Flooding: Cooperation across Government Contents

4Investment

Past investment

31.Funding of flood risk management is complex. More information about how the Government funds flood risk management is set out in a House of Commons Library Briefing paper available online.31

32.The independent 2008 Pitt review argued that, while it was not its role to consider precise levels of future flood defence spending, ‘with the evidence of increasing risks from climate change and the additional challenges identified’ it would be ‘sensible for the Government to plan on the basis of above inflation settlements in future Government spending rounds.’32 Similarly the independent 2014 Worsfold review argued that ‘levels of investment should not be lowered below 2014–15 levels due to potential risks around uncertainty and climate change.’33

33.Funding figures (see figure 1) show that at the beginning of the last Parliament there was a substantial drop in annual funding which remained until the winter floods of 2014–2015 at which point the Coalition Government responded with a one-off funding injection. This highlights a potential disconnect between what the Coalition Government planned to spend and what it actually ended up spending on flood defence. Rory Stewart acknowledged that governments tend to spend more in years immediately following a flood but argued that expenditure had increased in real terms over the five-year period:

If you look at the five-year period rather than annual spikes, the 2005 to 2010 period, approximately £1.8 billion was spent; 2010 to 2015 the figure will be approximately £2 billion, so the amount is going up over those five-year periods. It is correct that in that individual year more was spent, but if you average it over the five-year period and do not take into account the tendencies of Governments to spend more in the year immediately following a flood, you will find that flood expenditure has gone up year on year over the last 15 years in every five-year period and will continue to do so now.34

Figure 1: Total expenditure on flood and coastal erosion risk management in England 2000/01 to 2014/15 and 2015/16 budgets (£m). Real terms (2015/16 prices).

Source: Flood risk management and flooding, Briefing paper CBP07514, House of Commons Library, March 2016

34.The Government’s claim that spending on flooding has increased every five years does not reflect the fact that funding was initially planned to decline over the 2010–2015 Parliament and was only higher due to the reactive funding injection following the winter 2013/2014 floods. This approach is inefficient and goes against the advice of Sir Michael Pitt and Mark Worsfold in their reviews. We recommend that the Government adopt a more strategic approach to funding flood risk management which avoids such fluctuations in funding.

35.FCERM total expenditure can be broken down into capital and resource expenditure - broadly this means funds for new defences and maintenance of existing defences respectively. Daniel Johns from the CCC said it was important to sustain flood spending:

[ … ] we have about £20 billion-worth of flood defence assets already out there in the country. That takes money just to keep going, not only to maintain and upgrade those defences over time, but to build new defences in parts of the country that are currently pretty exposed and undefended. You need to run, in flood defence terms, just to stand still. [ … ].35

36.Daniel Johns also pointed out that maintenance funding in particular was at the lower end of what the Environment Agency (responsible for assets with a replacement value of over £20bn) needed:

The number that the Environment Agency say is sufficient to maintain defences over time is somewhere between £170 million and £190 million per year. That is the revenue cost of defence maintenance. They are currently spending £170 million per year and have said they will protect that in real terms over the course of this Parliament, so I guess you could say they are spending at the lower end of the ideal range.36

It is clear that there was underinvestment over the course of the last Parliament. We valued that at about £200 million in total over the five years. That was because of the significant reductions in both capital and revenue spending that were made in 2010.37

37.This was supported by a 2014 National Audit Office (NAO) report, Strategic Flood Risk Management, which highlighted that spending on managing flooding in England was “insufficient” to maintain defences. It reported that funding for maintenance had fluctuated. For example, between 2010–11 and 2013–14, within the 10% overall revenue reduction, the Environment Agency’s funding for maintaining flood assets had reduced by 14%. The report stated:

An additional £35 million allocated for 2014–15 and 2015–16 as part of the £270 million has, in cash terms, restored maintenance funding to 2010–11 levels. In real terms, this equates to a 6% decrease between 2010–11 and 2014–15. The Agency has reduced and prioritised its maintenance regime and also made efficiencies, including a £44 million saving on capital construction costs between 2011 and 2014.38

38.The result of this reduction was highlighted in the Worsfold review which showed that as maintenance spending declined so did the percentage of critical assets that met the Environment Agency’s required standard from 99% to 94% (see figure 2).39 The current target for Environment Agency maintained high consequence assets is to achieve 97% at or above the required condition by April 2017.40 The Worsfold review showed that between 2009 and 2013 the number of assets which met the required standard were totalled at or above 97%. Any decline below 97% represents a real world and unacceptable risk to local communities at risk of flooding. The Government has taken steps to rectify this, confirming in the 2015 Autumn Statement that flood defence maintenance spending will now be maintained. The Environment Agency said that it thought it was making good progress against its target but last winter’s floods had affected progress. It was confident that it would achieve its target by April 2017.41 Given the increasing risk from climate change we urge the Government to see the 97% as a minimum and to have the ambition of 99% of critical asserts meeting the required condition by 2019. We heard some evidence that previous under-investment could have contributed to the impact of last winter’s floods.

