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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as Ev 1135-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
Environmental CRIME: CORPORATE CRIME
THURsday 28 OCTOBER 2004
MR JOHN SEXTON, MR ROY POINTER and MR CLIVE HARWARD MR JOHN HOLBROW Evidence heard in Public Questions 109 - 209
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Thursday 28 October 2004 Members present Mr Peter Ainsworth, in the Chair Gregory Barker Mr Colin Challen Mr Mark Francois
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Witnesses: Mr John Sexton, Managing Director, Thames Water Utilities Ltd., Mr Roy Pointer, Chief Executive, and Mr Clive Harward, Head of Water Quality and Environmental Performance, Anglian Water Services, examined. Q109 Chairman: Good morning, gentlemen. Thank you very much indeed for coming along. As you know, we are conducting an inquiry into environmental crime and we are looking at the whole regulatory regime. It will come as no surprise to you to hear that you are here because you have had trouble with the regulator, and have been fingered, as it were, as repeat offenders in the past. We are therefore particularly interested in hearing your reaction to the whole process in which you have been involved. Thames Water particularly appears to have had considerable difficulties, although some water companies, according to the Environment Agency in Spotlight have been able to improve their performance. Thames has had particular difficulty in doing so. Is there a particular reason for that? Mr Sexton: Mr Chairman, can I start with a little bit of context about the scale of the water industry and what we are doing in this area? You appreciate that we are collecting waste from domestic and industrial premises. We cover a large geographical area and have a huge number of individual facilities. We have nearly 70,000 km of sewers and 13 million customers connected. We have nearly 2,500 remote pumping stations. The system has to take waste from domestic and industrial consumers. We have no control over the inputs to that area, and therefore there is always going to be much, much more risk of incidents happening over a large network than there is, for example, in a normal industrial process where you have a single site where you are in control of your premises and the activities going on. The Environment Agency recognised that when they appeared before you in January. As far as our historical record is concerned, the Environment Agency has publicly, and privately in meetings with us and Ofwat, confirmed that our environmental performance has improved considerably. If you look at the number of incidents, there are a number of different factors involved. There is a clear weather-related factor because our weather hugely influences overflows from the system. You will appreciate that the law as it stands gives us strict liability if there is any overflow from the system into a river, and therefore whether there are third-party blockages. In law we are responsible, and we cannot put up a due diligence defence. If an incident happens, we have to plead guilty, and it is about mitigation in court. We have a very complex system to operate, and it is our job to do that well - I am not saying anything other than that. The Environment Agency has changed its approach to classification of incidents and the number of prosecutions that they take. If you look in the year covered in that report, we had 40 incidents during that year. This year is considerably below that, but trends have been upward and in our case particularly because they changed the way they categorise incidents on the Tideway in London. Q110 Chairman: Is there reason to believe that although the number of incidents is going down, they are getting more serious? There was that notorious incident, was there not, on 3 August, of 600,000 tonnes of raw sewage ending up in the Thames? Mr Sexton: On the first point, Chairman, there is no suggestion at all that the incidents are getting more serious. There will occasionally be more serious ones, and that is in the nature of it; but there was no upward trend in the seriousness of the incidents. Q111 Chairman: There is no downward trend either, is there? I see that the Mayor of London has been taking a close interest in this, and there are reports that up to 20 million tonnes of raw sewage continues to be flushed into the Thames because the system cannot cope. Is that going to continue for the foreseeable future? Mr Sexton: Yes, it will. It is very, very different to the types of incidents that are normally the matter for prosecutions and reporting in Spotlight. The Thames Tideway suffers from over 50 overflows to the tidal river. That is how the system was designed in Victorian times, and it is how it still operates today. Those discharges are legally made, and it is exactly how the system is designed to operate. Q112 Chairman: Do you think it is right that it is legal to pump 20 million tonnes of raw sewage into the Thames? Mr Sexton: I believe it is absolutely right that it is legal at this moment in time because the system is operating as it was designed to do. Prior to privatisation we raised the issue that the situation with the Tideway was totally unsatisfactory; that it needed considerable investment to remedy. We have raised it at each of the price reviews with Ofwat, and five years ago Ofwat funded a combined study of ourselves, GLA, Ofwat, Defra and riparian boroughs, looking at what the solution should be to this. That group has reported and has come up with a scheme of the order of £2 billion. Investment is needed to intercept these sewers that discharge. That is a huge investment, and a decision whether or not to proceed with an investment such as that is one for ministers. I believe that that situation should not continue. The investment does need to be made. I repeat that it would be outrageous for us to be prosecuted in those cases, when the system is operating as it was designed to do, and when it is completely legal because they are consented discharges. Q113 Chairman: To what extent do you think that climate change may add to your problems, with rising water levels and wetter weather generally? Mr Sexton: The increasing intensity of short duration storms inevitably puts a load on the sewerage system. There are other factors as well. The urbanisation in London, with much less green areas for run-off so that the water goes into the sewers and peaks so that it arrives at the same time, and the increase in population, are putting increasing load onto the sewerage system. It needs a lot of investment to make sure it is upgraded to what I believe is right and proper for the 21st century. Q114 Chairman: It sounds to me as though it is likely to get worse rather than better. Mr Sexton: The downward trend is for it to get worse, and will require these very significant investments to be made to put the situation in a state where it ought to be for London. Q115 Chairman: There has been talk of running a big pipe down the length of the Thames. Is that something that is under active consideration? Mr Sexton: That is effectively the solution to this problem. Q116 Chairman: Does that not mean that it just ends up at Southend or somewhere else? On the whole, we take