Examination of Witnesses (Questions 340-359)
PAMELA TAYLOR,
RUPERT KRUGER
AND JACOB
TOMPKINS
WEDNESDAY 27 NOVEMBER 2002
340. Can you just tell me one thing. I am beginning
to get a picture here of people agreeing to lots of things and
then, all of a sudden, it is a bit like going into the restaurant
with a menu with no prices, ordering lavishly and then suddenly
discovering you have not got enough cash at the door to pay. Are
we in that kind of scenario on this Directive?
(Ms Taylor) We are heading for that, if we do not
look at all the policies available to us that we can use to offset
the expenditure. If DEFRA were to carry out the review of its
existing policies that it has and responsibilities it has for
certain policies, if it were to do that sooner rather than later,
and to tell us which policies it was prepared to bring to bear,
if you like, on the Water Framework Directive, then we would know
how much left there was. That is why I think talk about costs
has been very difficult, very problematic, and I think has been
quite negative, but understandably so, because the figures that
are bandied around are necessarily, I believe, too high, because
we do not yet know what it is we may discount.
341. Is the timetable over which this has got
to all happen really stretched out in too long a fashion, in a
way that you cannot actually address these cost implications as
early as you ought to? You mentioned the problem of this time
window, you get a very short period of time when you are supposed
to spend the money and a long period of time talking. Should we
be looking at a different implementation timetable to avoid some
of these problems?
(Mr Kruger) I think, on the timetable, there is a
long lead, in terms of the analysis that we are looking to do.
Now that has to be done, but what it means is you are back loading,
you are pushing to a later date the actual implementation timetable,
which is due to begin 2009. We have already discussed the dilemmas
that face the water sector. If we do not get any indication of
the necessary investment we may have to make between 2005 and
2010, the next periodic review, we will not be spending any money
directly to meet the requirements of the Water Framework Directive.
That means everything will have to be delivered 2010 to 2012.
If that is a £4 billion investment programme by the water
industry, physically, at the moment, we will struggle to get the
engineers on the ground, the planning processes will delay things,
it is going to be very, very tight.
342. Can I just ask you another question, which
occurs out of what you are saying. We live in a much more transparent
era now, as far as financial reporting standards are concerned,
and I would just be interested to know whether, in terms of making
provision for the expenses under this Water Framework Directive,
there are any FRS standards that will require water companies
to show in their annual accounts the future liabilities which
are being incurred with reference to the implementation of this
Directive?
(Mr Kruger) I am not an accountant but I do not think
there exist any standards for future liabilities for this Directive.
It may be an interesting question that you could put to Ofwat,
is there any mechanism whereby we can begin to recognise potential
future liabilities. Albeit, if we do not have the legislation
in place at a particular date in the UK, we know we are going
to have to have that legislation in place, we know we are going
to have to deliver a programme of work, so we can begin to recognise
that in advance. And there are a number of other examples where
that applies, Bathing Waters will be one of them, there is likely
to be a big bill attached to that; it is a revised Directive coming
through, we know it is on the cards, perhaps we need to get an
early indication of what we think the costs will be.
Mr Mitchell
343. Well, of course, you are not an accountant,
but if you report your respective revenue increase up front and
do not report the liabilities that you are going to have to incur
to deliver on it you can improve enormously your accounts?
(Mr Kruger) We will not be getting any revenue increases
because we are only funded when we spend the money, so that will
not be happening.
344. No, but, on the Enron principle, the revenue
will be authorised by Ofwat, therefore you can report it in your
accounts?
(Mr Kruger) I think you will have to address that
to Ofwat. I am sure they would not authorise a revenue from our
customers when we had not begun to spend any money on the investment
programme.
345. Just a couple of questions after that.
Have you undertaken any work on the potential costs of implementing
the Directive? What is your contribution to the cost debate?
(Mr Kruger) Sorry, I was mentioning earlier, we have
done that body of work. There is a report that has just been finalised
that I think certainly will add to the debate and we are very
happy to share with you.