Figure 2: FCRM expenditure for the period 2008/9 to 2014/15 and high consequence assets in target conditions (%)

Source: Environment Agency, Flood and Coastal Erosion Risk Management (FCERM) maintenance review, September 2014, p 11

39.The Foss barrier, a 16.5 tonne gate near York, is designed to prevent high water levels in the River Ouse entering the River Foss in a highly urbanised area. Last winter the barrier was overwhelmed causing flooding along the River Foss. Since its construction in 1987, the barrier has protected York on a number of occasions, including the floods of 2000, 2007 and 2012. It forms part of York’s city-wide defences.

40.During our visit to Leeds, we heard about the failure of the barrier during the winter flood. In May 2016, the Environment Agency published an investigation report examining the reasons for this failure.42 It reported that water leaked into the control room putting the power supply to the building at risk. Representatives from the Environment Agency told us that the 30-year-old barrier had recently been reviewed and £3.5 million had been allocated to repair it by 2020 (see appendix 1). These repairs would bring it up to withstand a one in 100 year event. They subsequently submitted written evidence stating that they had ‘started works to upgrade the facility with new pumps and an improved resilience using the £10m additional money allocated by the Government following the floods so that it can pump the flows from the River Foss experienced in December 2015.’43

41.The Worsfold review demonstrated a relationship between maintenance spending and the condition of critical assets which protect people and property from flooding. As maintenance spending has fallen so to have the number of critical assets which meet the Environment Agency’s required condition. Any decline in the condition of critical assets represents a real world and unacceptable risk to local communities at risk of flooding. Given the increasing risk from climate change we urge the Government to see the 97% target as a minimum and to have the ambition of 99% of critical assets meeting the Environment Agency’s required condition by 2019. The Foss Barrier in York provides a cautionary example of what could happen in other parts of the country when ageing defences fail. We note the Government’s commitment to sustain maintenance spending over this Parliament. However, it is worth noting that, since there are more new flood defence assets being built, maintenance spend needs to increase simply in order to stand still.

Current and future investment

42.At the end of June 2013, the Government committed to providing £2.3 billion in capital funding for flood defences for the period 2015–16 to 2020–21 in order to invest in over 1,500 flood defence schemes across the country, protect a further 300,000 properties, reduce flood risk by 5% and save the economy £2.7 billion by 2021. Following the 2015/16 winter floods the Government announced additional funding of about £200 million as a direct response to aid recovery. Further funds may also be granted from the EU solidarity fund. In the Budget 2016, the Government announced an additional £700 million for flood defence by 2020–21. Some of this additional money will build flood defence schemes in areas affected by the December floods, including Leeds, and some of it will boost the maintenance budget to keep existing defences operational, including York.

43.Rory Stewart described how the original £2.3 billion would be allocated based on “very narrow, defined economic criteria, driven through the existing formula”. Oliver Letwin said this provided a “fair system of distributing the money”.44 The £700 million would be allocated based on “political and sense of value judgments and broader societal impacts”.45 Oliver Letwin told us that this additional money was in response to “the revealed preference of the British public”.46 This “political calculation” provided the resources for more innovative approaches. Rory Stewart explained:

The additional £700 million represented a difficult, but I think correct, political calculation, which is that we decided as a Government that people want even more than that. They did not just want an increase in real terms on what had been the trend in the past, but that we need an additional injection. One of the reasons for that is in order to provide the resources for more innovative approaches, both to natural flood management and to a national resilience review, particularly looking at some of our critical infrastructure.47

44.Rory Stewart gave a specific example in relation to Leeds which he said “famously did not stack up in economic terms if you ran it through the traditional formula that simply looks at narrow cost benefit” but which misses the “the fact that it has the third largest commuter hub in the country; it has the headquarters of major industries; it has fantastic growth potential, particularly in the finance and insurance industry; it is a very important hub for the whole of the north. These are things that cannot necessarily be squeezed into a particular cost benefit formula”.48

45.Commenting on whether the £2.3 billion would be able to protect 300,000 properties, as claimed by the Government, Rory Stewart said, “my gut instinct is we will make that target.” He said that the 300,000 was predicated on spending the £2.3 billion on 1400 projects identified by the Environment Agency over six years in line with the formula.49 We note that this is 100 fewer projects than when the Government originally announced the funding programme. The Minister added that the 300,000 figure was likely to be delivered, “particularly if we add in the £700 million”.50 Oliver Letwin, however, denied that this additional money proved that previous spending levels were insufficient.51

46.Daniel Johns from the CCC told us that the Government’s assumptions that overall flood funding would deliver what the Government promised, were “brave”:

[ … ] the long-term investment scenarios assume that you take an economically optimal and rational approach to every single flood defence decision. [ … ] Certainly the assumption taken, in the long-term investment strategy, is that new [housing] development does not add to long-term costs and risks, whereas I think that assumption is quite a brave one. Also the assumption is that, at every point in the process, the economically optimal decision is made at every point in time.

