Water Bill

John McDonnell Excerpts

Monday 6th January 2014 Commons Chamber

[Miss McIntosh]

I am grateful to the hon. Lady for her good services to the all-party group, where we serve as fellow officers. We hear of many entrants, but obviously, until the law is in place, it is difficult to put a number on that. I am sure that my hon. Friend the Minister will have heard and can perhaps comment, as he is closer to the issue.

We suggest that if existing companies are unable to compete with new entrants who want to come in for very good reasons and lose customers as a result, it makes sense to allow an exit strategy. I personally feel that we heard no compelling evidence during the pre-legislative scrutiny of the draft Bill and during our consideration of the water White Paper to suggest that the reform should not include a retail exit strategy. That is why we feel honour bound to come forward for the sake of the Bill’s completeness.

New clause 2 would give all undertakers the power but not the obligation to transfer their non-household retail business to a different company. It would give the Secretary of State the power to make any such transfer subject to approval and any necessary safeguards to ensure an orderly exit from the market. I hope that the House will be able to support the proposals because much of the Bill is silent on these matters and we want to use the new clause and amendment to give it more teeth.

There are several arguments in favour of allowing such a retail exit. For example, an exit clause is needed to allow the market to function normally and competitively. Additionally, a company should be able to organise its business in the way it considers best in the interests of its customers and shareholders. An exit clause would facilitate new entrants, especially larger ones, into the water and sewerage retail market because they would not need to win one contract at a time. Without new clause 2, I understand that economies of scale would work against new entrants and either prevent them from entering the market or, at the very least, reduce the benefits that they could provide to new customers due to higher costs of entry. I hope that my hon. Friend the Minister agrees that the proposal is helpful and that he will be minded to accept it. It would not be in the interest of companies or their customers to force companies to stay in a market in which they have few or no customers.

The general thrust of the new clause goes to the heart of this group of amendments dealing with the regime of the water industry. We should learn from what has happened in Scotland. I understand that DEFRA has stated that it intends to create a market in which access is regulated—in other words, with the rules of entry clearly set out and adhered to by all market participants. The reverse side of the coin is that if the rules of entry are to be set out, the House would, I am sure, want rules of orderly exit to be set out. I am not saying that exit would happen in many cases, but it is important that such rules are on the statute book.

Following our pre-legislative scrutiny, we said that as much detail as possible should be set out in the Bill so that the House could consider it. It is wrong—I part company from my hon. Friend the Minister in this respect —to leave too much to regulations, given that many of us with a great interest in this subject will not be selected to serve on the Delegated Legislation Committees that consider them. As the Bill does not provide for retail exit, the strategy is too open. It could be argued that the Government’s approach is based on the premise that parties in the retail market should be left to negotiate among themselves about matters such as service and price, but that could be set out in the Bill.

Considerations of price, service levels and the ability to respond to difficulties go to the heart of why it is important to have a competitive market in England, as has been achieved in Scotland. There must be a way of policing a situation in which incumbents are simply slow in responding to requests for information or services from new entrants. It is important not only to facilitate the path for new entrants, but to allow for an exit strategy and to bring about a competitive market. The Bill is completing its remaining stages in the House today, but little is known about upstream competition. The Government are asking that we take an awful lot on trust, but it would be better if the Bill provided for a definite exit strategy, which is why I commend new clause 2 and amendment 12 to the House.

[John McDonnell (Hayes and Harlington) (Lab)]

I am pleased to follow the hon. Member for Thirsk and Malton (Miss McIntosh). I see in the national press that she has had a little local difficulty. I hope that she can resolve the matter, because she would be a loss to the House if she were not returned at the next election—unless of course she were replaced by a Labour Member.

I want to speak to new clause 14, which is in my name. It suggests to the House that before we move forward with further legislation, we stand back and look objectively at the performance of the water supply industry since 1989 when it was privatised. I am not part of this common agreement among some parties in the House that privatisation and competition have been a success and are the way forward. In fact, I deeply regret what has happened since privatisation.

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[Richard Benyon (Newbury) (Con)]

The hon. Gentleman has been a consistent if sometimes lonely voice on this issue for a great many years. It is not for me or for anybody to defend individual water companies, but does he not concede that companies such as South West Water have spent an enormous amount of money cleaning up our beaches and rivers? Has he measured the trajectory of investment that was happening before privatisation and compared it with the £100 billion plus that has been spent since privatisation on improving our water sector and making it more environmentally-friendly and on keeping costs down for customers?

