REACH etc. (Amendment etc.) (EU Exit) Regulations 2019

Viscount Hanworth Excerpts

Tuesday 26th March 2019 Lords Chamber

[Baroness McIntosh of Pickering]

I am most grateful.

In paragraph 17 of the 15th report the department is recorded as replying to one of the concerns thus:

“Should it become clear that we are in a ‘no deal’ scenario, staffing levels will be scaled up as required over a period of several years, allowing time for recruitment and training”.


The question has to be asked: as we are on the eve of a potential no deal, what is the position now and how far advanced are we with the scaling up? Are the officials coming from the industry and from other departments? What certainty can we have that the officials who are being asked to prepare for exit day under no deal are in place and have the knowledge in this regard?

My heart sank when my noble friend said that the dedicated IT system had been tried and tested and was ready to go. Successive Governments have found themselves in an embarrassing situation where we have a new, swanky IT system in place, it has been tried and tested and is ready to go, but it has proved to fail. I think the two examples I am going to choose actually reflect badly on my own Government. One relates to the Rural Payments Agency, where we not only introduced a new system of farm payments but, at exactly the same time, introduced a new IT system which had been tried and tested—and failed. The other IT system that caused great distress throughout the country was rolled out by the Child Support Agency. Again, we had a new IT system that had been tried and tested and proceeded to fail, with devastating consequences for families across the country. I hope that my noble friend will be proved right that this IT system is indeed ready to go.

At paragraph 27 of its 15th report, the committee raises concern about the possibility of failure and disruption:

“We remain concerned … that there may be disruption to the UK chemical industry, supply chains and wider economy as a result of new requirements to register chemicals from the EU after exit”.


That is certainly something noble Lords would wish to be satisfied on this afternoon.

My final point is that the House is incredibly grateful to Secondary Legislation Scrutiny Sub-Committee B for its work in preparing us for this debate on a very important SI.

I am rather concerned that the noble Lord, Lord Fox, might be at my dinner. We were at breakfast together this morning, as indeed was my noble friend Lady Byford and a number of others. We are now together—almost—post-lunch. I pray that we might be at dinner together this evening, but perhaps we might both have a reprieve. He mentioned the need for reassurance about ongoing consultation, and that all the groups are united. It is quite a challenge to unite such disparate groups as the Green Alliance and the broader environmental groups, the health companies, the animal rights charities and indeed the chemical industry. I conclude by asking my noble friend to give the House an assurance that the consultations are indeed ongoing and will continue throughout any transitional period.

[Viscount Hanworth (Lab)]

My Lords, much of what I intended to say has already been said, and said very well. Nevertheless, I will add further testimony that reaffirms the comments of my committee colleague, the noble Lord, Lord Teverson.

The experience of serving on the Energy and Environment Sub-Committee of the European Union Committee has highlighted a crisis in government that affects both politics and administration. Modern government is highly complex. Mundane matters of daily life and of trade are surrounded, as they must be, by regulations and legislation, and it can take a great intellectual effort to understand all the circumstances. Minor incremental changes to legislation can usually accommodated. If a small mistake is recognised, the matter can be amended. The changes proposed by the Brexit agenda are of a very different order. In this connection, Ministers and their civil servants have often had only a tenuous grasp of the matters at hand, and they have sometimes demonstrated before our committee an astonishing oversight.

The EU REACH regulations have proved to be a case in point. Here, we face some of the perplexities and absurdities of the Brexit agenda. It has been unclear whether under any circumstances the UK could continue after Brexit to remain a member of the REACH organisation, albeit that this has never been clear until recently.

The initial proposal put to our committee by the Minister in charge, who was flanked by a Civil Service adviser, was that the establishment of a UK REACH system—or a “BREACH” system, as we have heard it called—could be achieved easily by cutting and pasting the contents of the REACH database, which is owned by the European Chemicals Agency, into our own national database. It was pointed out to them that this was not generally possible. The information in the REACH database is also owned by commercial enterprises that have contributed to it. Some of it is subject to commercial secrecy. The data would have to be acquired via negotiations. Moreover, given that the data is often subject to joint ownership, such negotiations would be difficult and protracted.

In effect, the ambition of the Brexit agenda has been to acquire the fruits of a co-operative enterprise without having to co-operate with others. It has become clear that, in order to remain in business, UK companies will have to transfer their registrations to European Union-based companies, or parties, at least. They will have to bear the cost of registering with both the UK and the European Union. Moreover, unless they already have a presence in the European Union—other than in the UK—they will be depending for such registrations on the good will of rival enterprises. This is hardly a case of regaining national control.

The preponderance of the output of our chemical industry is exported. Some 61% of our chemical exports went to the European Union in 2017, and 73% of our chemical imports came from the European Union. If the Brexit agenda is fulfilled, we shall be looking at the likely demise of a significant British industry.

The chairman of our committee wrote to the Minister expressing our anxiety at the lack of preparation for these eventualities. In reply, the Minister told us that there has recently been a flurry of activity aimed at alerting industry to the need to prepare for Brexit. It is difficult to measure the extent of these activities, but it is clear that Defra has had other things on its mind.

This brings us back to a point that has already been made. The Conservative Party is in favour of small government and light-touch regulation, yet it has proposed changes far beyond the capacity of politicians and civil servants to accommodate. Its maladministration of the nation’s affairs amounts to an utter dereliction of duty.

[Lord Trees (CB)]

My Lords, I strongly support the amendment of the noble Lord, Lord Whitty, and will address the issue of animal testing, which has already been referred to by several noble Lords.

The amendment calls on Her Majesty’s Government to seek continued participation in REACH as a priority in negotiations with the EU. This is particularly important with respect to the use of animals for the safety assessment of chemicals. As was referred to earlier, animal welfare is of great concern to the public, but I believe that the vast majority understand the need, under strict regulation, to use some animals to ensure human safety.

However, all interested parties—the public, the scientists involved and the welfare organisations—expect observance of what are called the three Rs in experimentation. That is, to refine, to replace and to reduce the number of animals used. That concept has been pioneered in the United Kingdom. The REACH guidelines explicitly require minimal use of animals, and permit it only after all other alternatives are exhausted. Most importantly, having a single registration and regulatory portal for the EU avoids any repetition of animal testing.

