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27 Jun 2006 : Column 32WH—continued
“the dividends declared or paid will not impair the ability of the company to finance the regulated water and sewerage business; and...under a system of incentive regulation dividends reward efficiency and the management of economic risk.”
That is all very good. Those are economic and financial indicators designed to give the industry economic stability. Given the profits reported, however, Thames Water does not seem particularly at risk of economic instability. There is precious little in the paper about the environmental importance of water or the importance of customer care and the interests of residents in the Thames Water area.
Susan Kramer: Is my hon. Friend aware that, as well as the water distribution issues for Thames Water, there are many sewerage issues? I live in a part of London where, because we now have more violent weather, the discharge of untreated sewage into the River Thames happens virtually weekly, and from time to time to such an extreme level that there are dead fish in the river. Moreover, given the forthcoming Olympics, the demands on Thames Water to accommodate additional services in respect of both water and sewerage would be a huge challenge to an efficient company, let alone one that is failing in other ways.
Martin Horwood: I am grateful to my hon. Friend. I was not aware of that. I know that she has a reputation locally for tackling difficult issues, and she is clearly doing so with a vengeance.
Harry Cohen: The hon. Gentleman is making an excellent speech. I am enjoying it. He said that the environment was an important criterion for Ofwat, but it does not seem to be at the moment. Is there an argument for new legislation in respect of the protection and promotion of the environment, especially in respect of global warming? Water and global warming are crucially connected. Is not there a case for the regulator giving primacy to the environment and global warming?
Martin Horwood:
The hon. Gentleman makes an extremely good point, and I believe that there is room for reviewing the regulatory regime. If primary legislation is required, perhaps we should start considering it. The importance of climate change is twofold. First, as he rightly said, there is the interconnection between water usage and general energy and resource use, which contribute to climate change, but there is also the impact that climate change will have on the situation. It is possible that the drought
that we are now experiencing is partly the result of climate change and that the situation will get worse as extremes of weather become the norm. He is right to address the interconnection between climate change and water usage.
Clearly, leakage is a key issue. The hon. Gentleman produced the astonishing statistic that the leaked water would be sufficient to supply 2.8 million homes. With proper water management and efficiency, perhaps we would not have to impose hosepipe bans and drought orders at all.
Part of the regulatory regime deals with what is called the “economic level of leakage”, which appears to be an acceptable rate of leakage. An Ofwat report states:
“We believe that companies should compare the cost of reducing leakage and the value of the water saved...Operating at the ELL means that the total cost of supplying water is minimised and companies are operating efficiently. By setting leakage targets at an economic level, or a proxy for the economic level where this has not been adequately assessed, helps to ensure best value for customers.”
In fact, it does not. The economic level of leakage indicator as the primary target for water companies is reaching the end of its useful life, as I said in a previous debate. On that occasion, the Minister did not take up my point, but perhaps he will today.
I asked the Minister a question about Thames Water’s failure over time to improve its leakage position. He replied:
“It is Ofwat’s responsibility as the economic regulator to take action, and it has powers under law to do so.”
As we have seen, those powers are limited. It cannot, for instance, address issues such as profits and dividends, or redirect money to dealing with water leakages. He continued:
“Those powers are contained in the Water Act 2003, which the Conservatives inexplicably voted against.”
I am sure that that will be explained in a moment. He went on:
“We will not pre-empt Ofwat’s response, but we expect it thoroughly to examine the company’s return and to take the appropriate action.”—[Official Report, 22 June 2006; Vol. 447 c. 1448.]
Is the Minister able today to give us an update on what action he expects Ofwat to take and whether he will encourage it to take it? As has been said in this debate, there is a growing sense that the existing regulatory regime may not be delivering, and therefore his expectations of Ofwat are crucial.
The Minister’s reply was somewhat complacent. How many years can this sort of thing go on? The Government’s position contrasts with their approach in other areas of public service and public utilities. Turnaround teams go into failing NHS trusts. There is great intolerance of financial indicators being missed for more than one year at a time, and extreme action is taken. Such action is devastating my local NHS, which missed financial indicators. In education, special measures are taken for schools that are regarded as failing, and that is right.
When will Thames Water be put into special measures? When will it be given a turnaround team or be subject to some equally drastic action from the Government or the regulator? My sense is that, six
years on, Ofwat is running out of tools with which to improve Thames Water. There may be room for new legislation—there certainly is a need for a new approach to the regulatory regime.
Then there is the broader issue of water efficiency. Thames Water is partly responsible for encouraging it, but it is also a Government responsibility—indeed, it is the responsibility of us all. What steps are being taken to reverse the worsening situation that Water UK has recorded in respect of demand management? It states in its latest report that between 2002-03 and 2003-04 domestic water demand went up from 1.56 litres per pound of gross domestic product to 1.59 litres. In other words, the situation was getting slightly worse. Water demand, both domestic and non-domestic, in litres per person per day rose from 149.1 to 150.3, again a slight worsening of the situation. Overall, demand management is failing.