346. Have you actually had any discussions with
Ofwat?
(Ms Taylor) No. That report has just been finalised,
it is not our report, it is by the UK Water Industry Research
body. And what we would like to do is discuss that with DEFRA,
with Ofwat, with the Environment Agency, and then with other stakeholders
as well. Because my concern is that the figures look high, and
the figures look high because we do not know what it is that we
may discount, we do not know what it is, what are the other policies
that DEFRA will play in, for example. If they are prepared to
look at diffuse pollution as an issue to do with CAP review, then
we can discount that from the costs for the implementation of
the Water Framework Directive. So I shared concerns that were
expressed by members of this Committee earlier this morning, that
the costs are being used, if you like, in quite a worrying way,
which is why we would like first to have the discussions with
DEFRA and Ofwat, the Environment Agency and other stakeholders,
to see how we can, working together, bring those costs down.
347. As a general approach to the Directive,
do you favour the UK leading or lagging, is it more sensible for
us to lag behind and see what everybody else does?
(Ms Taylor) No. Unfortunately, it is not more helpful
to lag behind.
348. Why not?
(Ms Taylor) Because what we will do is miss the deadlines
and miss maximising the benefits we could get from the Directive.
If it were only something to do with an engineering project and
you wanted to watch how they built it first in South America before
building it south of Birmingham, for example, then you could say,
"Well, we'll learn from other people." But I do not
want the environment, I do not want business and I do not want
communities to have to wait for the benefits that can be brought
while we look to see what others can do, especially when we have
enormous expertise in this country. If we look at the coalition
of stakeholders who have so much goodwill towards this Water Framework
Directive, the expertise there exists from people sitting behind
me right now that can be brought to bear on this, it would be
such a shame not to use that to its maximum effect.
349. Just one question, which might be parochial,
but you say in your evidence, paragraph 19, that there will be
a variation in the way sectors and areas bear the costs, which,
of course, will be part of your discussions with Ofwat, and you
mention the ominous possibility that the costs might be higher
in the heavily agricultural catchments of East Anglia. Now, as
a captive of Anglian Water, because my proposed arrangement with
Severn Trent to bring it over in buckets in the back of the car
has broken down, and a resident of Grimsby, I would resent paying
a lot more because of farming practices further south in the county?
(Ms Taylor) That is where we need transparency, before
we then go on to make the appropriate decisions. At the moment,
as a water customer, by and large, you pick up the bill for cleaning
up the environment after the chemicals have gone into it. It would
make far more sense to identify that cost separately and then
to look at the most appropriate cost-effective way of reducing
that bill. It may well be that modulation of CAP, in some way,
would be the most cost-effective way of doing it. Then, as somebody
who is in the Anglian region, as indeed I am, we then may well
benefit from improved environment, a cleaner environment, we will
benefit more from the bird-watching we do, we will feel better
about living there, and other people will envy it.
Mr Borrow
350. What do you think the long-term benefits
of the Directive will be, to what extent will those be visible
and to what extent will they be, in some ways, unseen?
(Ms Taylor) That will depend on how we implement it.
If we bring together farming policy, if we bring together flood
defence, if we bring together caring for the environment, if we
bring together how we use our rivers, which are, after all, living
things, rather than, as Jacob was saying earlier, constraining
them, by building up to their edges, by farming up their edges,
if we use our best thinking in partnership with others then the
gains can be enormous. Not just in "Doesn't it look lovely?"
but also in terms of "Isn't it cost-effective to do it this
way," but also in terms of "Look at this new region
that we are creating in terms of wealth creation," and so
on. So I think that there are a lot of policies that we can bring
together. And issues to do with flooding, and so on, are not a
cost-effective way of managing the environment. And yet when,
after foot and mouth disease, because of the policies we have
in place, we were paying farmers to put the sheep back on the
hillside, who were then eating the grass so that the water came
straight back down again, we are rewarding farmers inappropriately.