The instrument under debate today will require an independent UK chemical regulatory process centred on the HSE and the Environment Agency. Notwithstanding the terrific logistical challenges that that presents, which have been well articulated by the noble Lords, Lord Teverson and Lord Fox, this is essential in the event of no deal, and indeed in the event that the EU will not accept the UK’s continued participation in REACH. I should point out that, to date, no third-party membership has been admitted to the REACH system.

I have three questions for the Minister. First, will he reassure us that the UK systems replacing REACH will harmonise with it as much as possible and will take all measures to avoid the need to generate separate data for registration? The Minister has told us that current registrations will continue to be accepted, but that all UK registrants will have to resubmit their registration dossier to the UK competent authorities within two years. So will the current animal safety testing data be accepted at that time without the need for further testing? Conversely, for UK firms importing products from the EEA that are currently registered by an EU member state, will the existing data for animal testing suffice when they are required to register within two years of Brexit?

Bearing in mind the problems of intellectual property, what assessment has Defra made of the problem of intellectual property and the ownership of data in the context of its transferability? Finally on future registrations of new products, will Her Majesty’s Government negotiate with the EU the mutual recognition of animal testing data so as to avoid the need to duplicate animal testing, whether for EU registrants to export to the UK or for UK registrants to export to the EU?

Environment: 25-year Plan

Viscount Hanworth Excerpts

Monday 29th January 2018 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I declare that I am a member of the European Union Energy and Environment Sub-Committee. My reason for this declaration is that I wish to allude to some of the evidence that we have heard from witnesses and to some of the ministerial replies to our inquiries regarding their opinions on proposed legislation from the European Union.

The Green Paper on the 25-year plan for the environment, which we are discussing, is full of laudable ambitions and good intentions. I hesitate to be critical of it. However, we have been waiting a very long time to see this document. It is the product of an agenda that has suffered significant delays. It is appropriate to question the Government’s commitment to some of their declared aims. The issues on which I wish to concentrate are the disposal of our domestic and industrial waste and its recycling. This also entails the composition of the waste and the question of what can be done to make it more amenable to recycling and less harmful to the environment.

The European Union has proposed some stringent targets for recycling. These are expressed, somewhat crudely, as the percentage of the waste, by weight, that should be recycled. A target to recycle 65% of urban waste by 2035 was agreed by the European Council and the European Parliament in December. The proposal now awaits a vote of approval by the member states. The target has already been reduced from 70% by 2030, which was initially proposed by the European Parliament. However, the UK has asserted that it cannot support even the lesser target. The UK delegation has proposed a 55% minimum target, while declaring that it has been unable to identify a mix of policies that would be effective in reaching a higher target. Nevertheless, waste management is a devolved matter, and Scotland and Wales have both adopted a 70% target.

Our committee has been struck by the variability of the recycling rates across the country, even within limited geographic areas. Thus, whereas South Oxfordshire already achieves a 67% rate of recycling, Greater London has a far lesser rate of 32% and the rate for the London Borough of Newham is a mere 14%. The explanations for the derelictions of some local authorities that have been offered to our committee have sounded unconvincing. It has been asserted that it is far more challenging to achieve high rates of recycling in urban areas than in rural areas and that many local authorities are locked into waste management contracts.

The truth seems to be that rates of recycling are correlated with the incomes available to local authorities. The matter has surely been exacerbated by the cuts to local authority incomes and expenditures that the Government have imposed. In any case, the degree of variability in the rate of recycling is indicative of a lack of a co-ordinated national policy. It is clear that, if the Government were willing, we could do much better.

The pronouncements that have accompanied the publication of the Green Paper suggest that the Government are keen to confront a wide range of environmental issues. However, a cursory examination of some of the practical proposals belies this impression. For example, the proposals for dealing with the menace of single-use plastic items are wholly inadequate. The 5p charge on plastic bags, which had been imposed on larger retailers, has now been extended to smaller shops. It should have been applied universally in the first instance and, in any case, it has already been mandated in European Union legislation. The scourge of plastic packaging should have been addressed by imposing a cost upon manufacturers commensurate with the environmental damage that it inflicts. There should be mandatory design guidelines to eliminate polymer mixes in plastic packaging that make recycling close to impossible. Many single-use plastic products should be banned.

Much of our plastic waste has been exported to China, but from January China has banned imports of such waste. The consequence is that, until we establish adequate facilities for recycling it, this plastic waste will be consigned to landfill sites or exported to some of our European neighbours for incineration as refuse-derived fuel. The Government have been unwilling to adopt any of the obvious measures and it is difficult to understand why. Perhaps the answer lies in their adherence to a free-market ideology that discourages intervention of Governments in commerce and industry and exalts the sovereignty of consumers.

An odd accompaniment to the 25-year environment plan is a cost-benefit analysis that expounds the metaphysical concept of the capital value of the environment. This has been the work of the Natural Capital Committee, a group of self-styled neo-classical economists who have been appointed to the task by the Government. Cost-benefit analyses attempt to apply the precepts of commercial project appraisal to social investments and to other initiatives of public authorities that have an enduring effect. This has to be done in the absence of markets that could determine the monetary values of the outcomes. It is proposed that, in the absence of a market value, consumers should be asked to declare what they would be willing to pay to obtain the benefits of a project or to avoid its detriments. This is not an appropriate way to determine how we should confront the threats to our environment. Instead of seeking to uncover the self-interested opinions of individual consumers, we should seek to create a social consensus in favour of actions that might save us from the sort of thoughtless folly that is bound to result in a universal detriment. It is the duty of Governments to take a lead in forming such a consensus, and I do not believe that this Government are fulfilling their duty adequately.

Brexit: Agriculture and Farm Animal Welfare (European Union Committee Report)

Viscount Hanworth Excerpts

Tuesday 17th October 2017 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I follow an excellent speech. The six sub-committees of the European Union Committee of the House of Lords have produced a collection of authoritative documents that have revealed in detail the nature of Britain’s relationship with the European Union. I have counted 17 such documents that are addressed specifically to the problems of Brexit, and there are more to come.