a pretty poor view of dumping raw sewage in the sea. Mr Sexton: At the moment, when the rainfall is excessive, these overflows discharge into the River Thames. The proposal is to intercept those overflows and to build a tunnel that more or less follows the route of the Thames. That tunnel would be huge, several metres across, and provides storage as well as a route; and then it would be routed through our treatment works at Beckton and Crossness. When these events happen the sewage is dilute because we are talking about a huge amount of rainfall, and that would be treated then at our existing works at Beckton and Crossness. There is no doubt at all that it produces a solution to the problem; but because of the £2 billion price-tag on it, it is obviously something that is a matter for ministers to decide whether that investment is necessary. Q117 Mr Challen: It sounds as though there is under capacity or unused capacity at your existing sewage treatment plant at the place you have just mentioned. Why is that? Why was it built with that capacity, which could be there now to accommodate this pipe's contents? Mr Sexton: Sewage works are upgraded to cope with increasing volume. The regulatory regime does not allow you to create a huge amount of excess capacity in case it is needed, and at each of the five-yearly price reviews we were putting proposals for increasing the flow to treatment. In the draft determination published in August, they have allowed for considerable increase in the capacity of our sewage works discharging into the Tideway, but the issues causing the pollution events we had in August are about the network, the pipes and tunnels that lead to the sewage works. We have to get it there. Those pipes have a finite capacity, and when they are full they overflow into the River Thames. Q118 Mr Challen: Obviously, it is 100 or 150 years since the Victorians built all these tunnels in the first place. When was this problem first highlighted? Mr Sexton: I am very aware that in the late eighties it was highlighted. A temporary solution was agreed then. I used to put the Thames Water Authority corporate plan into government in my previous role. It was highlighted there, and a temporary solution was put forward, rather than tackling the problem. That temporary solution is still used today, which is to have bubblers, boats that pump pure oxygen into the river, to try and reduce the damaging effect of the discharge. That was deemed to be an appropriate solution, and that is still deemed to be an appropriate solution. Q119 Chairman: How many years do you suspect it will take before we get a proper solution to this problem? Mr Sexton: Once a decision has been made to proceed, because of the scale of the problem it is anticipated it will take four to five years to do the detailed design and to get planning permissions and to acquire land, because it is from Richmond right through the centre of London. A tunnel of that size is estimated to be eight to ten years to construct. It is much more complex than the Channel Tunnel, for example. It is a huge engineering scheme, which is why it is so expensive. It is not a trivial decision to make whether it should happen, but it is one that we are supporting. Q120 Chairman: If the Channel Tunnel is anything to go by it will cost a lot more than £2 billion as well. Mr Sexton: That is of course a risk, yes. Q121 Chairman: Can we bring in Anglian water at this point, because you have also been described by the Environment Agency as a repeat offender, although I notice you have managed to reduce the number of incidents more recently. However, there was one involving the River Mimram (which is close to my heart because it runs past the end of my in-laws' garden in Hertfordshire). How do you manage to reduce the number of incidents, or is it just luck? Mr Pointer: It is a question of risk management in truth, Chairman. Can I say in opening that nobody condones pollution. I would never willingly or knowingly pollute in any direction in the environment. We have a long track record, particularly since privatisation, both in Anglian Water and in the industry generally of making significant improvements; and these are acknowledged by the Agency. On the one hand we are "repeat offenders" but on the other hand it must be acknowledged that there have been billions of investment made in improving the ongoing discharges, not discrete discharges but the flows from sewage treatment works, pumping stations and the like. Q122 Chairman: Can you put a figure on it? Mr Pointer: In the last five years my own organisation has spent £1.5 billion of capital investment in the water and wastewater environment. Q123 Chairman: This is interesting because it puts the costs of Thames's problem into a bit of perspective, does it not? Mr Pointer: Yes. We are talking big sums of money, and we are talking of improvements going forward beyond what is already a very, very satisfactory wastewater environment. The Agency will acknowledge that the rivers in East Anglia - and I believe that to be the case in the UK - are better now than they were before the Industrial Revolution. The bathing water has been transformed. You mentioned earlier that we do not now discharge raw sewage to sea; that was a big issue for us 15 years ago and has been stopped completely. This is bringing both the environment back into good shape, and it is a good driver of tourism and the economy generally. On the prosecution side it is very disappointing. As John Sexton said, we have strict liability. If a discharge occurs from one of our systems, and it is patently obviously sewage or arising from sewage, there is no defence; we are liable. I am sure John would confirm that we invariably plead guilty when such an event occurs. The way we have tackled bringing this activity down is by having a robust telemetry system, where we monitor all of our sites. As you and your colleagues will realise, very, very few of these sites are manned 14 hours a day because it is just not a practical proposition, and so we have invested heavily in telemetry and instrumentation to try and detect when things might be getting out of kilter, or a spillage is occurring. The other areas to address are solid management reporting systems. Again, in my own organisation - and I am sure it is industry standard - if pollution does arise and we become aware of it from any source whatsoever, we are quickly on to that pollution. The first duty of the management team locally is to stop it happening, and they will then inform their boss or team leader to get reinforcements to stop this being the case. They will then immediately notify the Environment Agency so that they can mobilise their resources and just assess whether there are significant environmental issues arising from this. We have always demonstrated, notwithstanding we are likely to be prosecuted, a very open and transparent approach. Q124 Chairman: We hope to come on to your relationship with the Environment Agency. Mr Pointer: We welcome documents like Spotlight because it has been a very good publication to bring together the data, so that there is an objective measurement of progress made; and I am delighted to see that progress is being made. Q125 Chairman: There is an element of naming and shaming. Do you welcome