Water Industry

Julian Smith Excerpts

Tuesday 5th November 2013 Commons Chamber

[Charlie Elphicke (Dover) (Con)]

I beg to move,

That this House has considered reform and infrastructure of the water industry and consumers’ bills.

I move the motion also in the names of my hon. Friends the Members for South Swindon (Mr Buckland) and for Skipton and Ripon (Julian Smith). I thank the Backbench Business Committee for allowing time for this debate. The subject has been in the news recently, so the debate is timely, and it is positive that the House should have the chance to consider the issues in relation to the water industry and what reforms, if any, ought to be introduced.

[Julian Smith (Skipton and Ripon) (Con)]

Before my hon. Friend starts his main remarks I would like to pay tribute to him for his work in leading the debate since early this year and for securing this debate and, hopefully, some exciting announcements from the Government.

[Charlie Elphicke]

I thank my hon. Friend for his customary generosity.

I will turn to the pressures that hard-working families are facing as we come out of a very difficult economic time for our country. The fact is that most people do not particularly care about politics. They vote us in every few years and decide the Government of the day, but they do not consider politics on a daily basis; they consider how they are going to keep the wolf from the door. They consider how they are going to get through the day, provide for themselves, their families and loved ones, raise their children, manage to pay their bills and get a better paid job. The Government have been very effective in ensuring that there is more employment and a return to economic growth, from rescue to recovery and onward to greater economic strength for our country.

Part of keeping the wolf from the door is dealing with the utility bills that cost all our constituents so much money. That is why water reform matters. People do not really have a choice, because there is not much competition. It is a natural monopoly and people have to pay their water bills. There is an opportunity to foster more competition and ensure that the industry is more effectively regulated than it has been. For many years nothing was done to keep on top of the water industry, particularly before this Government were elected. Now we have an opportunity to make further changes and look more closely at what the issues are and what might be done.

Before the Government were elected, there was a settlement with Ofwat and the water industry that was to last for five years. The assumptions on which the settlement was made have since altered. Retail prices index inflation has risen more quickly than it was expected that construction inflation would rise, and interest rates have been lower than expected. The result has been excess profits for the industry. Ofwat figures highlight a return on regulated equity in excess of 20% in some cases. Investment was allowed to fall in real terms after 2007, while customer bills have risen by more than inflation. Dividend payments are often greater than the profits made, which some would say is particularly unattractive.

--- Later in debate ---

[Richard Benyon]

The Select Committee produced many good things with which I agree. If that is what it said at the time—I am afraid that many of my memories of the last three and a half years merge into one—I would probably not agree, because there was bold ambition in the water White Paper, which was reflected in many of the comments made about it by many different people.

[Julian Smith]

I pay tribute to my hon. Friend’s work as a Minister. He is speaking passionately about the White Paper and the Water Bill, but does he agree that the financing of these companies still looks dodgy to many of our voters? I would appreciate it if he commented on that before he concludes.

[Richard Benyon]

I shall talk about debt and gearing shortly, and I think my hon. Friend will find me in agreement with him on those issues.

Let me explain why I believe the Water Bill is only a work in progress when it comes to delivering the ambitions of the water White Paper. In the next Parliament, I really hope we will see a Bill to address the needs of abstraction reform. It would be impossible to bring that forward as part of the Water Bill because there are tens of thousands of abstraction licences, on which many of our constituents and the businesses that employ them depend for their water supply. Trying to create a new abstraction regime from the one created back in the 1960s is a Herculean task that will require thoughtful legislation to make sure that the taps still flow and that we do not suck dry aquifers like the Kennet, which provides a very important water supply to the constituents of my hon. Friend the Member for South Swindon (Mr Buckland). That, however, has been the cheapest place from which to suck water, and it is only through the construction of good infrastructure and investment that we can do this in a sustainable way that keeps bills down, keeps water flowing and supports our economy. Further legislation, then, is needed.