The reports demonstrate the complexities that an advanced industrial nation faces in the context of a global economy, where there are numerous interdependencies of trade and production; they have also served to highlight some startling deficiencies in the knowledge and intelligence of the incumbent British Government. However, to be fair, such shortfalls are inevitable in the complicated modern world. It seems that the sub-committees have processed and revealed far more information than the Ministers in charge of Brexit negotiations are capable of absorbing. Even the civil servants charged with advising the Ministers may be severely challenged. Therein lies one of the major hazards of Brexit.

The first matter on which to focus our attention is our trade in agricultural products with the EU and the rest of the world. The EU is our largest single trading partner in agricultural products. Of our agricultural exports, 80% go to the EU and 97% to countries in a wider free trade network, which includes the countries with which the EU has a free trade agreement. Likewise, 94% of our imports of foodstuffs and agricultural produce, which considerably exceeds the value of our exports, come from such countries.

The EU trading arrangements are based on a commonality of interest among the member nations, though their basic feature is unrestricted free trade among those nations. The EU has established numerous free trade agreements beyond Europe, while maintaining tariff barriers that have been designed to protect European agriculture and industry. The British Government are keen to maintain the benefits of our free trade with the EU while seeking to promote our trade with other nations through further reciprocal agreements. In the somewhat discredited phrase, the aim has been to have our cake and eat it. It is a fallacy to imagine that we could easily negotiate a more profitable trade in agricultural products with the rest of the world, as the Foreign Secretary has asserted. As examples of products that could be targeted for greater exports, he cited haggis, which the US has banned on health grounds since 1971, and Scotch whisky, on which India imposes a 150% duty. Those are hardly significant opportunities.

The process of negotiating trade deals is lengthy and difficult. At the heart of any such negotiations are the tariff rate quotas, which provide favourable reciprocal trading relationships at reduced tariff rates within limits governed by the values and volumes of the trades. Our Government have blithely assumed that they could acquire a proportion of the EU quotas determined by previous volumes of trade. As we have heard, that proposal has met with strong resistance from those with whom we would seek to increase our trade. The UK has been told that such an arrangement is unacceptable to the US and other WTO members, who wish to force the UK to open its market further to their farm products. Several witnesses who contributed evidence to our sub-committee warned that this would be the likely outcome. Many commentators regard it as unlikely that, after Brexit, the UK will be able to retain access to the free trade agreements of the EU with third countries. The nightmare is that we shall become subject to conditions of free trade in respect of imports, while being restricted in our exports.

The greater access to our markets of agricultural producers in the third world might result in lower prices for our consumers, but it could devastate our agricultural industry. In return for allowing our industrial imports into the US, we would have to allow the import of US agricultural goods that are produced to very different standards and by very different methods from our own. The EU imposes stringent standards on food safety, animal health, the use of pesticides and a wide range of agricultural practices. If Britain were constrained to pursue a trade policy outside the EU network, many of the standards that we impose on imports might have to be disregarded. To be competitive in overseas markets, we might have to lower our standards, which would severely prejudice our chances of maintaining our volume of trade with the EU. Merely to incorporate raw materials in our products from sources that are not regulated by EU standards would prohibit our trade with the EU.

Next, I turn to the restrictions on the freedom of movement of labour that are the objective of many Brexit advocates. British agriculture relies greatly on workers from the rest of the EU. There is considerable reliance on seasonal migratory labour for harvesting and fruit picking, but many permanently resident EU migrants are employed throughout the agricultural and food processing industries. Some of the facts and figures are surprising. We have been told that 40% of staff on egg farms are EU migrants, as are 50% of workers in egg-packing factories. In poultry meat factories, the figure is 60%. In recent years, nearly half of the veterinary surgeons registering in the UK have qualified from veterinary schools elsewhere in the EU. We have been told that 90% of the vets working in slaughterhouses are EU nationals from abroad. Vets can be described as skilled workers, in contrast to fruit pickers and abattoir workers. However, our witnesses have been unanimous in declaring that it is unhelpful to make such a distinction in agriculture. Fruit pickers may not have qualifications relating to their job but they are skilled nevertheless, and they cannot be replaced readily by casual untrained labourers. Our agriculture depends on them. Whereas some Ministers recognise the truth of that, the message coming from the Government is that the immigration policy after Brexit will be based on the skill levels of immigrants.

There is much more that can be said but I am conscious that our time is limited. I am happy to see that others have raised some of the many issues that I have neglected.

Brexit: Fisheries (EUC Report)

Viscount Hanworth Excerpts

Monday 16th January 2017 Grand Committee

[Viscount Hanworth (Lab)]

My Lords, the preservation of fish stocks in the face of unbridled consumption is one of the greatest challenges to human social organisation. It is a challenge on a global scale, and it has been met with widespread failure. The failure to preserve European fish stocks is one of many examples of this all too common tragedy.

As we have heard, in spite of highly efficient modern technology aimed at locating shoals of fish and capturing them, the quantity of fish landed in UK ports is less than a third of what it was in 1930, when it reached a maximum. The UK fisheries statistics to which I refer are readily accessible in a briefing paper from the Commons Library. The quantity of fish landed today is significantly less than it was in 1890, when much of the fishing fleet consisted of small vessels under sail. The decline of the catch in the face of the ever-improving technology of fishing points unequivocally to a decline of fish stocks.

The two world wars saw sharp reductions in the size of the catches, which was largely restored when the wars ended. Leaving aside the effect of the subsequent war, there has been a steady downwards trend since the 1930s, on the back of which there have been significant annual variations. However, after 1973, the decline accelerated. That happens to be the year when Britain joined the European Union. This was also the era when the confrontation between the United Kingdom and Iceland regarding fishing rights in the north Atlantic ended with Iceland’s victory. Iceland established an exclusion zone around its territories of 200 miles from the coastline, and British trawlers ceased to fish in Icelandic waters. The fishing fleets of Hull, Grimsby and Lowestoft, and elsewhere along the east coast of Britain, were decimated.