that? Mr Pointer: I welcome the fact that it is an objective report, based on agreed data; and companies can see where they are making progress. In the copy you have, the Agency mentions that for three companies, my own being one, there are fewer incidents, and they are very pleased to see that these companies direct management resources to that aim - and that is what I will always do. Q126 Gregory Barker: When these discharges lead to offences, and the offences lead in turn to serious penalties, what impact does that have upon the corporate reputation? Mr Sexton: Every single incident is one that we regret, and I confirm totally what my colleague has said; that the first concern is to stop a leak, a continuation event, and clean it up. That clean-up operation is usually very expensive. We then move on to re-stocking with fish, and that is the normal response. Any incident hits us that way. Secondly, the fine itself of course is a huge issue, but then there us the reputational damage arising from it and the matter of pride: every time an incident happens, and not just those that are prosecuted, the organisation hurts. None of us want to cause damage; we are here collecting the waste from society, treating it and trying to dispose of it safely. The type of people that are attracted to our business are predominantly people who are environmentally aware and are concerned. All these factors together cause damage. There is no doubt that it has impacted on overseas operations that parts of my group deal with. When we try to buy companies in the US, our pollution record and our prosecution record is actively used against us. Other countries find it difficult, because I do not believe any other country operates on the strict liability regime that we have, that there is no defence in law, and with a prosecuting authority that actually takes action. Sometimes the law is equally strict but it is not enforced, and other countries find it very difficult. All in all, these combined issues have a huge impact. There is absolutely no benefit to us in continuing these activities, and we want to prevent them. That is what we are working towards. Q127 Gregory Barker: Is there a sense that these things are self-criticism, or is it a worry that you are falling behind your competitors, or that you may lose competitive advantage versus other people in the industry? Mr Sexton: Both factors are there. I just repeat the word "pride": people are damaged by these actions. They do not want to have an environmental incident. We are here to prevent damage to the environment, and that is what we do, day in, day out. Q128 Gregory Barker: You told us earlier that the incidents are not increasing in number of seriousness, but they are a regular occurrence and they have not shown signs of a measured decrease either, so is this just something you live with? Mr Sexton: No, it is not. In terms of basic incidents, we make huge efforts - and I am sure it is true for all the other companies - in trying to reduce the number of incidents. We have a much more sophisticated control room these days, much more telemetry on site. In the end, we are often talking about these incidents happening in bad weather conditions; people have to get to site; they often happen in multiple; you get peak problems, and all these factors come together to cause an incident. Many are caused by blockages over which we have no control. We have to accept that occasional incidents will happen. Our job is to make sure that ones where there is a systemic fault are dealt with and resolved, and that when incidents do happen we respond quickly and help clean up the environment and make improvements. That is where our focus is. Mr Pointer: There is a very big reputation issue. It is a very big driver within the business, but also our economic regulator, Ofwat, takes measure of service performance regularly from the companies, and he is able to reflect this in potential determinations under the periodic review process; so this can hit really hard for bad performance. Coming back to Spotlight, the Agency now relates these incidents that you talk about to the population served, and this puts it into context. In my own organisation, it is 1.6 incidents per annum per million population. In the context of our operation, in Anglian Water we have 5,500 installations, whether sewage treatment works or pumping stations, each one of which could go wrong at any time and give rise to pollution. In the context, this is at the margin, and regrettable though it is and strive though we might to prevent it happening, it is almost inevitable when there is an infrastructure that is required to receive and treat everything that is thrown at it. As we said earlier in this discussion, when heavy rainstorms occur, the volume multiples going through these pipes can be 10-20 times what would be the normal flow rates. Obviously, strength again can vary markedly with trade effluent and discharges and so on, as mentioned earlier; so you have a very, very wide range of inputs, all of which have to be treated to some of the highest standards in the world. These standards continue to increase. As we have been proud to achieve the quality improvements, of course the very standards of the consents also get more stringent, and therefore breaches will occur more easily. Q129 Chairman: Do you think the law is too strict and the regulations rather too stringent? Mr Sexton: I think there are areas where it is but we support tight regulation and clear laws that are uniformly enforced. My personal view, not being able to put a due diligence offence together, where we have had third-party actions where a manhole has overflowed due to a blockage and we are prosecuted, is going to the extreme where the law enables the Environment Agency to take actions that I do not think are helpful. Q130 Chairman: There is a case for saying that the law is too strict; that you are regularly in breach of it, which suggests that you are bringing the law into disrepute. Mr Sexton: You need a balance between the law, its enforcement, and agreement to the investment that is needed to improve the system: these things all have to be in balance. We have talked earlier of the Thames tidal problem, where the investment has not been in balance with what reasonable environmental obligations ought to be; but there are other areas where enforcement by the Environment Agency is very heavy handed, whereas if we could have a due diligence defence there is a good chance that a corporate fine would not be something that warranted a guilty decision. Q131 Chairman: Have each of you totted up the number of fines you have had in the last five years, and the value of those? Mr Sexton: Yes, we have been averaging about five prosecutions a year since privatisation. Q132 Chairman: What was the value of the fines paid? Mr Sexton: Last year it was about £70,000, and it has been lower than that, but in the last few years it has been a similar amount. Mr Pointer: For us it was £50,000 last year, and in the 40s this year. Q133 Chairman: What is your turnover? Mr Pointer: At the moment about £750 million. Mr Sexton: Ours is about £1.1 billion. Q134 Chairman: So the value of fines in relation to the size of your companies is piffling! Mr Sexton: The value of the fines is, but as I explained