What are we doing to promote dual flush loos, given that 33 per cent. of potable water is flushed down the toilet in this country? Is there a beneficial VAT regime as there is for energy efficient installations? Are there grants comparable to those for the Energy Saving Trust? We discussed that in the last debate. Such things do not seem to be available at the moment. What about sustainable drainage systems?
I have come across a list of recommendations from the Environment Agency that is as long as your arm. It suggests a whole range of measures that could be taken to promote sustainable systems that would encourage the proper drainage of water into the water table rather than out into rivers and the sea. It addresses issues such as the building regulations. The Department for Communities and Local Government is planning an enormous new house building programme, much of it in the south-east. What would the Minister do to encourage it to ensure that those houses will be entirely supported by sustainable drainage systems and not by hard standing that allows water simply to flow into the drains and out into the rivers and the sea?
What are we doing to support rainwater harvesting systems? Is there a beneficial rate of VAT for those as there is for energy-efficient materials? Are there grants comparable to the Energy Saving Trust grants for rainwater harvesting systems? I know that there are not, because I am trying to fit one in my house at the moment and it is extremely expensive—I was about to use unparliamentary language there. The capital costs of these schemes is not huge in the context of a whole house. If it were compulsory in the building regulations and if new house builders had to add that cost into the total building cost of a house it would not be a great burden on them, but it is quite a burden for a household to find that money on a one-off basis.
I should like to hear what the Government are doing to encourage those rainwater harvesting systems. Again, as the hon. Gentleman mentioned, there are grey water systems and even the euphemistically termed black water recycling and reuse systems that could be encouraged more. I should like the Minister to answer all those questions. Then perhaps we will start to get to a situation where drought orders like the one that is being proposed will not be necessary, even when there has been a natural drought and a shortage of water. That will be a service to Thames Water’s customers, to its shareholders and to the environment too.
11.42 am
Gregory Barker (Bexhill and Battle) (Con): London’s climate is changing, and we now have less rain in London than there is in Rome. That is a startling fact. As we all know, the south-east is one of the driest parts of Britain, yet while we are getting less rainfall—something that is reinforced every year—we are also, bizarrely, seeing an increase in flooding. The Thames barrier, which only 15 years ago was expected to be raised once every six years, is raised on average six times every year. Forecasts are that it will continue to be raised more frequently still.
Even if Thames Water was ahead of the game, it would still have a huge challenge to meet the problems that London will face in the coming years. Given that the forecasts are so challenging, it is extraordinary that of all the water companies in Great Britain, Thames Water has the most appalling record. To be fair, some water companies are responding well to these arid conditions. Some are efficient and provide a good service for their consumers and investors, but Thames Water is an exemplar of how water companies should not be running our water supply.
However, Thames Water alone is not responsible for this state of affairs—it is not a company operating in a free market in its purest sense and this is not something in which Government intervention is unknown. It is a company operating within a tightly controlled statutory framework in an extremely regulated environment.
Since the water companies were first privatised, the Labour party has been in control of that regulatory environment for the majority of the time. It has been in office for nine years—longer than the preceding period during which the water companies were first privatised. Back in 1997, when Labour came to power, it said in its manifesto:
“Labour is determined to see significant improvements in the way the water industry serves local people, contributes to its communities and looks after the environment”.
I would not disagree with a word of that, and I do not think that anyone who had a hand in the legislation that took the water companies into the private sector anticipated that the framework under which it was privatised would remain carved in stone for ever after—that there would not be some further adjustment.
Certainly since the early 1990s, we have known much more about climate change. We are much more aware of the effects of global warming and the urgent need to respond and change our habits in the face of that if we are to rise to its challenge. Therefore, Thames’s record is totally unacceptable. According to its latest figures, the Thames Water daily leakage rate would cover 18,000 football pitches every day. That is colossal. We know that for three years running it has missed its leakage targets, which in themselves I do not believe to be that stretching or ambitious. I would like it to go further and faster, yet over the past three years the Government seem to have sat back.
I have to say that we had this debate only a week ago, as the hon. Member for Cheltenham (Martin Horwood) said, and it is the season for talking about water shortages and the response of the water companies, but nothing that I have heard in previous discussions and debates with Ministers or that I have read in the media gives me
any indication that the Government have a clue how they are going to respond to the situation in the long term.