At the same time, Britain’s accession to the European Union ensured that all European waters should be accessible to the fishing fleets of the members of the Union. In the years that followed, there was a growing recognition of the radical depletion of the fish stocks, and in 1983 a version of the common fisheries policy—the CFP—of the European Union was enunciated that has prevailed until recently. By limiting the total allowable catch, the policy aimed to address the problems of depletion. The common fisheries policy has been strongly criticised by British fishermen. They attribute most of their distress to this EU policy. They have been virtually unanimous in declaring that its constraints and empowerment of fishermen of rival nationalities are responsible for the threat to their livelihoods. They feel that others have robbed them of what is rightfully theirs.

In 1992, the European Commission proposed a policy whereby fishermen would be encouraged to scrap vessels that were surplus to their requirements. This was intended as a means of alleviating the pressure on fish stocks. The Commission proposed that money should be provided from the European Union budget for the purpose of purchasing the vessels for scrap. In the case of the UK, that money would have been deducted from the rebate to their contribution to the budget that Margaret Thatcher’s Government had won. Instead of participating in this policy, Britain proposed to allow our fishermen to dispose of their surplus vessels by selling them on the open market.

Foreign owners were keen to buy British boats because, under British regulations, if you own a boat you also have a guaranteed share of the British national quota. It was a policy of the British Government to break down the national quota boat by boat and to allow the sale of quotas in this manner. The result is that numerous Spanish and Dutch boats fly British flags and catch part of the European Union stocks allocated to Britain. Their catches are counted against the British quota. This arrangement, known as quota-hopping, exacerbated the opinion of British fishermen that they have been robbed. In fact, the ineptitude of the British Government, rather than the policies of the European Union, is to blame.

By general consent, the EU common fisheries policy enacted in 1983 has been, until recently, an unmitigated failure. It was based on a concept of allowable catches, intended to limit the amount that each nation may extract from the seas. Those quantities have been guided by scientific advice but almost invariably that advice has been ignored in the process of the competitive bidding of the nations for their quotas. Much of the blame for this can be attributed to Britain. We approached the negotiations in an aggressive manner in the belief that we were denied our rightful share of the resources. There have also been suspicions of widespread disregard of the quotas. It has been incumbent on the European Union nations to enforce the quotas but most have been lax in doing so.

The Scottish black fish scandal of 2012 was notable for uncovering illegal landings designed to evade the European Union quotas. Fraud of almost £63 million was revealed. The common fisheries policy has also been vitiated by allowing fish that have been caught in excess of the quotas for their species to be cast overboard. It has also allowed undersized fish to be discarded as well as fish of lesser commercial value. Invariably, discarded fish are dead when they hit the water.

The most recent revision of the common fisheries policy took effect in January 2014 and promised to address some of the principal defects of the former policy. The most significant revision is the intention of gradually introducing a landing obligation whereby all catches of regulated species must be landed and counted against quotas. This would ban the practice of discarding unwanted or surplus fish. Further features of the revised policy concern rules on access to waters, controls of fishing effort, and technical measures to regulate gear usage and to determine where and when fishing is allowed. There are signs that the CFP is making progress towards the objective of preserving fish stocks. Nevertheless, the policy is bedevilled by its failure to take proper account of the biological, ecological and economic principles of fish stock management.

The policy makes frequent reference to the objective of catching the fish at the rate of their so-called maximum sustainable yield or MSY. This term seems to suggest both sustainability and economic efficiency, but the pursuit of the MSY achieves neither. The MSY is the maximum rate at which the fish are capable of replacing themselves in the face of the depredations of fishing. If such a rate of fishing is exceeded for any length of time then, inevitably, the fish will be driven to extinction. To pursue the fish with such intensity is also uneconomic. It would be more profitable to derive a smaller harvest from the more abundant population that would result from lesser depredations.

I have already noted that, in 1890, more fish were caught by sailing boats from abundant stocks of fish than are caught today from depleted stocks, using technology that was unimaginable in the 19th century. A communication from the European Commission of June 2015 not only declared the objective of fishing at the MSY, but made allowances for the difficulties of achieving that objective immediately. Thus, it stated that if the policy of fishing at the MSY,

“would imply very large annual reductions of fishing opportunities that seriously jeopardise the social and economic sustainability of the fleets involved”,

then,

“a delay in reaching the objective beyond 2016”,

would,

“be acceptable, through a more gradual reduction of fishing opportunities to achieve MSY”.

This defies logic. If the harvest were allowed to exceed the MSY, then the only way the population could recover is if the harvest were to be reduced subsequently to a level substantially below that of the MSY. Otherwise, the extinction of the fish stocks would be guaranteed. To allow the harvest to be reduced gradually from a higher level towards the MSY would be to guarantee extinction.

The deficiencies of the CFP suggest that it should be replaced by something more rational and more effective. I have little faith that this could be achieved, as many have proposed, by our taking full possession of the fish that lie within our so-called exclusive economic zone. That would be an unprecedented assertion of our fishing rights at the expense of other European nations, and it would be met, inevitably, by counterclaims. This could have a disastrous impact on the fish stocks. The impact on our negotiations to leave the European Union would also be severely affected by an attempt to exclude the fishermen of other European nations from our EEZ.

An exclusive economic zone is a concept adopted at the third United Nations Conference on the Law of the Sea in 1982. We call this conference UNCLOS. This was some time after Britain’s accession to the European Union, when the basic features of the common fisheries policy were determined. An EEZ stretches out from the coastline of a maritime nation for up to 200 miles. In the case of two adjacent maritime nations, the common perimeter of their zones is equidistant from their shores. By virtue of its geography, Britain has by far the largest zone among the European nations, both in absolute terms and in proportion to the area of its landmass. Other maritime nations, such as Belgium, the Netherlands, Germany and Denmark, have highly constrained zones that are of negligible area in comparison to that of the UK. Therefore, it is wholly inappropriate to propose that their rights to fish in European waters should be in proportion to the size of their zones. This would imply a significant reduction in their existing rights. Nevertheless, that is what appears to be proposed by our fishermen, seemingly with the support of at least one government Minister.

I propose that the only sensible way forward, in view of Britain’s intention to leave the European Union, is to build on the existing common fisheries policy. This is notwithstanding its history of failure. The present objective of conserving the fish stocks should be supported and reaffirmed by the adoption of more appropriate regulations and directives, which the UK should help to formulate. The prevailing spirit should be one of mutual trust and co-operation.