earlier, that is just one element in the concerns we have about the incidents. Clearly, on its own that would not be a deterrent, but it is not wilfully made; these are events that we are trying hard to prevent. Q135 Gregory Barker: Do you think that the offences where there is a penalty involved recognise the difference between poor management and systemic failure? Obviously, you have a competitive situation in the UK; some companies are well managed, and others less well managed. Some have, individually, poor managers. Do you think the law is rooting out poor management, or is it just responding to a Victorian infrastructure? Mr Sexton: Personally, I think both elements are there. There is no doubt that with some of the incidents we would have to say that in a wider sense there was management failure, where we have not responded quick enough and where we may think there is good mitigation but nevertheless we ought to be able to cope with. There are other cases where it is absolutely nothing to do with us, and yet we still have an action taken against us. Both elements are present. Mr Pointer: The UK is a model in terms of regulation. We have very strong regulation in drinking water, and that is how it should be - and we are a model, I believe. We have a very strong and powerful economic regulator and we have a very strong environmental regulator. I absolutely support that. When we are operating in this area, however, the cases need to be judged on a case-by-case basis and on the merits and demerits of the action taken. We are that thin green line between the effects of society and the environment. We are prosecuted for failing to maintain that green line in a way, and that is a rather different complexion in my judgment from somebody who knowingly or grossly pollutes the aquatic or agricultural environment. Q136 Mr Challen: Can you think of any cases where it is cheaper to pay the fine than to sort the problem out? Mr Pointer: It is never an attitude that I would support. This is a criminal prosecution and a fine should represent the culpability of the company or the individuals concerned. Q137 Mr Challen: It is not really a punishment, is it; it is just a business expense? Mr Pointer: It is a punishment to the extent of the publicity that is generated. There is the potential reputation damage, and also the potential for the regulator generally to take a hostile view of the company. Q138 Mr Challen: The customers are not going to say, "Thames or Anglia was fined today, so tomorrow I will change my supplier"; they cannot do that, can they? Therefore, what difference does damage to your reputation make? Mr Pointer: You are right that the customer in the broad instance cannot change supplier, but through the regulatory system and through WaterVoice, which looks after customers' interests, and the Agency and the other regulators that can be brought to bear in the regulatory arrangements we have. Mr Sexton: The effect on commercial businesses elsewhere in our group is marked and very well documented. In the US, where we have been trying to become involved in other contracts, our prosecution record is invariably brought up by people who are opposed to it, and it has led to loss of business. It is a huge deterrent. Q139 Chairman: I was going to ask you as to the extent these cases feed through to investor confidence and the City, but you have answered that. Mr Sexton: Yes. Q140 Mr Challen: The Environment Agency said they had detected a change in attitude in some of the major operators in the water and waste industries and that in general there was more challenge to the activities of the agency; for example, in refusing to provide representatives to attend for interviews, and challenging legal definitions like the definition of "waste". This may be in an attempt to avoid liability due to increased shareholder awareness of environmental responsibilities or because of the adverse impacts on cost, reputation, et cetera. Do you recognise that statement? Mr Sexton: On behalf of Thames, absolutely not. There are elements of it that are true. If you take new legislation, we have been pursuing and interpreting new legislation. We have a case at the moment concerning sludge, where there are regulations over the control of sludge and the Environment Agency has sought to bring an action under the waste regulation. We have challenged whether that is legal to do so, and whether sludge is covered by the legislation. There are examples like that where we will pursue a case with the Agency. Q141 Mr Challen: Have you tried to co-operate with them first on this issue? Mr Sexton: Absolutely. Q142 Mr Challen: They are not being co-operative themselves. Mr Sexton: The Environment Agency agrees that we co-operate with them. The times they say we do not co-operate are when they are trying to decide whether or not to take a case against us. On prevention of offences we have regular workshops at the working level on how we ought to operate the system, and how we should respond when incidents happen. We co-operate fully with them. They have actually praised us for the progress we have made over the years and the consistent improvements that we have made. When it comes to an incident, we always co-operate on clean-up; either of us will take the lead and we will support one another. We have never had complaints from them about that. When it comes to whether or not they are considering taking action, they admit themselves that they have changed their attitude. They classify more things now as incidents. Q143 Mr Challen: You are saying they are taking a tougher attitude. Mr Sexton: Without doubt. Q144 Mr Challen: Do you think that is right? Mr Sexton: I think it is right where the causes are things that are reasonably under the control of management. If environmental damage takes place, of course that is the right thing to do. Q145 Mr Challen: What about Anglian Water? Mr Pointer: I am surprised and disappointed by that statement, frankly, because we have always operated a very open, transparent and compliant role with the agency. We have had no policy of non-attendance at interviews. Where we have received some criticism directly from the Agency is presenting people at interview who are not fully apprised of all the facts, and to assist that we have said that if the Agency were to give us a list of the questions they wished answer on an event of pollution, we would provide a comprehensive response to that in writing that they can use for their own purposes. I have found recently that that has been a productive way forward. I learnt about this evidence that had been provided to you only in the last ten days, and so concerned was I that we have already made contact with the chief prosecutor at the Agency with a view to getting a high-level meeting to understand exactly where their complaint lies in this respect, because there is no way in which I want to preside over any organisation that is seen to be not co-operating in any case of potential prosecution. Added to that, as we have said a couple of times already in this interview, is the fact that we have strict liability for this event anyway. Once a discharge is aligned to one of our assets, the case is almost proven, and almost invariably we plead guilty. Mr Sexton: We are working locally with