There is nothing to indicate the scale of the Government’s ambition or their engagement with the industry. The hon. Gentleman also asked earlier what the Government are going to do: are they going to send in turnaround teams? It is a misunderstanding of the nature of the industry to say that the Government could or should send in turnaround teams, but they could and should be doing a great deal more.
Martin Horwood: The hon. Gentleman may have misunderstood. The idea of putting in a turnaround team is quite viable when we consider that some water companies such as Wessex Water and Dwr Cymru have an impressive record of tackling their leakage problems, and therefore they might be able to supply consultants to go in and support Thames Water in tackling its problems more efficiently.
Gregory Barker: Yes, but the notion that the turnaround teams are going to be sent in from the Department for Environment, Food and Rural Affairs or Whitehall is ludicrous. I hope that there will be a case for best practice being shared through the industry, but the water industry is not the NHS. It is not a wholly owned public service in that way, so it is dangerous to embark on inappropriate comparisons and parallels. Certainly there is a need for turnaround, which goes without saying, but it requires a private sector solution.
During our last debate here a few days ago, I challenged the Minister to tell us what the Government thought of Thames Water’s repair rate. What discussions have the Government had with industry to take an independent view on whether Thames’s repair rate and the excuses that it has consistently proffered for the last three years—if you will excuse the pun, Mr. Taylor—hold water?
It seems that the Government have no idea of what industry is capable of. Having sat down with the chief executive of a leading engineering company, I know that many in the private sector think that Thames has been wholly unambitious and could do much more if it embraced the latest technology and new management techniques to run its business more efficiently. But Thames has no incentive to do so if it can passport the dividends that are flowing back to Germany to pay its senior directors so well. Now that they can sell Thames at a significant profit, they also have no incentive to do so if their returns are fair.
A Lex column in the Financial Times commented on 3 June that investor returns in Thames Water for the past three years have been pretty good:
“Drought-induced hosepipe bans, like queue-jumping, provoke outrage in many Britons. Investors in UK water companies remain serene. They have enjoyed outstanding total returns in the past 12 months of 20 to 30 per cent.
Three factors explain this. First, the 2004 regulatory review heralded an investment splurge in the UK’s decrepit pipes and sewers. Between 2005 and 2010 the industry’s regulated asset base...will rise from £36 billion to £39 billion in real terms. Permitted profit levels are generous, premised on a real, post-tax cost of capital of 5.1 per cent. and in most cases a premium return to this. Real 10-year gilt yields have since fallen from about 2 per cent. in 2004 to a low of nearer 1 per cent this year.
Second, companies are reversing past efforts to diversify. This was fashionable in the 1990s but has produced mixed results...RWE’s auction of Thames Water has attracted private equity interest although, so far, no conclusion.
Is this sustainable? The bounce-back in real gilt yields towards 2 per cent. is not helpful. Most companies now trade at premiums to RAB. However, they still enjoy a favourable balance of power with their regulator. In a recent paper, it suggested required investment of over £20 billion between 2010 and 2015, compared to £17 billion in 2005-10.”
I do not think that when considering Ofwat, DEFRA has a clue about the investment framework in which water companies operate. It does not understand capital demands or the workings of the investor community, and therefore does not ask Ofwat the right questions. Ofwat is not getting the political direction from Ministers that it ought to have at the highest level of public policy, because Ministers simply do not know where they want to take the water industry.
Harry Cohen: The hon. Gentleman is making an impressive speech, and the points that he has made, including the last one, are important. I am a little concerned, however, about one phrase that he used—“private sector solution”. I am worried about that because RWE is clearly looking to sell off Thames Water and make a killing out of it.
A lot of Londoners would be happy to see the back of RWE because of its management of their water supply, but then it would have to be asked, “Who’s next?” Which other private sector solution is next, and will it do any better than RWE? Will it be required to do any better than RWE? It might involve more asset stripping.
David Taylor (in the Chair): Order. Interventions should be brief.
Gregory Barker: I entirely take the point and accept the hon. Gentleman’s analysis to a certain extent, but ultimately the private sector is best placed to provide the solutions, within the context of robust public policy and sensible regulation that has vision and ambition. The missing parts of the equation in the Thames example are vision in public policy and the implementation of correct regulation.
Elsewhere in the country, the private sector has delivered higher investment, higher standards in water quality and a good deal for consumers. On balance, the overall framework is right; it is only here, right under our noses in our capital city, that we have the problems. A share of the blame for those problems ultimately falls to the Government, for failing to set the right tone from the regulator and show that political leadership.
Martin Horwood: I hope that the hon. Gentleman can forgive me for saying this, but he is in danger of issuing a lot of sound and fury but signifying nothing. He seems to be relying entirely on best practice and vision to deliver changes, but over six years they have led to a higher, not a lower, leakage level. Is he proposing any change to the regulatory regime at all?
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