Let me make a further point about investment before I reach my final point. If we want to see continued investment from pension funds—whether they be British or from overseas—sovereign wealth funds and other investors, we need to recognise that this is a relatively fragile and competitive market. I shall give the House an anecdote about the frequent visits I made to speak to the investor community to make sure that it saw that our ambitions in the water White Paper and the Water Bill were consistent with continued high levels of investment.

Some time ago, there was a hiatus concerning a rather technical issue that might well have gone over the heads of most people in this country. It related to the licence modifications that Ofwat wanted to create. This brought me in touch with a new breed in my life—City analysts, many of whom, in the words of my children, were “wusses”. They took an instant view that the regulated sector was not the place in which to invest, so the water sector saw quite a high risk of much needed investment being reduced. It took a Herculean effort—by me on the bottom echelons of the Government, right up to the higher levels—to make sure, first, that what Ofwat was trying to achieve was understood. In my opinion, it might have had a virtuous reason for what it did, but perhaps went about it in the wrong way. It reminded me that if we want to see continued levels of investment, we have to make sure that we explain what we are doing. Ultimately, the need to deal with infrastructure problems needs to feed through to bills, and we need to explain that we want to see a vibrant regulated sector in this country.

--- Later in debate ---

[Mr John Redwood (Wokingham) (Con)]

It is a pleasure to see you taking up your new duties, Madam Deputy Speaker.

Monopoly is the evil that we are here to debate. It is monopoly that stifles innovation. It is monopoly that drives prices higher. It is monopoly that takes away choice and consumer power, and it is monopoly that leads to rationing. We saw all those features in the water industry when it was nationalised. I am amazed that the Labour party still has people who think it would be a good idea to go back to the nationalised water monopoly, which regularly ran out of water in the summer. Woe betide the man or woman who had bedding plants in a hot summer in Britain—because before global warming we used to get hot summers, and then the water would run out. It was a tragedy, because it was a direct result of the nationalised industry.

The privatised industry, I am pleased to say, has done one thing better than the nationalised industry—it has got access to more capital. It has mended a lot of pipes, put in new pipes, and put some investment into dealing with dirty water as well, so we have fewer interruptions to supply under the privatised industry than before. However, we did not go far enough with the privatisation. We transferred the ownership but, as some of my hon. Friends have wisely pointed out, we kept in place much of the regional structure.

We bought the idiotic idea that the industry sold to Ministers and advisers that because rivers run to the sea in separate geographical areas called river basins, it was terribly important to have local monopolies around a river basin. Woe betide anyone who wanted to move water from one river basin area to another, and woe betide anyone who wanted to use borehole water. Apparently, it all had to be organised around river valleys. Sometimes it is difficult to create boundaries between them, because tributaries and streams have a habit of not being as neat as administrative lines on maps, but it was decided that we had to have this “natural monopoly”.

There is no natural monopoly in the supply of water. As was pointed out by the right hon. Member for Holborn and St Pancras (Frank Dobson) who has recently departed the Chamber, rain falls across the whole of the United Kingdom, not always all at the same time, not always in the same quantities, but this island is not cursed with a shortage of rain for most of the time, and we collect very little of it. It is also not true to say that water is some precious resource that has to be husbanded because it will run out. Water is the ultimate renewable resource. It falls as rain; it mainly runs out to the sea; it is picked up by the winds and goes back into the clouds; and it comes back again as rain. Nature or God, depending on one’s beliefs, does most of the job for us, producing an endless supply of water to this country. All that we have to do is provide business people who can raise the capital to make sure that we capture enough of that water in a form that we can then put into pipes, and that we clean it up to an appropriate standard for the use.

We did not introduce competition into the industry when we privatised it, so many of the evils of monopoly are still with us. We have less rationing, but we can still have rationing. We have quite dear prices, although perhaps they do not go up quite as quickly as they did when they were part of a Treasury exercise. We certainly get more capital into the industry, but at the expense of quite substantial gearing, as some hon. Gentlemen have mentioned. However, many of the bad features of the nationalised industry are perpetuated and it is very difficult being a challenger to the industry, so I pay tribute to the former Minister, my hon. Friend the Member for Newbury (Richard Benyon), who produced a White Paper which is becoming a piece of legislation, which will try to open up the market a bit more.