[ … ] In rough terms, as long as you take and accept the assumptions that were made by the Environment Agency in their 2014 long-term investment scenarios, they are broadly spending an appropriate amount over the next six years. But, as I say, as soon as you start to factor in these suboptimal decisions potentially being taken, and as soon as you take into account the impacts of new development, you might come to the conclusion that we are probably again spending at the lower end of the ideal range. 52

47.In response to questions about a potential shortfall in funding Sir James Bevan, from the Environment Agency, told us that he thought he had enough money:

On the resource issue we did our own modelling—the long-term investment scenarios, which were updated and published in 2014. That had a figure for optimal investment in flood defence over the next several years. If you put together the money that the Government is contributing for the next four or five years, the £2.3 billion, and the investment that other partners are going to contribute [ … ] and the maintenance spending that has been locked in for the next four years, you are at around the figure that was identified in the long-term investment scenarios as the figure that you need to do the right sort of investment. [ … ].53

48.The Government’s commitment to spend £2.3 billion and an additional £700 million on flood risk management is welcome. We remain sceptical that the Government will reach its target of protecting 300,000 properties, based as it is on an inherently optimistic forecast that assumes optimal efficiency in spending decisions. The Government should also clarify whether the £2.3 billion will pay for 1500 flood defence projects, as originally proposed, or 1400 projects, which the Minister said during our inquiry. We were also surprised to hear that the additional £700 million of funding was based on a “political calculation”. This is an economically inefficient way of allocating Government resources. It highlights that the Government is continuing to take a reactive rather than proactive approach to funding flood risk management by ignoring the recommendations on these issues from previous reviews. Communities deserve more certainty that they will be protected from floods.

Partnership funding

49.As part of its December 2014 flooding investment plan, the Government said the future £2.3 billion capital investment (for building new flood defences) was contingent on attracting £600 million external contributions. Oliver Letwin described how they had introduced this approach to help reduce the cost of flood protection schemes:

Before the partnership funding system was in place, it was a sort of free ride in those days. If you had your money, you had 100% of the money put up, so there was no incentive to sharpen your pencil and reduce the cost, so far as possible, of the scheme in question. Now, because you are not going to get 100% and you have to come up with some partnership funding of your own, you have a quite strong incentive to work with the Environment Agency to come up with a cheaper scheme that will deliver the results and to balance in an optimal way cost and benefit.54

50.Sir James Bevan from the Environment Agency told us that the money that he had received from the Government and from partnership funding meant that they were “on track” for the money needed to complete their five year programme.55 Rory Stewart updated us on how much money had been raised to date and how much was left outstanding:

[ … ] we have about £230 million securely tied down [for partnership funding]. The Environment Agency is pretty confident about an additional £200 million or more, probably about £250 million. [ … ] That leaves a remaining something in the region of £100 million that we need to pin down over the next five-year period.56

He was confident that the additional partnership funding could be raised but the Minister said that projects were only possible if “somebody is able to top it up” and that this was justified in order to be “fair to all parts of the country”. The Minister suggested that cancelling projects because of a lack of partnership funding was a “worst-case scenario” and that he was “pretty confident” it could all be delivered.57

51.Ministers and the Environment Agency described the types of organisations that would make up the additional funds. A large part comes from other public sector bodies such as county councils and city councils. Sir James recognised however that many of these councils have “budgetary challenges” and so he was keen to “draw the net more widely”. Both he and the Minister seem to be particularly interested in growing contributions from the private sector such as water companies. In follow-up correspondence, however, the Environment Agency told us that they estimated only 15% of funding would come from private sources. It may be optimistic to assume that the private sector will be able to contribute significantly to the amount of partnership funding required.58

52.The Environment Agency also gave some examples relating to coastal flood protection which was part funded by EU money but it was not clear whether this qualified as partnership funding. Environment Agency also reported that it had worked with local authorities and third sector partners who had secured lottery funding to ‘achieve economies and deliver heritage, environmental and socio-economic benefits that are additional and complementary to reducing flood risk.’ This distinction was made because ‘Flood and coastal erosion risk management (FCERM) and the delivery of reduced flood risk outcomes are not eligible for lottery funding’ and as such ‘where lottery funding is secured but used to deliver additional benefits beyond FCERM, it is not reported FCERM Partnership Funding.’59

53.The Worsfold review made a specific recommendation on partnership funding. It said that:

Partnership funding delivers benefits to the overall FCERM programme. Defra and the Environment Agency should improve the process and procedures in delivering investment funded by partnerships. The primary aim of this should be to:

reduce perceived bottlenecks in delivering the FCERM programme; and
establish how partnership funding could be balanced with programme contingency in order to maintain a pipeline of efficient delivery.60

54.Rory Stewart said the Government had addressed this recommendation by developing “serious” partnership funding teams which had more expertise and who were better at structuring complex deals.61 The Minister then broadened the topic and linked this issue back to the £700 million which would be allocated politically instead of using economic criteria and appeared to dismiss Mr Worsfold’s findings.62 The Minister explained that economic criteria were not necessarily the best way of dealing with flooding issues:

These are things that cannot necessarily be squeezed into a particular cost benefit formula, but which are the kinds of judgments that you have to make and that gets into the partnership funding. I think perhaps the one way in which my gut instinct is, we have to be honest about the fact that not everything that you do can be reduced to the kinds of engineering criteria of somebody like Mr Worsfold, who is working within the private sector water companies on the basis of cost benefit calculations, often on the basis of value for their shareholders. That isn’t necessarily always how Government will do its business or ought to do its business.63

55.The Government has made good progress in raising partnership funds to support overall funding for flood protection. However, 85% of this funding is still expected to come from the public sector, which is subject to significant resource constraints, and only 15% from the private sector. Partnership funding represents a risky approach to funding flood protection. It increases uncertainty for local communities about whether they will be protected from future floods. If the Government or the Environment Agency fails to attract additional funds, important flood protection schemes will not get the go-ahead. The Government must set out how it intends to support these flood protection schemes if additional partnership funding cannot be raised.

Efficiency savings

56.In addition to the partnership funding the Government also said its £2.3 billion capital investment was contingent on Defra working with the Environment Agency to make efficiency savings of at least 10% by 2019–20.64

57.Sir James said that the Environment Agency would “embrace” the Worsfold review to deliver this.65 The review’s main conclusion was that ‘the management of flood defence assets is primarily driven by asset condition, which does not help the Environment Agency forecast service and expenditure requirements.’ The review suggested that this has ‘highlighted the need to improve investment planning processes and capabilities for modelling and predicting operating and capital costs’66. John Curtin from the Environment Agency gave a specific example of how this was being addressed:

One example: we started a programme called creating asset management capacity, which the review encouraged. This includes how we use IT to better inform our inspection of assets, detection of their deterioration, and then pushing our investment into bringing them back to their standard.67

58.Oliver Letwin described what the Government had done to look at the “whole life cost” of projects rather than the upfront capital required.68 Rory Stewart provided a specific example:

We have what we believe is an increasingly sophisticated integration between our calculations on the ongoing maintenance cost of something and the initial installation. To give you a concrete example, if we are building an access to a dam now, where in the past we might have looked at building a gate, which is a cheaper thing to build, we would now look at building a ramp. The ramp is more expensive in capital terms, so it is more expensive to install a ramp than a gate, but in maintenance terms it is much cheaper.69

59.Rory Stewart confirmed that his Department was also on track to make the 10% savings. He reported that the savings are being made by bringing central services together and by people leaving the organization:

A lot of those savings at the moment are coming from a combination of bringing our central services together. [ … ] Some of it has come through people leaving and our organisation has become smaller. People have taken either retirement or they have taken voluntary redundancy packages and our organisation is now smaller than it was.70

60.The Minister said that the savings would not impact Defra’s work on flooding. This element of his budget was protected. He said that “the people who are feeling the strain, are the non-flooding people.”71 He went on to say:

The funding on flooding has been an area that the Government has been determined to increase in real terms, as have certain other areas. National parks would be another example, but correspondingly that means there are other areas that have been cut.72

61.We recognise that Defra needs to prioritise flooding as an issue that impacts on lives and livelihoods. However, it should be transparent about where it has had to make cuts to accommodate this. We also ask the Government to set out, in the response to this Report, the evidence-base justifying its decision to protect flooding at the expense of other parts of the Department, in order to demonstrate that this decision was grounded in evidence and not just “political calculation”.

31 Flood risk management and flooding, Briefing paper CBP07514, House of Commons Library, March 2016

32 The Pitt Review, Learning lessons from the 2007 floods, June 2008, p xviii

33 Environment Agency, Flood and Coastal Erosion Risk Management (FCERM) maintenance review, September 2014, Page 7

34 Q212

35 Q29 [Daniel Johns]

36 Q36

37 Q38

38 National Audit Office, Strategic Flood Risk Management, November 2014, p 24

39 Environment Agency, Flood and Coastal Erosion Risk Management (FCERM) maintenance review, September 2014,
p 11

40 Environment Agency (FDG0013)

41 As above

42 Environment Agency, Foss barrier and pumping station - factual report of flooding on 26 December 2015, May 2016, p 1