Farmers do not want that either. So it is a question of bringing
together all these policies and then seeing the benefits.
351. You mentioned, I think, in reply to Austin
Mitchell, this issue of who pays and the extent to which it should
fall on domestic water users or business users. Is that an area
you are still exploring, or is that an area that you have come
to some concrete views on?
(Ms Taylor) The principle of transparency is something
that we absolutely believe in. The principle that the polluter
should pay is what we absolutely believe in. Then it is a question
of what is the most cost-effective way of achieving that, and
that is what we would like to see, but we want to see openness
and transparency in the discussion, in the debate. If Mr Mitchell
and I are to pick up the bill for farming in East Anglia, we would
like to know that, as customers, and we would like to be consulted
on that, as customers.
352. Rather than actually passing the bill straight
on to the farmers?
(Ms Taylor) Most people have no idea that they are
paying to take chemicals out of water, most people have no idea
that is in their bill.
353. East Anglia probably is the obvious area.
To what extent do you think water pricing has got a role to play
in ensuring that we have got sustainable use of water?
(Mr Tompkins) Obviously, water pricing is one mechanism
to ensure that we have sustainable use of water. But I think what
the Water Framework Directive is doing is looking at it in a wider
context, saying if we can renaturalise rivers, so to speak, and,
rather than taking water off agricultural land as quickly as possible
into rivers then into the sea, if we slow that down and let rivers
meander as they used to, you will get more recharge of water back
into the aquifers, so basically you are retaining more water within
the land, therefore you are increasing the amount of water we
have available. That is one area where the agricultural side can
link up. We could also look at the planning side and say should
we be building 200,000 new houses in areas where there is not
much water, without at the same time having a fairly rigorous
campaign to ensure that people are using water more efficiently.
Now the water companies are doing that, they are promoting water
efficiency, but there is a lack of promotion of water efficiency
at a government level. And again these are the sorts of things
that can be done under the Water Framework Directive, so it is
not just purely a thing of what are the engineering solutions,
what are the financial solutions, it is what are the broader solutions
in other policy areas that can offset this problem in the first
place. But, yes, to a certain extent, prices will play a role,
but there needs to be greater transparency, and everyone needs
to be able to discuss these questions, hence our suggestion that
there should be a national water forum, where all of the players
can be brought together to say what is the best way of increasing
water efficiency.
(Mr Kruger) I think it is worth just pointing out
though that we already do practise full cost recovery, so, in
terms of pricing, our customers pay for all the costs that are
incurred, in terms of delivering their drinking water and removing
their waste water for treatment. So that is a philosophy that
is within the Water Framework, it is one that is already practised
in the UK and it is one that we would be continuing with.
354. I am just trying to get my head round the
situation as to why we are making progress on some of these areas,
when I can possibly understand why DEFRA is saying "We'll
leave it to 2008-10 before we put in all the big infrastructure,"
there is a Treasury argument that we will leave it till then.
But I would have thought there was a very strong, sensible argument
that these issues around making policy decisions early, as to
how land use by farmers affects the water system and all these
areas, which are not necessarily involving huge investment up
front but actually set the framework for decision-making by partners,
is something that would make a lot of sense to be done now rather
than left until the end of the decade?
(Ms Taylor) That is absolutely right, and, of course,
it is partnerships like that, where people are willing to form
those partnerships, that take longer to deliver, and we have got
to make sure that we meet the deadlines in the Water Framework
Directive. So what we are saying is that the sooner we make decisions
like that, the sooner we can begin to see the improvements in
the environment, and so on, the better that will be. The longer
we delay making the principles of the decisions, the more likely
we are then to end up with the end-of-pipe, concrete solution
that will mean higher cost and less benefit.
355. Coming on to the competent authority, early
on in this session you did make it clear that you felt the Government
needed to appoint a competent authority to manage the whole process,
and were dissatisfied that that has not happened now. Do you see
any of the existing players as the appropriate body to be the
competent authority, with modifications and enhancement, or do
you think that is something that needs to be started from scratch
and a completely new body established?