I pay tribute to the modest steps taken in Scotland, where it was discovered that far from the taps running dry or the water prices going through the roof if the authorities dared to have more than one provider of business water, the opposite has happened: the prices went down—a little bit, because there was not a great deal of competition coming in—and above all the quality of service rose. I have talked to some of the Scottish businesses that have to deal with the water industry. They say that the great breakthrough in Scotland as a result of competition was the fact that they could get a much better service. They could get the water supply when they wanted it and where they wanted it, and pipes and so on mended and repaired.

Businesses in Scotland can also negotiate with their water industry about what sort of water they want. At present, under a nationalised monopoly or a privatised monopoly, only one type of water is available. It is cleaned to a certain standard and it then has additives put in it. An industry wanting to make drinks may need to take the additives out before it can make its drinks, so there is a double cost and a nuisance, because it cannot get the type of water it wants. A firm that wants to carry out a fairly rudimentary washing business does not need water of a quality that we can drink, but it has to pay the extra price to buy the very high-quality water literally to tip it down the drain.

Therefore, we are not seeing experimentation, innovation or customer service because of a lack of competition. The industry is determined to supply only one grade of water and only the amount it can be bothered to supply, and then it blames the customer, should we dare to say that we want a bit more. We are now bombarded with messages from the industry suggesting that water is a natural monopoly and not the ultimate renewable resource. We are told that good people take only one bath a week in order to save water, that they do not use so much water for cleaning and that they ensure that they husband their use of water in their sinks and whatever machines they have at home that require it.

I have good news for my constituents: I do not believe that. I think that water is the ultimate renewable resource, that it ought to be made available more abundantly and more cheaply and that that could be done if we trusted competition. Surely one of the advantages of rising living standards, which is what we are all here to try to help create, is that people can then use more water because they have more things to clean, or because they wish to enjoy themselves in their bathroom. We need to ensure that they have access to the right quantities of cheaper water, and competition is the way to do that.

[Julian Smith]

My right hon. Friend, as always, is speaking in an impassioned way about the merits of competition. Will he explain to the House how quickly he thinks domestic competition could be introduced and whether he thinks the Government should be moving more quickly on that?

[Mr Redwood]

I would do it straight away. I cannot see what the problem is. If water is a natural monopoly, as some people argue, no harm will be done by breaking the formal monopoly; it is just that nothing will happen. But of course it is not a natural monopoly, which is why the industry is fighting so hard to keep a legal monopoly. It knows that it will have to wake up and change quite a lot if it has to face competition.

We would have to give the market some help to get it going, because the monopolists are in a very strong position. We would need to tell them to use their pipe network as a common carrier, because other people would need access to it. However, the challengers might soon find, as was the case with those sorts of arrangements in the telecoms industry, that the existing assets are not so great and that they want to put in their own pipes. The challengers in telecoms did that with wires, and then of course the radio links became a cheaper and better way of doing it. Who knows what technical breakthroughs there might be or how much challengers would want to use the common carrier network? However, to get competition going we would need to start with a common carrier network, so a system would need to be put in place to allow people access to the pipes.

We would also need to ensure that the Environment Agency was prepared to license borehole water and sensible levels of river extraction by other licensees. I do not want our rivers to be run dry by people taking too much out in a dry season, so we would need proper regulation for that. As has been pointed out, however, we let huge quantities of water go to the sea during wet periods, so we do not seem to be very good at planning our water use and holding it in suitable locations so that we have plenty in drier weather.