I end by mentioning proposals to resolve the problem of quota hopping. This was attempted in 1988 when a Labour Government passed a law requiring three-quarters of the shareholders of British-registered trawler companies to be British. Three years later, the law was quashed by the European court as contrary to EU rules on freedom of movement of people and capital. If a similar attempt were to be made, after our leaving the European Union, to disbar foreign owners, then I fear there would be damaging political consequences.

Water Bill

Viscount Hanworth Excerpts

Tuesday 25th March 2014 Lords Chamber

There is a pretty substantial public interest in the totality of the behaviour, financing and structure of the water companies. It attracts particular attention around the time of the price review, but it is there the whole time, and it is not currently reflected in the regulatory framework and practices. This amendment would allow issues such as dividend policy, the structure of decision-making within the companies and their taxation requirements, as well as broader corporate social responsibility, to be taken into account by Ofwat when setting the price review. Ofwat would probably rarely use that power significantly to change the price review, but if it needed to, it could. At the moment, I do not see that it can. The public, certain elements of the media and consumers in general all have an interest in this, and I think Parliament should too. I do not think that water companies have yet been effectively called to account, by either the parliamentary process or the regulatory process. This relatively straightforward amendment would at least allow Ofwat the possibility of so doing. I beg to move.

[Viscount Hanworth (Lab)]

My Lords, I support the amendment of my noble friend Lord Whitty. The privatisation of the UK water industry occurred as long ago as the late 1980s, and it was accomplished in a fashion and manner that paid scant attention to the need for an attentive regulation of the industry.

A provision for the public regulation of privatised industries was an integral part of the concept of privatisation but, in many cases, only lip service has been paid to this aspect. The light-touch regulation of the water industry has provided a case in point. It is arguable that, had there been a more active regulation of the industry, it would be in far better shape than it is at present. An active regulator might have prevented the firms of the industry from becoming the pawns in financial manipulations of foreign owners that have had the motive solely of private enrichment.

The firms have been used as tools in strategies of leveraged corporate acquisitions and takeovers that have borne no relation to the ostensible purposes of the industry. The investments in the water industry have fallen short of what they might have been if the profits had been ploughed back. Instead, they have been used to pay large dividends to the owners and to the shareholders.

Finally, it is questionable whether the majority of the firms in the water industry have any clear concept of their social responsibilities. A full provision of information is required to enable interested parties, including the Secretary of State, to assess the performance of the industry. Then steps could be taken to redress the abuses that have occurred in the past and that are liable to occur when there is insufficient regulation. That is what the amendment calls for.

I hope that the Government will be able to accept the amendment. There used to be the so-called “June review” which was assembled by the regulator, Ofwat, but it has since fallen into abeyance, as we have heard. The amendment would reinstate that review, but it would give it more force and it would ensure that it could not fall into abeyance in the future.

[Lord De Mauley]

My Lords, I thank the noble Lord, Lord Whitty, for moving his amendment. We have heard about asking water companies for information, much if not all of which is already freely available in their annual reports and accounts. I have said before that the amendment would, to that extent, simply duplicate existing powers.

What we are really talking about is Ofwat’s ability to examine what companies are doing to ensure that they are not profiteering at the expense of their customers. Although I disagree with the amendment before us, I most certainly agree with the principle that water companies must be effectively regulated. I believe that the regulator is doing its job robustly.

The focus of the amendment is, in particular, on reopening a price review. In fact, Ofwat already has the power to reopen the price review in two ways. It can do this under the “substantial effects” clause of a water company’s licence or by making an interim determination. It is clear that Ofwat has the power to revisit price determinations, if it so wishes. In fact, in October last year, Ofwat consulted on whether or not it would be right to utilise this power with respect to Thames Water. However, given the fundamental importance of regulatory stability in the water sector, it rightly utilises these powers with caution. Ofwat considers carefully whether any intervention it might make would be in the overall interests of customers.

Of course, it must be right that Ofwat does this with the bigger picture of stable economic regulation firmly in mind. The objective of setting prices for a five-year cycle is to create a period of stability during which companies are able to invest and deliver the outcomes that they have agreed with the regulator. They have a period during which they are allowed to receive the benefits of that settlement and then, at the end of the period, prices are adjusted to capture those benefits for customers.

That is what is currently taking place through the price review process. Ofwat believes that by taking account of the current low cost of borrowing it will be able to limit price increases from 2015 to 2020 by between £4 and £25 a year. Accordingly, I am unable to see what purpose the proposed annual returns will fulfil. We should look to the future and look at what Ofwat is doing. Let us be clear about the direction of regulation in the water sector. Ofwat is already taking action to improve standards of corporate governance across the sector. It is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance. Ofwat recently published new principles relating to board leadership, transparency and corporate governance. These set out clear standards for the sector and a clear timetable for their introduction. The response from the water companies has been positive and I welcome this. Ofwat is also consulting on principles for holding companies covering risk, transparency and long-term planning. It has made it clear that the companies’ licences may need to be brought up to date to reflect these reforms and it is already discussing this with the companies. Further reporting burdens will not contribute positively to this process. I hope that the noble Lord will agree to withdraw his amendment.

Water Bill

Viscount Hanworth Excerpts

Thursday 6th February 2014 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, as I had occasion to remark at Second Reading, some water companies have been making exorbitant profits on the back of the rather generous tariffs that have been allowed by Ofwat. Whereas consumers were once able to disregard the cost of their water usage, it can now be a significant item in their budgets, to the extent that those in poverty may struggle to pay their bills. I have also indicated that the revenues of the water companies have often been used by the owners of those companies for purposes quite unrelated to those of the industry, when they should be used to cover operating costs and the costs of investing in capital infrastructure.

This amendment seeks to ensure that consumers will be adequately informed of the details of tariffs and that they will be properly alerted to any schemes that are available for mitigating the costs when they prove hard to bear. The amendment can also be seen in the context of the various schemes that have been proposed that would alert consumers to their current water usage. This amendment and the one that follows it seek to cast further light on the costs and revenues of the water companies, which continue to be opaque, to say the least.