the Environment Agency on a protocol to deal with this, so that it is absolutely clear what they expect us to do and how we will react. That is why I am really surprised to see this coming from their national centre. Q146 Mr Challen: Both of your companies are aware that the Environment Agency specifically named your companies in this regard as being somewhat obstructive. Mr Pointer: Through the evidence provided to you. Q147 Mr Challen: That is right, and you are taking that up with them. Mr Pointer: Yes. I am also concurrently Chairman of WaterUK, which is the industry representative body, and I intend that WaterUK should also engage with the Agency on this important topic. Q148 Mr Challen: Are there any cases ongoing at the moment where this charge might be levelled at you, do you think? Mr Sexton: I am trying to think of one current. There are one or two where there are some interesting issues, but our general approach is that we always require our staff to co-operate. Because the Agency has legal powers of prosecution and can take action against only the company as against individuals, we have always said to staff, "if you are being asked to give evidence under caution or under statutory compulsion" - which the EA has powers to do "you should always ask if you can have a lawyer present". It would not normally be a company one because there could be a risk of an action against an individual. If they cannot do that, they can ask to have someone else accompany them so that they can keep a record. We have never instructed people not to give a statement under compulsion. Under caution, we have always said we would co-operate, but the dangers we see of the Environment Agency rushing in to take a statement under caution is that they can be misleading because they go to anybody, whether a contractor or a junior person on the site, or a manager, and it happens during the course of an incident. We find that particularly concerning when our efforts are on trying to control the incident. Q149 Mr Challen: Why should you be treated any differently from anybody else who faces an inquiry of a judicial nature? If I were on a charge and had to go to court, if I said to the judge, "I would prefer it if I was given the questions in writing before I answered them, so do you mind doing that?" I would probably be told I was in contempt; or I would be laughed out of court. Why should you be treated differently to other bodies that face potential prosecutions of a serious nature? Mr Sexton: We are not asking to be treated differently. Q150 Mr Challen: One of you said that your approach was to ask for questions in writing, and that might have some justification. I am not saying that in a preliminary state of inquiry it is unreasonable to ask for that. Clearly, if they say that is how they are going to do it, and they have that power, and you are saying you want it in writing and having all these legal quibbles about it ----- Mr Pointer: I made that comment, and I made it because when we have attended these interviews before we have been criticised that we have not been able to give them the information they require, because they ask questions on a very wide spectrum, as you would imagine; they are trying to understand the network, the management actions, the operation telemetry and so on. I come back to the point that even before we would get to an interview, the fact is that the discharge is almost certainly to have been linked to one of our assets, and so under the strict liability position - which is rather different from another court case - we almost have to plead guilty. Q151 Mr Challen: So it is not a question of trying to wear them down with to-ing and fro‑ing and a bit of ----- Mr Pointer: Absolutely not. It is trying to get the facts properly recorded so that both parties understand what has gone on at that site. Q152 Gregory Barker: It all comes back to the issue of reputation and management. Do these investigations and penalties impact materially on your share price, or on your overall cost of capital so that it makes it more expensive for you to raise money and perhaps in the longer term undermines your ability to raise the capital necessary to invest in long-term infrastructure? Mr Sexton: It would not in the short term but could in the longer term, and I repeat the examples I have used before about affecting commercial business and commercial growth, but they are not as far as the utility, the regulated business. Q153 Gregory Barker: Your share price is not very sensitive to these things. Mr Sexton: We are part of a bigger group anyway, and therefore the share price is from a national body, and therefore performance of the utility in the UK is only a small part of it. Q154 Gregory Barker: The borrowings presumably secured against your particular company are not more expensive as a result of these issues. Mr Sexton: I am not aware that there is a direct feedback. Mr Pointer: There may be some long-term implications in that respect. It has to be said that we are judged by reputation, as any other company; and the effects of these events and the general publicity is a bad news story for the company. It is one blot on what is a very strong, powerful record of improvement, particularly over the last 15 years. Q155 Chairman: You are a bit different from other companies. You have a captive consumer base. If somebody took the view that putting 20 million tonnes of raw sewage into the Thames every year is a bad year, they could not do much about it, could they, unless they go and buy Buxton water, or Perrier if they are unpatriotic? Mr Sexton: They can of course not be or they could interact with politicians to get the situation changed. Q156 Chairman: To the extent that you have that captive market, you are not susceptible to the usual pressures of consumer choice, are you? Mr Pointer: That is a fair comment. Q157 Chairman: Which means that it is not unreasonable that there should be a stringent regulatory regime in which to operate. Mr Pointer: Yes. Mr Sexton: I absolutely agree with that. Mr Pointer: As I said earlier, from the law and from regulation. The law at the moment, being the criminal law, is a very powerful weapon because in extremis normally these cases are dealt with through the magistrates' courts but some of them can go to the Crown court where the penalty is unlimited fines and potentially imprisonment. There is a very powerful legal structure around it. We need further dialogue with the Agency as to how that law is policed and implemented, where there will be differences of view, and obviously issues that have arisen over the last several days. Q158 Chairman: I wish you well in your dialogue with the Agency. We will be very interested to find out how that misunderstanding appears to have arisen and whether or not it is going to be resolved. We will be looking at that. Neither of you has sent us evidence on this inquiry. There were some specific questions in the press release that we issued, and it would be extremely helpful to us if you could briefly set out in writing a response to the questions. Mr Sexton: We will be pleased to do so. Memorandum submitted by Federation of Small Businesses
Examination of Witness
Witness: Mr John Holbrow, Environment Committee Chairman, Federation of Small Businesses, examined.
