisions of funding created by the need for an individual project to be affordable:

—  within a specific financial year; and

—  by the availability of funding at both central and local Government levels.

—  the nature and extent of the powers granted to the Environment Agency to undertake flood defence works.

  1.3  As the issues which drive the conclusions set out in this submission are both complex and interrelated the submission conclusions are provided first. The rationale for the conclusions is then set out in separate sections as follows:

—  Management and Control structure;

—  Project Appraisal;

—  Project Funding and Procurement.

CONCLUSIONS

  2.1  The present arrangements for the management and control of flood defences do not permit the optimisation of flood defence expenditure across the whole of England and Wales. The principal reasons for this include:

—  the shared roles of the Ministry of Agriculture, Fisheries and Food (MAFF) and Local Government can act to impose artificial limitations on project scoping as it may be constrained by the geographical boundaries of the local Government entity proposing the project and differing local behaviour concerning the distinction between capital projects and on-going maintenance;

—  traditional central, and particularly, local Government accounting conventions and procurement methods may result in the:

—  project scope being constrained by the availability of funding in any given financial year;

—  the project works of larger projects having to be carried out over a number of years in recognition of the availibility of funding (particularly local Government) with the consequence that the project cost is increased.

—  the current MAFF project appraisal technique may have the perverse effect of stimulating the demand for flood defence works on an increasingly escalating basis;

—  there is not a close correlation between the beneficiaries of flood defence schemes and the bearing of the cost of the defences provided;

 the agriculture committee267

—  the flood defence project design, consultation and planning processes are time consuming and expensive;

—  consideration should be given to the Environment Agency refusing to exercise its permissive powers to provide flood defence schemes where planning restrictions and/or the demands of consultees threaten to increase unreasonably the cost and/or timescale of providing the proposed flood defence works;

—  a reform of the current management control and funding arrangements for flood defences would enable more innovative approaches to the procurement and maintenance of flood defence works to be explored and, where appropriate, adopted.

MANAGEMENT AND CONTROL STRUCTURE

Background

  3.1  Expenditure on flood defence is controlled through Regional Flood Defence Committees (RFDCs). The role of the RFDC is to decide what schemes The Agency should undertake. It is therefore responsible for the approval of new schemes. The RFDC comprises representatives from the Ministry of Agriculture Fisheries and Food (MAFF) and the constituent councils of the flood defence region. MAFF's involvement is as a result of being the Ministry who set flood defence policy and since all capical projects remain partly funded by MAFF (see later) currently their approval is required. The Agency attends RFDC meetings but has no voting representation on the committee.

  3.2  The RFDCs delegate the work of identifying expenditure and approving new schemes to Local Flood Defence Committees (LFDCs) in some regions. The LFDC committee members are appointed by the RFDC and the local authorities. The RFDC and LFDC are responsible for approving new schemes and agreeing the local authority levy raised by The Agency to fund the local regions flood defence expenditure. The FDCs also have an obligation to consult local authorities and representatives of organisations interested in flood defence about any proposed new schemes prior to approval.

  3.3  The actual work of identifying new schemes and suggesting the regions' annual expenditure is performed by The Agency who submit recommendations to the FDC. The Agency does not vote on approval of the expenditure or the setting of the local authority levy.

Observations

  3.4  The above arrangements do have the advantage of involving local Government and central Government funding departments in the decision making process concerning flood defence schemes. However, this structure which is, to some extent, mirrored in the funding arrangements may result in the creation of artificial geographical divisions.

  3.5  This issue may arise because individual RFDCs and LFDCs identify their own particular priorities for flood defences and the need for:

—  new or replacement flood defence works broadly within the context of the MAFF priority scoring system;

—  local maintenance practices.

  3.6  Whereas these priorities may be appropriate in the local context they may not:

—  adequately recognise that project work or maintenance practices at one location may have an adverse impact on the flood defence needs and existing flood defences of neighbouring territories for which they do not have responsibility;

—  permit the identification of larger and possibly more cost effective flood defence projects which would cross local territorial boundaries.

  3.7  Further, it should be pointed out that it is far from clear as to how a project prioritisation system which is based on regional and local initiatives and which is constrained by regional funding limits can lead to the creation of an appropriate overall project prioritisation assessment for England and Wales as a whole.

  3.8  The present management and control arrangements have a number of further affects. These include:

—  the role of funding flood defence works and the role of planning, procuring and executing them are to a large extent separated;

—  the Environment Agency, in practical terms, is focused on effective project delivery rather than the wider issues of optimising the value received for the overall spend of flood defences in England and Wales.

  3.9  In making these comments it is not suggested that the present management and control arrangements do not operate effectively within the context of their structure. It is, however, suggested that by taking a wider view of the overall flood defence needs and priorities for England and Wales different priorities and individual project scopings might emerge and these could offer better value for money.

PROJECT APPRAISAL

Background

  4.1  New projects and extensive renovation of existing defences are designated as capital projects. These are eligible for grant funding from MAFF. For a scheme to qualify for grant funding it must comply with the requirements of the Project Appraisal Guidance Notes (PAGN) published by MAFF as guidance on investment in flood defence.

  The PAGN method of assessing projects can be summarised into two tests.

Economic Justification

  4.2  The economic benefits of a flood defence scheme are derived from attaching value to the property, infrastructure, farmland and environment protected by the flood defences and these benefits are compared to the life costs of the projects proposed. Providing the benefits of a scheme exceed its total life costs it is eligible for consideration for MAFF funding. The PAGN analysis does not distinguish between the benefits to the public and private sectors ensuring the widest impact of the scheme is considered.

Indicative Standard

  4.3  The evaluation methodology applied by MAFF includes recommended levels of protection. The appropriate level of protection is influenced by the extent of development, agriculture and other activity in the vicinity of the area under consideration.