[Lord De Mauley]

My Lords, I thank the noble Lord, Lord Grantchester, for introducing Amendment 118, which, as he said, would insert a new clause into the Bill to place a legal requirement on water companies to include information on their bills about the Water Sure scheme. The scheme provides a mandatory safety net for low-income customers on a meter who, for reasons of ill health or because they have a large family, use larger than average amounts of water. It caps the bills of these households at the average for their company area.

The eligibility criteria for Water Sure are twofold: the household must be in receipt of a relevant low-income benefit and must have three or more dependent children living at home or someone with an illness that necessitates high water use. It is unfortunately a feature of all means-tested benefits of this sort that take-up, as the noble Lord mentioned, can fail to match eligibility. That is why promotion of the scheme is so important. I am pleased to be able to tell the noble Lord that all water companies already voluntarily provide information about Water Sure on their bills.

In addition, Amendment 118 would require all water companies to provide information about tariff structures and the lowest available tariff. This is not the energy sector—water companies do not have complex tariff structures. In fact, the situation is quite the reverse. The choice for the majority of household customers is between paying according to volume of water used—a metered tariff—or according to the rateable value of their home. All water companies provide information on household customer bills about how to get a meter fitted free of charge. Companies also provide advice to customers on whether or not they might benefit financially from the installation of a meter; a role also performed by the Consumer Council for Water. The cheapest option for each household will depend on the location of the property and the amount of water used by the household. Where a company offers a social tariff, information on whether a household may qualify is provided by the company alongside the customer bill. The Consumer Council for Water works closely with each water company on the information provided on household bills to ensure that customer interests are met. Its very practical advice is that customers are likely to be put off by too much information in their bills.

For these reasons, I cannot agree that customers will be best served by placing an increasing number of legal requirements on water companies to include additional information on customer bills. I believe that the current approach of working in partnership with the body responsible for representing the interests of customers is more likely to be effective. I therefore hope that I can persuade the noble Lord to withdraw his amendment.

Water Bill

Viscount Hanworth Excerpts

Tuesday 4th February 2014 Lords Chamber

Moved by

[Viscount Hanworth]

2: Clause 1, page 2, line 13, at end insert—
“(8) The Secretary of State shall, following consultation, issue rules for the designation of the market operator for the retail non household market, setting out the procedures, responsibilities, status and governance of such market operator.”

[Viscount Hanworth (Lab)]

My Lords, I also thank the noble Lord, Lord De Mauley, for his very helpful approach in informing some of us of the intricacies of the Bill. This is a probing amendment, designed to throw some light on the arrangements regarding the so-called market operator. An electronic search of the Bill fails to reveal a single instance of the words “market operator”. We have been alerted to the intention to create this entity by an organisational flowchart entitled “How Will it All Work?”. This was provided by Defra officials in the course of a seminar that preceded the introduction of the Bill to this House. The words are to be found within a centrally located box that is connected to boxes labelled “the regulator”, “the retailers” and “the wholesalers”. I tend to view such charts from the perspective of the circuit diagrams of electrical engineering, hence I have anxieties about the dangers of short-circuiting or worse. This flowchart contravenes all the rules of electrical safety.

There was nothing in the document presented at the seminar to inform us of the role of the market operator. However, one noticed that the top left-hand corners of its pages were stamped with the logo of an organisation called Open Water. We have been told that Open Water is a programme created to support the Government’s vision for the future of water management in England and that it is to be steered by a high-level group consisting of representatives of Defra, the Scottish Government, the Welsh Government, customers, Ofwat, the Water Commission for Scotland and the water companies. Only Uncle Tom Cobbleigh is missing from the list.

An immediate question is whether this organisation is real or a mere fiction. One way of substantiating the existence of an organisation is to look for its website. The website of Open Water is readily accessible but an examination of what is there only adds to the doubts and confusion. One prominent item on the site is a question and answer file that purports to be an interview, in real time, with the programme director, Keith Fowler. It is clearly nothing of the sort and this assertion is notwithstanding the fact that the document ends by expressing thanks to Keith Fowler for “talking to us today”. I had not previously encountered this kind of bamboozlement.

A somewhat more informative document, available at this website, is titled Market Operator Target Operating Model. This purports to tell us what the market operator will and will not do. However, in places the document is curiously self-contradictory. Thus it is stated that the market operator,

“should carry out monitoring and reporting of market code compliance”,

and have delegated authority to issue,

“warnings and … financial and non-financial penalties”.

It is also stated, in a seeming contradiction, that:

“Enforcement of significant market issues should not be performed by the”,

market operator, and it is said, in an oddly confusing manner, that, if needs be, the market operator,

“should administer, but not arbitrate on, market disputes”.

Clearly, there is need for some clarification here, which is what the amendment seeks.

A further issue that needs to be clarified concerns the steering of a market operator, and its relationship to Open Water. We learn from the aforementioned document that the market operator,

“should be a company limited by guarantee”,

that will be owned and paid for by the water companies, that its set-up costs should be paid for by the wholesalers and that its running costs should be split between wholesalers,

“incumbent retailers, new entrant retailers and self-supply customers”.

A danger that may arise and that needs to be guarded against is that of regulatory capture, a process by which regulatory agencies eventually come to be dominated by the very industries that they have been charged with regulating. The terminology originated in the United States, where it has been used to describe how the intentions of the federal Government have been widely subverted. Aspersions of regulatory capture have already been made against Ofwat; we need assurances from the Minister that the Government are aware of such dangers and will take steps to avert them. I beg to move.

[The Earl of Selborne (Con)]

My Lords, I declare my interests, as I did at Second Reading, that, like the Minister, I am a farmer with an abstraction licence, although I have not been flooded—so to that extent, I do not claim the same interests.

The amendment would require Ministers to issue rules for the,

“designation of … procedures, responsibilities, status and governance”,

of a market operator. I cannot believe that such ministerial control would assist in the implementation of a successful market. In regulated utility industries, whether energy, communications or water and sewerage, the management and control of market operations is initially the responsibility of the regulator, working alongside the industry. Once the market is up and running, it becomes the responsibility of the industry, supported of course by the oversight of the regulator, which provides the framework. This approach helps to ensure that the regulator and the industry work together; the industry will need to adapt to innovation and new circumstances. We recognise that in this Bill we are promoting innovation and we have to ensure that the regulation adapts accordingly. The industry will need to adapt to innovation and these new circumstances, and it is for the regulator and industry to ensure that working practices are aligned in the regulatory framework that we are establishing in the Bill. I simply do not believe that it would be helpful to have a politician—the Minister of the day, of any party—fulfilling the role of controlling the market operator in this far-reaching way.