Chairman: Thank you for coming, and thank you for your memorandum, which we read with interest. Q159 Gregory Barker: You have 185,000 members, which is very impressive. You divided them up into small and micro. What is the split? Mr Holbrow: We would consider a micro those that employ ten people or less. Q160 Gregory Barker: How many of your firms are micro, as you define it? Mr Holbrow: The majority. I do not have the exact figure, but I can get that for you. Q161 Gregory Barker: The majority are micro. Mr Holbrow: Yes. Q162 Gregory Barker: That would be helpful. According to the evidence provided by the Environment Agency, SMEs are responsible for over 50 per cent of pollution incidents, and more than 60 per cent of the commercial/industrial waste produced in England and Wales. That is not a very good record, is it? Mr Holbrow: I would say that although we do not condone breaking the law on these matters, a lot of it results from ignorance. It is no defence, and we would like to see the Environment Agency and the Government generally making people more aware of the environmental laws. We had an instance recently where the Hazardous Waste Regulations came out in July, and if one read the press there was very little information. We made our own members aware from our own in-house magazine, but there was very little in the press to raise awareness. Q163 Gregory Barker: Of this huge number of pollution incidents committed by your members, how many of them do you estimate were committed by firms in the construction area? Mr Holbrow: We do not have the evidence of that, but the impression we have is that some small building companies do cause problems with fly-tipping ----- Q164 Chairman: You do not have to go far to discover that. Mr Holbrow: No indeed. We do not condone it, and we would like to think the information we hand to our members - well, they are not all our members. Q165 Gregory Barker: You say you do not condone it. That is not a very strong statement. It is an illegal act to fly-tip. Are you stronger than that? Mr Holbrow: Yes. In our in-house magazine we produce articles pointing out that it is illegal and that people should not do it, but we have so many members, and with lots of people in the construction industry, all one can do is make them aware of it and hope that education over time will point out the error of their ways. Q166 Gregory Barker: What sort of impact will the end of co-disposal have? Are they aware of it? Mr Holbrow: If they read our in-house magazine, they are aware of it. Co-disposal will be a problem, and it is not being helped by the fact that there are very few waste sites around the country that can deal with such things. Q167 Gregory Barker: Do your members read your in-house magazine? Mr Holbrow: They do, I believe, from some of the questions we get; but whether they act on it, who knows! I would hope they do. Q168 Gregory Barker: How many members have you found to be operating illegally when it comes to disposal of waste - do you know? Mr Holbrow: I do not have an answer to that. We will search our records and see if there is something that we can send on to you. Q169 Chairman: The Environment Agency have told us that in their opinion - and this is fairly depressing - about 70-75 per cent of small businesses are completely unaware of their environmental obligations. That figure would suggest that not a lot of people are reading your in-house magazine. Mr Holbrow: We do not disagree with that figure. The Environment Agency did that survey via their NetRegs and we did a similar survey in our Lifting the Barriers earlier this year. The Environment Agency figure was 24 per cent and ours was 23 per cent. All we can do is re‑double our efforts to make people aware. I agree it is depressing, but if you look at all the regulations that SMEs have to deal with on employment and lots of other things, sad to say that environmental legislation is not the top of their list. They do not have big HR departments et cetera and the owner is usually the HR manager as well. Although, as I say, we do not condone it, all we can do is provide the information. We cannot go out and make sure they do it. Q170 Chairman: Would it be higher on the list if the fines were greater? Mr Holbrow: I think that is the case. Again, one needs to target fines. From some of the evidence we have had, not all cases are prosecuted, and there is a very patchy regime throughout the country from the Environment Agency. What happens in some cases would not occur in another part of the country, and we would like to see a more uniform approach throughout the country so that we do have a more level playing-field. We get members in one part of the country that will get prosecuted for doing the very same thing that occurs in another part of the country, and nothing happens. Again, we do not condone bad behaviour. Q171 Gregory Barker: Of your members, there are an awful lot of small and micro businesses. What percentage of the overall sector do you represent? Mr Holbrow: Again, I do not have that figure, but we can get it for you. Q172 Chairman: That would be helpful as well. Going back to that exchange, and the fact that you say you do not condone illegal activity and you try to inform your members of what they need to do, the feeling I am getting is that there is more than a little tipping of the wink - "mind your eye because you could get caught doing something naughty", rather than taking the lead in saying, "this is clearly something that is unacceptable and you should not do it". Mr Holbrow: We do that in our articles because we do point them to what I believe is one of the best sources of information for small businesses, the Environment Agency's own NetRegs. We give the website and the details of how to contact NetRegs in these article, which is very important. Where something is provided that is good, I still think government should give more publicity in good time. They know when a lot of these regulations are coming in because they often start of in Brussels, so there is good time to let people know; but it does not always happen. Q173 Chairman: The Environmental Services Association has a code of conduct for its members that involves penalties and possible expulsion if they persistently break the law. Do you have a code of conduct? Mr Holbrow: We have a code of conduct that members should operate in a particular way. We do not have penalties. We do not think it is appropriate for our organisation to have those sorts of penalties. Q174 Chairman: Why should it be appropriate in the Environmental Services Association? Mr Holbrow: I do not know. I am not familiar with the way they operate, but certainly we do not think it is appropriate for our members. Q175 Chairman: Is it not bad for your reputation as an organisation that there may be members who are repeatedly flouting the law, and who remain members of a respectable organisation like the Federation of Small Businesses? Mr Holbrow: If it came to our attention that was happening, we would certainly look at it when membership renewal came up. However, it has not been brought to our attention that people are doing that. If it was, we would certainly look into it. Q176 Chairman: Are you aware of how many, if any, members of your organisation get prosecuted every year for environmental offences? Mr Holbrow: No. Q177 Chairman: Do you think you should be? Mr Holbrow: I do not think it is our duty to take one particular aspect of regulation, namely environmental legislation, and home in on that. We do of course have a 24-hour legal helpline, so that if there are people who are unsure they can ring that helpline to make sure they do not break the law. We have invested significant sums of money in giving them access to this legal helpline. Q178 Chairman: Are you able to provide assistance to your members if they get into legal difficulties, and give them legal advice after the event? Mr Holbrow: Yes, we do have a facility via the legal helpline to assist them, providing they make people aware early on in the piece. We do not come round to sweep up the mess afterwards. If they let us know they have a problem, then we will provide legal advice and legal help. Q179 Chairman: What sort of cases do you get? We are obviously interested in environmental crime and fly-tipping and that kind of activity, which seems to be very prevalent, and I am afraid is associated in the minds of many with smaller companies. Mr Holbrow: Indeed. Q180 Chairman: How many cases of that type come up through the legal helpline. Mr Holbrow: We do have statistics, but I do not have them to hand. We will look at that and let you have them. Q181 Mr Challen: Do you get any direct help from the Environment Agency to communicate with your members about environmental offences at all? Mr Holbrow: Not direct financial help, but we do have speakers along at some of our branch meetings and regional meetings. The Environment Agency are very good in providing speakers at meetings when we request them. Q182 Mr Challen: I am intrigued as to how you see your role, whether it is a proactive role in helping to educate members not to commit environmental crimes or whether to defend them, to provide a legal advice line and help them, as it were, to get off the hook. Mr Holbrow: Not the second one of those. We spend an awful lot of our members' money in raising awareness and providing legal information. We believe the information is there, and we provide details of how they may access that information. What we cannot do is to force them to do it. Q183 Mr Challen: Do you think the Environment Agency should be doing more with you to promote understanding of environmental crime, and if so what sort of things should they be doing? Have you been to them and said, "we think you should be doing this or that to help us"? Mr Holbrow: We do have regular meetings with the Environment Agency, as to what services they can provide for small businesses. As I said before, the NetRegs one is a very good system, and we were involved in detailed discussion with the Environment Agency when NetRegs was set up, as to what small businesses needed from it. We think that that is a very good system. However, we feel that what needs to be done earlier in the day, when new legislation is coming in, is to give small businesses the information. Q184 Mr Challen: How often do you meet with the Environment Agency? Do you have regular meetings? Mr Holbrow: Yes. We have a slight difficulty at the moment in that our policy development officer who attends these meetings has recently left the Federation, and until we get a replacement early in the new year, there may be a small period of time where the meetings are not so regular. We welcome these meetings with the Environment Agency to exchange views. Q185 Mr Challen: Just to exchange views though, not to talk about how you can practically get to grips with this problem. Mr Holbrow: Yes. We do talk about what they plan to do, and we ask them to do things that we would like to see in terms of raising awareness. I keep coming back to that, because it is the raising of awareness by all parties that is important. Unless they are aware, they will break the law often without realising it. It is this whole question of raising awareness that is the real key, where the Environment Agency, Government departments, the Small Business Service and all agencies, including ourselves, can help raise awareness. Q186 Mr Challen: We have already discussed that there are some kinds of business that probably have a greater propensity to cause environmental damage, and it may well be that they are less likely therefore to be members of your organisation. I think that is probably true because they are not very responsible to start off with. Do you try and communicate with particular sectors, or is it simply through your magazine and your website? Mr Holbrow: It is still our magazine but we do look at particular sectors when particular legislation comes out - for instance, we responded to the White Paper on fly-tipping and talked to a number of our members in the building industry. I liaised with the chairman of our construction policy committee on this whole question of fly-tipping. Again, we get anecdotal evidence that it has been dealt with properly, but other anecdotal evidence came out to say it has not been dealt with by small businesses properly. We like to think that people who have taken the responsibility of joining an organisation like ours are not in the forefront of fly-tippers. Q187 Mr Challen: Do you monitor the use of your legal advice line or the other help that you provide legally, to see what kind of offences have been committed, and to see if there is a pattern? Mr Holbrow: We monitor regularly the queries that are referred and the telephone calls that are made. As I said earlier, I can provide you with that information. We do not monitor prosecutions unless they come through our legal advice line service. Q188 Chairman: You are chairman of the environment committee, are you not? Mr Holbrow: Indeed. Q189 Chairman: How often does the Committee meet? Mr Holbrow: We meet as and when required. We meet two or three times a year to look at overall policy, but we meet on a regular basis on particular legislation. Q190 Chairman: So you have ad hoc meetings as well as regular meetings. Mr Holbrow: We have ad hoc meetings. We have focus groups and take ourselves away for a whole day. We get people who are involved with particular pieces of legislation. We have done that recently with environmental liability, which has just come to Westminster having come out of Brussels. We are also at the moment doing the detail on the REACH regulations, which are still in Brussels; but we need a small business voice raised on that. We would have specific companies that have the problem along for a focus group, take all day over it and then come up with information which we will then use for lobbying our point of view. Q191 Chairman: Do you think there are too many environmental regulations? Mr Holbrow: I think they need to be more focused. They are scattered a bit like confetti. It would be better, I feel, for the environment, if they were more focused. To give you an example, I would maintain that the Climate Change Levy is a tax-raising levy rather than having a (marginal) effect on the environment. I have yet to meet anybody who has done a great deal when faced with the Climate Change Levy, which is involved with making environmental change. They may change their supply to reduce their costs - talking about small businesses - to actually make a significant change. Therefore, I think the environmental legislation needs to be focused on making a benefit to the environment. I think our members would go along with that more, rather than just seeing it as a tax. One can add aggregates tax in that as well. Q192 Mr Francois: There is a lot of scepticism about the Climate Change Levy, as you quite rightly say, as to whether it has environmental benefits or whether it is a tax. There is an additional issue, is there not, that in some cases smaller companies are unable to qualify for the 80 per cent abatement that larger companies can then negotiate on. Mr Holbrow: Yes, indeed. Q193 Mr Francois: That is my impression, but since you are here is that correct? Mr Holbrow: Yes, that is correct. We do have some members. One comes to mind: I was speaking the other day to a baker who is a member of the FSB but also a member of the Federation of Master Bakers. They have a negotiated agreement, so although he is a small