[John McDonnell]

I have heard the argument about infrastructure investment doubling since privatisation, but what is significant—

[Alison Seabeck]

Let me pursue the point about South West Water. There is no doubt that it has made dramatic inroads into the problems around the coasts, but there is an issue with the privatisation in the first place. The customer base was far too small to sustain the work that needed to be done around those coasts. As a result, bill payers in the south west—here I disagree with the hon. Member for Newbury (Richard Benyon)—are paying an extraordinarily high amount for their water.

[John McDonnell]

I agree that significant investment has been made in the infrastructure, but the problem is that since the 1990s that has declined as a proportion of the overall turnover of the industry. So the record is not glowing by any means, and the cost of that investment has been paid through significant debt burdens on those companies, which is eventually then paid for by consumers

[Hywel Williams]

I am sure the hon. Gentleman would agree that the level of investment would be even higher if all the profits were devoted to investment in the infrastructure, rather than being siphoned off abroad.

[John McDonnell]

That is one reason why I support the Welsh model of a not-for-profit company, because, as I say, I feel that the general public have been ripped off throughout this period.

Let me just finish off with my last couple of examples, because I would not want to miss them out: United Utilities was fined £75,000 for management failures that contributed to a fire in October 2013; and Severn Trent Water received a £30,000 fine for sewage pollution in September last year. The performance record of these companies is that not only do they not tackle the leakages and the real need for infrastructure investment, but they are polluting the very water they are supposed to be protecting and supplying.

[Joan Walley (Stoke-on-Trent North) (Lab)]

My hon. Friend mentioned Severn Trent Water. Given the pollution incidents involving water companies, does he agree that there is an urgent need to examine the court costs and fines imposed on water companies? Does he also agree that there is a real danger that some companies might prefer to go ahead, pollute and accept a fine because that approach is nowhere near as expensive as making the investment in the first place?

[John McDonnell]

The drive for profits is making these companies ignore their duty towards the wider environment, and the fines and costs are relatively marginal in comparison with the profits they make.

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[Madam Deputy Speaker (Dawn Primarolo)]

Order. Interventions are supposed to be brief. If the hon. Gentleman wants to make a defence of the water industry, he can stand up to make a speech—he may not do so in an intervention.

[John McDonnell]

Former Ministers need an element of retraining, so may I say to the hon. Gentleman that he can intervene on me as often as wants, but perhaps he could be a bit briefer?

The issue is this: we are not talking about advocating a return to the previous model of nationalisation here; we are talking about the long-term future of the water industry, which is why this debate is important. My view is that privatisation and competition has not worked, but there are other models that we should explore. The Welsh model of a not-for-profit organisation ploughing the money that comes back into the infrastructure and into quality of service is the one we should now be exploring.

[Hywel Williams]

Does the hon. Gentleman agree that this can be clearly seen in Welsh Water’s response to the cryptosporidium outbreak in my constituency some years ago, when it managed to spend £1 million almost immediately on installing new mechanisms to get rid of the cryptosporidium and then spent £7 million on further treatment works? It responded appropriately and quickly to the outbreak.

[John McDonnell]

Competition and privatisation have not worked, which is why I do not think that the Bill, the main thrust of which is to introduce more competition and privatisation, represents the way forward. It provides further opportunities for exploitation. I think that we can all agree to condemn the level of profiteering that has taken pace, particularly in recent years.

I wish to put on the record what has been happening, as independent examinations have shown. Sir Ian Byatt, Britain’s top water regulator throughout the 1990s, wrote in the foreword to a report by the think-tank CentreForum that

“many companies, especially the private equity infrastructure funds, have paid out excessive dividends to their owners.”

He went on to argue for some form of dividend control. That was echoed by Jonson Cox, Ofwat’s chairman, who has called for water companies to share unintended gains with consumers, arguing that the profits and tax- reducing corporate structures were “morally questionable”. I can understand why.