Observations

  4.4  A number of different scenarios can be envisaged which would give rise to the need for flood defences. These include:

—  Scenario 1—in a developed area a need for flood defence works emerges due to changing coastal or fluvial conditions;

—  Scenario 2—in a developed area which is already defended the works required to be upgraded and/or replaced;

—  Scenario 3—in an undeveloped and undefended area commercial or residential development takes place and this creates the economic justification for the provision of flood defences.

  4.5  Scenarios 1 and 2 can be regarded as normal conditions under which it would be expected that central and local Government would act to preserve the economic value in place. However, it should be pointed out that where, in scenario 1, a susceptibility to flooding has been long standing a pernicious cycle maybe triggered as follows:

—  the market value of property etc may initially reflect the susceptibility to flooding;

—  the provision of flood defences reduces the susceptibility to flooding and increases the market value of the property defended;

—  finally, the enhanced market value of property will raise the priority for those flood defences to be maintained and even strengthened in the longer term.

  4.6  The consequences of this cycle are that:

—  the property owner enjoys the benefit of the additional value created whilst only making a marginal direct contribution to the cost;

—  the Government is potentially faced with a long term escalating liability to provide flood defences. This is because unless a decision is taken to abandon some existing defended areas each new initiative adds to the overall long term obligation for the maintenance and provision of replacement flood defences.

  These observations should be considered in the context of the predicted rise in sea level and consequent impact of this on the need for flood defences.

  4.7  Scenario 3 addresses a somewhat different but nevertheless important issue. This is that local authorities have only a minimal financial disincentive to grant planning permission in areas which are susceptible to flooding. Similarly, the developer is not always required to contribute to the cost of flood defences which are necessitated by the development which it is proposed to carry out.

  4.8  The present project appraisal technique is not sensitive to the above issues and this may be appropriate in the overall content of Government policy. However, it is considered that project proposals should not just be approved on the basis of economic justification. For example, it may, in some circumstances, be more cost effective to consider:

—  the use of compulsory purchase orders;

—  seeking to identify new mechanisms for obtaining contributions to flood defence schemes.

PROJECT FUNDING AND PROCUREMENT

Background

  5.1  Each flood defence region is allocated a fixed amount of MAFF grant each year. The MAFF grant covers a fixed percentage of a scheme's total cost. The portion funded by MAFF varies between the regions, sparsely populated areas with large expenditure requirements receive a higher percentage grant for capital projects. The balance of the funding for projects is obtained from the Local Authority Levy.

  5.2  The significant features of this funding method described above are:

—  There is a finite amount of funds for each region each period particularly as levy funds can only be committed within the committee area in which it is received;

—  Funding is awarded annually;

—  Although MAFF do have a priority scoring system the application of funds may still be influenced by the availability of local funding.

  5.3  These features have hitherto prevented The Environment Agency awarding long term contracts spanning several funding periods with the result that:

—  Schemes progress can be inhibited by the need to carry out construction over several years in line with the availability of funds;

—  The contracts awarded are smaller and can result in several contracts for a single scheme creating inefficiencies as contracts are wound up and down;

—  The need for The Agency to retain funds for emergency work in each region throughout the year results in each region being put under pressure to use up its budget towards the end of the financial year in February and March when bad weather conditions can make working less effective.

Observations on Funding

  5.4  The above constraining features of the funding arrangements and the issues raised earlier in respect of management and control combine to produce micro rather than macro solutions to flood defence needs. This is because:

—  the geographical authority limits of the RFDCs and LFDCs necessarily suggest projects within those geographical limits; and

—  time limitations created by financial years dictate the size of individual contracts in respect of project works and the timetable in which construction takes place.

  5.5  In the previous section of this submission, reference was made to the likelihood of an escalating long term liability for flood defences in England and Wales. One of the ways in which to address this liability would be to ensure the total flood defence funds available for England and Wales are committed in the most effective manner for the countries as a whole. This is only likely to be achieved if:

—  a single entity is responsible for the management of flood defences, not including drainage, in England and Wales and for the allocation of funding associated with the provision and maintenance of flood defences;

—  a greater freedom is provided to permit the entity responsible for flood defences to enter into term contracts which involve on-going commitments across an extended number of Government financial years;

—  more innovative procurement methods are explored and exploited where appropriate.

Procurement Issues

  5.6  Typically, flood defences have normally been procured through a conventional process of requiring contractors to bid competitively for works which have been specified by independent consulting engineers acting on terms of reference provided by the Environment Agency.

  5.7  Currently, two flood defence schemes are being tendered with a view to their being awarded on the basis of a PFI/Partnering relationship. The discussions that have taken place within the market generally and bidders in particular suggest that:

—  an even stronger private sector involvement would be forthcoming if flood defence schemes were larger in scale and offered greater opportunity for design innovation, particularly if this were allowed to evolve over the concession period;

—  there is considerable scepticism as to whether or not the Government will actually commit to long term Partnering contracts in view of the long term funding commitments.

  5.8  Ernst & Young suggest that it is important that greater private sector participation is harnessed in order to promote design, construction and operational efficiency in the provision and maintenance of flood defences. This could perhaps be most effectively provided by creating a number of concession areas and requiring the successful bidder to provide flood defence management for the duration of the concession period. It would be for the contractor to determine the appropriate means of providing such flood defences subject to guidance concerning minimum standards by the responsible Government authority. This minimum level need not correspond to the current levels that would be indicated by PAGN.

  5.9  Further, it should be noted that many new and innovative financial products are now being developed in assist to develop business in managing risks. Such products are emerging in respect of flood defences and may offer a more cost effective mechanism than physical defence works in addressing certain areas of risk.

7 April 1998

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Prepared 5 August 1998