--- Later in debate ---

[Baroness Northover (LD)]

My Lords, I have no interests to declare except as a frequent user of water and sanitary facilities and, therefore, I am extremely grateful that we do, indeed, have both.

Amendment 2, moved by the noble Viscount, Lord Hanworth, seeks further clarification about the market operator. At his request, I will do my best to be clear and not add to the bamboozlement that he referred to. I say to my noble friend Lady Parminter that we are very grateful to the Delegated Powers and Regulatory Reform Committee for its careful consideration of the Bill. We will respond in due course and make sure that noble Lords receive a copy of the Government’s response.

I am most grateful to the noble Viscount, Lord Hanworth, and to my noble friend for tabling their respective amendments and thus for giving me the opportunity to discuss the market operator, clarify its role and purpose and, I hope, set their minds at rest about any concerns they may have. The market operator will be a company limited by guarantee that will initially be set up by Ofwat. Incumbent water companies and licensees that will operate in the competitive market will own and manage the market operator. As noble Lords will know, Ofwat is accountable to Parliament and has a primary statutory duty to protect customers as well as powers to take action against anti-competitive behaviour under the Competition Act. Ofwat will oversee the overall operation of the market and ensure that it is working in the interests of customers, with powers to intervene if the market operator were acting in any way that was anti-competitive. For example, Ofwat could take action against the market operator under the Competition Act 1998 if its activities were disadvantaging customers.

I should make it very clear that the market operator is solely a facilitator with an entirely administrative role. Despite what the noble Viscount, Lord Hanworth, said, it is not a regulator. The market operator will hold a register of premises eligible to switch. It will also facilitate switching and financial settlement between incumbent water companies and licensees. Ofwat will be involved in developing the licence conditions that will set out how licensees and incumbent water companies must interact with the market operator. Market codes may also be used to set out some aspects of these arrangements. The market operator does not in itself have any formal statutory roles.

Looking somewhat wider than the Bill—I see that the noble Viscount, Lord Hanworth, looks perplexed—I hope that the following remarks may be helpful. There are other examples of such companies set up in retail markets—for example, in the gas and electricity retail markets. Perhaps the noble Viscount needs to look at some other 60-page documents in relation to other utilities. The Metering Point Administration Service company administers switching in the UK electricity market and Xoserve does the same for gas. These are not exactly household names because they do not come into contact with the public. They are private companies set up for and by participants in regulated markets to operate silently in the background. None of these companies was established under statute and none has had its respective remit set out in legislation or by the Government.

The water industry and regulators have already set up a company limited by guarantee called Open Water Market Ltd. The noble Viscount has clearly done a lot of research on this matter. The company will initially be a vehicle to take forward the delivery of the Open Water programme, which is establishing the retail market on behalf of the Government, Ofwat and the industry. A decision will be made in the coming months on whether this company or another one will be established as the market operator for the retail market that goes live in April 2017.

The market operator will be governed by its articles of association and will be accountable to its members, which will be the incumbents and licensees that it serves. As a limited company, it will be subject to the provisions of the Companies Act 2006 and will have to prepare accounts and reports in accordance with that Act. Decisions will have to be made in the future on whether the retail market operator or another body should operate in the upstream market. If there were to be an upstream market operator it would not have roles around the inputting of water or withdrawals of sewage that would properly fall to the Drinking Water Inspectorate or the Environment Agency. The market operator’s role is likely to be limited to registering arrangements and verifying quantities of water input and consumed to facilitate financial settlement arrangements. An example of such a market operator in energy is Elexon, which facilitates settlements for the electricity generation market.

I shall comment on a point made by my noble friend Lady Parminter about market codes being subject to the affirmative procedure and explain that market codes will not be subject to any parliamentary procedure. The regulations under Clause 12 are subject to the affirmative procedure and these codes will be subject to consultation. If my noble friend needs further clarification we can provide that.

Coming back to the issue of what the market operator is, I conclude by saying that the market operator will not have any statutory roles, duties or responsibilities within the retail market of the sort that would need to be set out in regulations. I hope that I have clarified that. It will handle routine transactions and communications between incumbents and licensees to help them to meet their statutory and regulatory obligations, as prescribed by legislation, codes and their licences. The market operator will not take over any responsibilities that properly belong with the incumbents, licensees or regulators. I hope that I have provided some elucidation to noble Lords. Obviously we would be happy to provide any further elucidation that is required. In the mean time, I hope that the noble Viscount will be content to withdraw his amendment.

[Viscount Hanworth]

I thank the Minister for that explanation. She has told us that the market operator is intended to operate silently in the background but I am not sure that that justifies the complete silence of the documentation we have received about the market operator. This is a fundamental part of the architecture of the water industry as it is intended to evolve so the lack of any mention of it in the principal documents is extraordinary. I have made that point rather forcefully but I shall withdraw the amendment as it is a probing amendment. I hope that others will also voice an opinion about the extraordinary lacuna that we have in the documentation if not in the legislation. I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

Water Bill

Viscount Hanworth Excerpts

Monday 27th January 2014 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, I should like to talk about the financial circumstances of our water companies, but first I must describe some of their recent history and its relevance to their prospects.

From the middle of the 19th century for a period of 100 years, the water utilities in the UK and elsewhere became progressively concentrated under public and municipal ownership. Then, in the UK in 1989, the process was reversed through privatisation. Now the UK water utilities are owned almost entirely by private profit-seeking firms, of which the majority are in foreign ownership. The motives for privatisation in the UK and elsewhere were both ideological and fiscal. By the late 1980s, the water utilities were in a parlous state. Successive Governments, who had been intent on limiting public expenditure, had been unwilling to afford the necessary capital expenditure that was required for maintaining the water network. The water mains were corroded and the sewerage system was in a state of collapse.