Let me give some examples of the profiteering that has gone on. Northumbrian Water is owned by Cheung Kong Infrastructure Holdings, which is based in Hong Kong. Last year its operating profits were £154 million, but it paid nothing in tax. Its debt was £4 billion. Its chief executive, Heidi Mottram, received a salary, bonus and benefits worth £595,000. Yorkshire Water is owned by Citi, a US company, GIC, which is based in Singapore, Infracapital Partners and HSBC, based in the UK. Last year its operating profit was £335 million, but it paid only £100,000 in tax. Its debt was £4.7 billion. Its chief executive, Richard Flint, received a salary, bonus and benefits worth £800,000.

Anglian Water is owned by Canadian Pension Plan, Colonial First State Global Asset Management and Industry Funds Management, which is based in Australia, and 3i, which is based in the UK. Last year its operating profit was £363 million, but it paid only £1 million in tax. Its debt was £6.9 billion. Its chief executive, Peter Simpson, received a salary, bonus and benefits worth £1,024,000. Thames Water is owned by Macquaire Group, which is based in Australia, China Investment Corporation and Abu Dhabi Investment Authority. Last year its operating profit was £577 million, but it paid minus £70 million in tax, because it is receiving grants from the Government, as the right hon. Member for Bermondsey and Old Southwark (Simon Hughes) pointed out at the time in his article in the Standard on behalf of the Liberal Democrats. Its debt was £9 billion. Its chief executive, Martin Baggs, received a salary, bonus and benefits worth £845,000.

South Staffs Water is owned by Alinda Capital Partners, which is based in the US. Last year its operating profit was £16 million, but it paid only £200,000 in tax. Its debt was £488 million. Its chief executive, Elizabeth Swarbrick, received a salary, bonus and benefits worth £202,000. Sutton and East Surrey Water is owned by Sumitomo Corporation, based in Japan. Last year its operating profit was £17 million, but it paid only £1 million in tax. Its debt was £219 million. Its chief executive, Anthony Ferrar, received a salary, bonus and benefits worth £290,000. Those are obscene levels of profiteering at the expense of the consumer.

Why is the borrowing level so high? It is not because it is all going into infrastructure. It has now been exposed that some of the borrowing is being used to pay dividends to shareholders and high salaries to chief executives and board directors. That was not the intention of the Thatcher Government’s original privatisation—well, it was not the stated intention. Privatisation was meant to reduce prices, increase investment and make the industry more accountable to the wider public through shareholding. That has not been the case. It is not more accountable through shareholding, because most of the companies that now own British water are owned by overseas shareholders. It does not make it any more efficient for the consumer, because prices have gone through the roof in recent years, which people are angry about. It does not make it more accountable to the taxpayer. In fact, the taxpayer is being bled dry as a result of tax avoidance and the various scams that have been going on, which have been explored by Richard Murphy, the tax justice expert.

Corporate Watch has produced an excellent report on some of those issues. It reports that six UK water companies took high-interest loans from their owners through the Channel Islands and then converted them into euro bonds. They then lent them back to the companies and paid virtually no tax on them whatsoever. This is a tax scam for which these water companies are used as a vehicle. Corporate Watch found that the six companies it looked at—Northumbrian, Yorkshire, Anglian, Thames, South Staffs, and Sutton and East Surrey—had borrowed £3.4 billion using this method. It highlights Northumbrian Water as “the most brazen case” as it paid 11% on just over £1 billion of loans it had taken from its owner, the Cheung Kong group, a Hong Kong-based conglomerate run by the world’s ninth-richest person. No wonder he is the world’s ninth-richest person—we are making him so. This is a scandal. The Bill does not go any way near addressing this rip-off of the British consumer or tackling some of the tax evasion and tax avoidance by these companies that has gone on. People are angry about this. In recent reports in the media there has been exposure after exposure, and people expect this House to act on these matters.

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[Dan Rogerson]

I certainly was not seeking to suggest that the market is not working in Scotland. My point was that some people have chosen to stay with their incumbent, and they may wish to do so rather than to have an incumbent abandon them and walk away.

An Oxera report commissioned by WICS and published in November 2012 predicted that incumbents would lose some 40% of their non-household customers in the first year of the opening of the retail market, with a 5% loss of profit. However, arguments that make an economic case for exits seem to be based on incumbents losing all their public sector and multi-site customers in the first year of market opening. The Oxera view is bolder than that of the rating agency Moody’s which, in February 2012, said that a worst-case scenario would be incumbents losing 25% of their non-household customers in the short to medium term, with a much smaller loss of 0.69% of profit. Although no doubt all incumbents will lose some customers, we can suppose incumbents will take steps, such as those that Business Stream has taken, to retain customers.