company he can get his 8 per cent reduction from the negotiated agreement on the basis of the big users. We do have other businesses around, but the majority of small businesses cannot enter into negotiated agreements because they do not have the number of big companies in the same sectors. This is the problem. Q194 Mr Francois: You said it yourself, so we cannot be accused of putting words in your mouth. The general view is that basically it is just a tax. Mr Holbrow: Yes, and this is not just an opinion. We have done a survey a year after the Climate Change Levy came out of small businesses, to see what their attitude was and which sectors were affected, because some are affected more than others - hotels and restaurants are affected, where they have small numbers of people but they do not get the rebate of the payments and they do have very high costs. They were quite adamant in the survey that they see it as another tax. If you want to join in the game, then that is a tax you have to pay. The only way they see of mitigating it is to negotiate with the energy suppliers to see if they can get on to a lower tariff. Combined heat and power plants, which also give you an advantage under the Climate Change Levy, are not appropriate for small businesses. In the area I come from, the local council does a lot of work on providing combined heat and power plants, but that is used to go to very large businesses, because you would not invest in a combined heat and power plant just for a small business - it is not economic. Q195 Mr Francois: I do not want to get too bogged down, but would it be the view of the FSB that you would like to see the levy markedly amended or scrapped? Mr Holbrow: Scrapped preferably or amended if possible. Q196 Mr Francois: With regard to this whole matter of regulations and fines, we have had submissions from other parties that there is a general feeling that some regulations are just too complex and unworkable, and that they almost have a perverse incentive of encouraging some companies to break the law because the whole thing is such a mess. What is your view of the overall state of regulation? Can you give us some idea? Mr Holbrow: I think regulations need to be looked at more carefully. There is scope for de minimis levels to help small businesses, or in Brussels derogations of small businesses; but ministers and the Commission seem to set their minds against it because they can point to a few instances where a small business does not do an awful lot of damage. There is scope for change in the whole area to help small businesses. As I say, it is not just the environmental businesses that are the problem; it is that added onto other regulations. Q197 Mr Francois: Do you think the current levels of fines are effective deterrents to those who get caught? Mr Holbrow: No. Again, while not condoning significant increases in fines, it is not looked up on as being a deterrent. Some of our members even report that they see blatant things going on; they report it, but nothing appears to happen. It is not saying nothing does happen, but nothing appears to happen, which is one of the complaints I hear going round the country. All the regulations are there, but if people break them, the level of fines is not seen as a deterrent. Q198 Chairman: Yet you said you would not condone a significant increase in fines. Mr Holbrow: No, because it is an increase to business costs. Q199 Chairman: It is an increase in business costs for businesses that do not behave properly, but what would you recommend instead? Mr Holbrow: I think one has to increase awareness. It is this whole question of increasing awareness of the regulation and a light touch from the Environment Agency to point out the error of people's ways, rather than necessarily coming down with heavy fines. Q200 Mr Francois: What is the point of having increasing awareness if when they do transgress the fines are so de minimis that it makes no difference? Mr Holbrow: Again, it is a bit like some of the answers of our water company colleagues; it is this public perception in the areas in which small businesses work. They are working in the community; it is their community, and therefore they would not to be seen - certainly our members would not want to be seen upsetting colleagues and other people who may very well be customers in their own area. Q201 Mr Francois: You are almost arguing, without putting words into your mouth, that the fines do not really work and it is better to try and shame them. Mr Holbrow: I would have thought so. Q202 Chairman: There are people we know who deliberately flout the law for profit. They do it for gain because they make money out of it, and they undercut their competitors, and they are unscrupulous; and they know the law backwards. That is how they are able to circumvent it. I do not suppose that in cases like that you are saying we need to keep fines down. Mr Holbrow: I think though the Environment Agency will know who those companies are, and those companies really do need stricter fines. Q203 Chairman: Substantially bigger fines. Mr Holbrow: So that it is a deterrent. Q204 Mr Francois: The Chairman is right; those people that do cheat blatantly - others will say, "why on earth should we abide by the law when the company down the road gets away with it?" Mr Holbrow: Yes. Q205 Mr Francois: Are you saying that for those persistent offenders, they really should get clobbered? Mr Holbrow: Yes. There is also a need - and again this is a personal view, not necessarily FSB policy - for local magistrates to have better training, because some of this law is very complex. Therefore I am not convinced, from cases I have been involved with in the past, that magistrates understand the complexities of some of these laws. Chairman: We have received a lot of evidence to that effect and published a report earlier in the year on it. Q206 Mr Francois: On a related point, the Environment Agency, when previously appearing before this Committee, complained to us that quite often they want to be proactive, but they really do not think they have the resources to police this legislation properly. Is it your experience that the EA is under-resourced? Mr Holbrow: Yes. There are all sorts of areas where the Environment Agency needs more resources. I think they are doing a reasonable job with the resources they have got. I come back to this point, that the EA website is superb. It provides small businesses with a lot of extremely good information, and we do continue a dialogue with the Agency as to how that may be updated with more information. Again, there needs to be an incentive for people to access that site. Q207 Mr Francois: You talked about clobbering those that really transgress; the Environment Agency are particularly interested in using the lifestyle provisions in the Proceeds of Crime Act 2003 as one mechanism for doing what it is you are arguing for. Are you aware of that, and what effect do you think it would have on companies if it were used in the way the Environment Agency would like? Mr Holbrow: I am aware of it. It would be welcomed by the honest trader who, particularly in the construction industry, is doing his best to meet all this complex environmental legislation; and if he saw people deliberately flouting the laws for profit, then that has to be welcomed. Small businesses would welcome that because it would make a more level playing-field, and their costs would not mean they were at a disadvantage to the people that are doing this illegal activity. Q208 Mr Francois: So those who abide by the law would no longer be at a disadvantage. Mr Holbrow: Exactly. Q209 Chairman: That concludes our inquiries. Thank you very much indeed. Mr Holbrow: Thank you for the opportunity for putting our point of view. |