(Ms Taylor) I think that at this stage we would say
that the Environment Agency should be the competent authority,
but we recognise that the Water Framework Directive is about environment,
about community and about business, if you like, economics. So
the Environment Agency will need the resources in order to be
the competent authority, and, through no fault of their own, I
am not confident that they do have the necessary resources to
carry out this role. They have not yet been told formally that
they are the competent authority, and that in itself is a great
disappointment to us. So we believe that they should be told that
they are the competent authority, it should be recognised that
they have enormous expertise in environmental matters. There are
two other legs to this, the community leg and the economic leg,
where they will need additional help and resources in those areas,
and we should get on with appointing them as the competent authority.
356. Have they got the powers? We have heard
quite a bit of evidence that they have not got the resources.
If the resources were provided in financial terms, and it ended
up that they had the resources in terms of personnel, have they
got the necessary powers in order to do the job?
(Mr Tompkins) I would suggest that to a certain extent
they do, but if you are going to start bringing in things like
land use planning then there may be a need to consider what powers
they would need. I will also say that perhaps a catchment or a
river basin district management board, that contained local authorities
and also contained representatives of the public, such as elected
members, for instance, or other forms of local authority, and
also regional business groups and others, would be able to advise
them on that. And the statutory powers of that group could be
decided by DEFRA. But there is an absence of statutory powers
on things like land use planning. We are not prescribing what
this board should be, we are saying that there is a gap in this
area and really DEFRA need to look at that, otherwise you are
just purely going to be getting the Environment Agency doing things
the way they have always done them, and you are not going to be
getting the crossover into other policy areas.
Paddy Tipping
357. We have talked a lot about diffuse pollution
today and you have told us that you are about to produce a study
about costs, which other people have done for you. What assumptions
have you made about diffuse pollution and the costs of diffuse
pollution in that study?
(Mr Kruger) I have to say that the study we have undertaken
has only been looking at the possible implications for the water
sector, and that was where we focused in on, we are not experts
in how you manage diffuse pollution. So that would be, I think,
a complementary piece of work that we would welcome. As I say,
we will be speaking with DEFRA, EA, Ofwat, about the work we have
done, there will be additional work that needs to be done, to
address other industrial sectors as well. We have been focusing
thus far primarily on agricultural diffuse, but I think we have
to remember that, in terms of other industrial sectors, the water
industry is not alone, we have a chemicals sector that will have
to be aware of the implications, and we have a paper and pulp
industry. So there are others that need to be brought into the
picture and need to understand the implications in terms of cost
for their industries.
358. Ms Taylor, you told us earlier on that
there needed to be a change in the CAP, switching from production
on subsidy to payments for more environmental gain. Are you confident
that that is going to happen in the timescale we are talking about?
(Ms Taylor) If I operated only in the UK I would say,
well, I am hopeful rather than confident, but, as was mentioned
earlier, I am also active in the European scene, and I have looked
at the work that we are doing there with DG Environment but also
with DG Agriculture and also talking with the pan-European farming
organisation, COPA-COGECA, and so on. I have to say that I have
got some degree of confidence as regards this, but the Government
currently has the powers in any case to switch from one pillar
to the other, it has that existing power right now, and it could
make better use of that. And certainly, in talking to Margaret
Beckett and Larry Whitty about this, we have been heartened by
the responses we have been receiving. But we do not underestimate
the challenge that there is for this, we do not underestimate
the problems there are for farming, which is why we also talk
very closely with the NFU about it.
359. What do they say?
(Ms Taylor) They are not as appalled by it as they
were when we first started talking with them. Because we have
talked about the aspirations of farmers, we have talked about
recognising what it is that farmers wish to achieve, what it is
that they can do, and we have talked about some sensible things,
such as Set Aside, where you have to set aside a field, well could
you set aside a strip next to a water course to protect it instead.
The answer is that, at the moment, no, that is not allowed; well
we could help, in terms of saying, well we believe that this should
be.
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