Anecdotal evidence from business customers suggests that incumbents are already upping their game, even though retail competition reform is some years away. Large business customers have suddenly discovered that they have a named customer service contact, and some have been offered improved metering services. The idea of incumbents sitting around while customers disappear is therefore, in our view, an unlikely scenario. In addition, water-only companies will be able to apply to Ofwat for a sewerage licence, which will allow them to compete with licensees and other incumbent sewerage companies by offering both water and sewerage services to their customers.

My point is that this is evolution, not revolution. Many non-household customers may choose to stick with the incumbent supplier because the incumbent supplier will improve its services to them as a result of the reforms. The benefits of that may in turn be passed on to household customers. Forcing or even allowing retail exit ignores such points. Where customers choose to switch, we anticipate a growth market in which innovation and competition lead to benefits, both environmentally and in customers’ bills. Allowing partial retail exit would open the door to forced separation if individual cases of discrimination were discovered, and we have made clear our position on that.

As I have said, any decision on separation should be made by Ministers and Parliament. We are not prepared to take the risk of forced restructuring, or even the potential for it as provided for in new clause 2, destabilising investment or increasing costs to customers. The new clause envisages the Secretary of State permitting exits, but that may not reduce the risk of a competition authority forcing an incumbent water company to make an application to exit. I therefore urge hon. Members who tabled new clause 2 and amendment 12—led by the Chair of the Select Committee, the hon. Member for Thirsk and Malton (Miss McIntosh)—not to press them to a Division.

The hon. Lady raised other issues about the industry in general, particularly in relation to upstream reform. We know from experience that setting out how markets should work in primary legislation is very inflexible and can stifle innovation. I know that she is keen for us to do more in that regard, but our view is that that was one clear lesson from the last attempt to extend competition through legislation in 2003. That is why the framework in the Bill sets the scope and direction of reform, without being overly prescriptive. We are working closely with Ofwat, customers and the industry—through the high-level group and the Open Water programme—to ensure that new markets work effectively, and we know that the industry does not want to constrain the market unnecessarily with too much detail in primary legislation, any more than the Government want to do that.

On new clauses 11 and 14, the hon. Members for Dunfermline and West Fife and for Hayes and Harlington (John McDonnell) have raised important issues about how the sector is run. As the hon. Member for Dunfermline and West Fife pointed out, we had a previous debate on this set of issues in which hon. Members from all parties were keen to put on the record their concerns about the past operation of the industry. I fear, however, that we have been talking about things as they were, not as they are and will be. Ofwat is already taking action to improve standards of corporate governance across the sector. It recently consulted on principles relating to board leadership, transparency and corporate governance, and it is putting pressure on water companies to strengthen audit arrangements, board member appointments and governance. The response from water companies has been positive and I welcome that. I do not want to belittle the issues that the hon. Member for Hayes and Harlington set out, but Ofwat has listened and is providing leadership to deal with them.

[John McDonnell]

Is the Minister satisfied that United Utilities, which supplies water to the north-west, is forecast to have made £627 million in the year up to March last year, which is up from £594 million; that Pennon, the owner of South West Water, which must supply his constituency, is due to unveil profits of £273 million, which is up from £268 million; and that earnings at Severn Trent Water, which supplies the midlands, are expected to hit £525 million, which is up from £504 million? The profiteering is continuing as normal.

[Dan Rogerson]

The hon. Gentleman is referring to the current price review period, but we are about to enter a new one. The measures that I am setting out have been prepared by Ofwat to change the industry and to meet its aspiration of better performance by the industry. They also recognise the low cost of borrowing from which companies have benefited in the latter years of the current price review period.

[John McDonnell]

Would the Minister put his mortgage on United Utilities, Pennon and Severn Trent not increasing their profits next year?

[Dan Rogerson]

I suspect that they would not welcome my mortgage, given the debts that they are already dealing with because of the investment that they have put into the sector. The Secretary of State made it very clear in the letter that he sent to the industry and the framework that he set out for Ofwat that we want to see a settlement that reflects the market conditions that companies have benefited from in recent years. Ofwat, in turn, has been very clear that it expects companies to take account of that in the coming price review period. Companies are responding to that and we have seen some good signs.