The effect of privatisation was to release the water industry from this burden of financial stringency and to allow it to fund its investment by borrowing from the financial markets. Soon, the beneficial effects of the increased capital funding became evident. There were significant improvements in the state of repair of the water network, and the cleanliness of our rivers and beaches began to approach the standards that had been mandated by European legislation. In the six years after privatisation, the companies invested £17 billion, compared with the £9.3 billion that had been invested in the six years before privatisation.

The proponents of privatisation regarded the improvements as a validation of their philosophy. However, the improvements were at a cost to the consumers. Tariffs increased by 46% in real terms during the first nine years after privatisation. Operating profits increased by 142% in the first eight years, which is to say that they more than doubled. The private profitability of the water industry has increased in the ensuing years and has reached astonishing levels, but now there is an impending crisis in the provision of the services. Our water supplies are coming under increasing pressure as a result of a growing population and a changing climate. The summer droughts and the winter inundations that have been experienced in recent years are set to become increasingly severe.

The necessary investments to meet this crisis have not been forthcoming and the Government no longer have the power to compel the private companies to meet the needs. It is only by dint of increasing investment in the water infrastructure that the resulting problems can be alleviated. The requirement is for a nationwide strategic initiative aimed at upgrading the infrastructure, and this is what we should expect from a water Bill. The current Bill falls far short of what is required. It seems to embody the delusions of the protagonists of privatisation.

The intention of the Bill is to address the emerging problems by creating a competitive environment in which the water companies can operate. Thus it has been asserted in a document of the Department for Environment, Food and Rural Affairs that:

“Allowing more competition in the sector will drive forward both innovation and efficiency, by bringing in new players and new ways of thinking, and by using market forces to keep down customer costs”.

The hope is that:

“This will benefit not only customers and stimulate growth, but will also contribute to our future resilience and the environment”.

This prescription must be utterly bemusing to anyone who is mindful of the circumstances of a natural monopoly. It is as if by tinkering at the edges of the industry, the major demographic and climatic problems that we face can be addressed.

It is appropriate, at this point, to examine what has happened to the ownership of the industry since it was privatised, and to explain why the Government can have little influence over its investment decisions. The firms of the water industry have become vehicles for financial profit-seeking by owners who have used their guaranteed profitability to pay exorbitant dividends to themselves. In fact, the ultimate ownership of the firms is often obscure and has to be traced through hierarchies of holding companies back to private equity companies, which often reside in offshore tax havens, or to sovereign wealth funds. The tenure of ownership is often fleeting—five years being a typical duration.

The owners have used the equity of the water companies as a means towards some highly leveraged borrowing of funds that can be used for purposes that have nothing whatever to do with the financing of investment in the infrastructure of the water industry. The attraction of the water companies to the financiers has been on account of the highly assured income streams that they generate. There is no likelihood of a reduction in the demand for water, and some generously remunerative water tariffs are fixed for five-year periods by the regulator Ofwat. Such circumstances are liable to lead to favourable appraisals by the credit rating agencies, which enable the borrowing of funds at low rates of interest.

As a result of their borrowings, the leverage ratios of the water companies, which are the ratios of their total borrowings to the enterprise value—which is the sum of the borrowings and the equity capital—have reached astronomical levels. It is reported, for example, that the leverage ratio of Thames Water reached 80% in 2013; and figures as high as 95% have been reported for other companies. On the eve of privatisation, virtually all the enterprise value of the water companies was in equity capital, which is to say that their leverage ratios were close to zero. A high leverage ratio constitutes a significant tax advantage. It implies that the debt servicing of the company is predominantly via interest payments as opposed to dividend payments. Interest payments are regarded as part of the operating costs of the company and are deducted from the income before the residue is taxed. By contrast, dividend payments enter into the calculation of the tax liabilities.

A disadvantage of a heightened leverage ratio is that it is liable to prejudice the credit rating of the company. Given that variations in the size of the dividend payments can provide a significant buffer in the event of a loss of profitability, the financial vulnerability of a highly leveraged company is increased and, therefore, its ability to borrow is decreased. In consequence of its heightened leverage ratio, Thames Water is facing financial difficulties and cannot borrow the money it needs to finance the Thames Tunnel project. As a private equity company it is unwilling to raise more equity, since this would entail a loss of control in favour of the shareholders. Instead, it is asking for help from the Government.

This may be the first of a series of similar circumstances affecting our water companies. Companies will have difficulty in financing other similar investment projects that will be vital to our future environmental security or resilience, as the Government’s documents term it. Therefore, it is probably inevitable that the Government will have to provide the necessary funds. This should also provide the Government with an opportunity to restore the water utilities to some degree of public or municipal ownership and control.

There is one outstanding example of what can be achieved by the appropriate governance of a water company: Welsh Water, which is run as a not-for-profit company. It was bought from its owners in 2000 at a cut price when it got into financial difficulties through an ill advised programme of diverse acquisitions. The buyers were a group of former industry executives and public servants, and their leveraged buyout was financed entirely by debt. Since this acquisition, the performance of the company has been outstanding. Its surpluses have been invested in the network and have been used to augment the company’s financial reserves. Shares have not been issued but the ratio of the company’s debts to its total asset value has fallen from 93% to 65%, thereby giving it the best credit rating in the entire UK utilities sector. This is a model of responsible ownership and governance that could be replicated throughout the water industry.

Thames Tunnel

Viscount Hanworth Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Henley]

My Lords, that is exactly what Thames Water is proposing in the plans. That is why it wants to consult on them and why it will have to go through the planning process in due course. At the end of that planning process we hope that it will be able to produce the right tunnel, in the right place, that will produce the right benefits.

[Viscount Hanworth]

In the 1960s when we were digging the Victoria line tunnel I remember that we caused minimal disruption around London and that the spoil was carried away directly. Can the Minister tell us why this cannot happen in the case of the Thames Tunnel when there is an easy way of carrying the spoil away—by the river?

[Lord Henley]

Again, it is a matter for the planning process and planning authorities to propose what conditions they think appropriate to impose on Thames Water. Since it is proposed at the moment that the tunnel should follow the river down, I would have thought it might be possible to have a lot of the access points close to the river. It should therefore be possible. However, it is not a matter for Government but for the planning process to consider using the river, rather than roads, for disposal of that spoil.