Another thing that I think the water industry needs to pay attention to, along with other utilities in this country, is the huge disruption they cause to our road network. Our road network is a nationalised monopoly and therefore has rationing and, looking at the tax bill, is extremely expensive. It has all the characteristics of monopoly provision that I dislike. One of the things that make our totally inadequate road network even worse is the fact that it is regularly disrupted by businesses digging up great chunks of tarmac and subsoil with pneumatic drills in order to lay new water pipes, other utility pipes and wires. Why on earth have we not learnt that it is not a great idea to put these things right down the middle of the road and then hard-pack soil, subsoil, tarmac and stones on top, which means huge delay, disruption and cost every time we want to change it? In modern buildings all the services run in ducts under the floors so that we do not have to rip out the plaster, half demolishing the place, every time we want to change the wiring.

Surely we could have a system to provide easy access along the side of our roads to pipes, wires and anything else we want to put down without having to dig up the road every time. We could at least start doing that when we build new estates, shopping centres or whatever. We should do it intelligently by putting in ducts to save all that money and time. I find utility companies very sympathetic to that idea when I invite them in to talk about it. They say, “It’s a very good idea, but it won’t work in this case, Mr Redwood.” We have to make it work, because many other countries are well ahead of us on all this. They think we are completely potty to go in for this idea that the water company digs up the road and puts in a new pipe, then six months later the gas people come along and do exactly the same thing in a slightly different position, and then the following year the electricity people turn up and do it again. It is mad, costly and inefficient, and it is doing huge damage to an inadequate road network.

For all those reasons, give us competition, give us choice, give us innovation, and give us some common sense, because we are getting a rotten deal at the moment.

--- Later in debate ---

[Julian Smith (Skipton and Ripon) (Con)]

The cost of living is a major issue in Yorkshire, as it is across the rest of the country. I therefore pay tribute to the Government for acknowledging that we need to deal on every level with the cost of living, and this debate is at the very centre of what we are doing.

The policies the Government have come up with to get every energy consumer on to the lowest tariff are exactly the right thing to do, and I hope the review of green levies and Labour’s £125-worth of green taxes will enable us to reduce energy bills, too. As my hon. Friend the Member for Newbury (Richard Benyon) and my right hon. Friend the Member for Wokingham (Mr Redwood) have said, addressing water bills will be another big step, by making the industry more competitive and ensuring we have a water industry that is fit for the future.

Giving businesses the opportunity to switch will enable big users of water to get the very best deal. It is unfortunate, however, that that opportunity will not be available to the consumer. I agree with my right hon. Friend, who urged the Government to push ahead, where possible, with consumer-led competition. My constituents really have only one option, which is Yorkshire Water, unless they happen to live in Long Preston, near Settle in the western part of my constituency, where they have their own water trust, which enables them to guarantee much lower prices.

I wish to focus on Yorkshire Water because my hon. Friend the Member for Brigg and Goole (Andrew Percy) is correct: Yorkshire Water has done some positive things on infrastructure, and it has also done some good, and some bad, things on flooding, but the financial situation and decisions of Yorkshire Water show that it is exploiting my constituents and people across Yorkshire.

If Members have not read the Yorkshire Water annual report, perhaps I should recap. In 2013 it made an operating profit of £331 million on a turnover of £936 million. Average increases in bills were 6.6% with the average bill being £356. There was a quadrupling of the dividend payment, from £62.3 million to £256 million in the past year. The thing that really sticks in the craw of my constituents is the fact that despite those massive dividends and huge opportunities for its shareholders, Yorkshire Water paid zero tax in the last financial year, and with a highly leveraged balance sheet. When we compare that behaviour with the behaviour of my constituents, the small and micro-businesses throughout my rural constituency, we see that today’s debate and the one we will continue to have about holding the feet of the water companies to the fire is vital.

People will say that Yorkshire Water has done nothing illegal, and it has not, but we thought as Yorkshire MPs that we should take that from the horse’s mouth, so we invited the senior management team down to Westminster. Let me list that team: Kevin Whiteman, the chairman, earns £1,077,000; Richard Flint, the chief executive, earns £1,091,000; Liz Barber, the director of finance and regulation, earns £476,000; and the communications officer earns £165,000.

[Frank Dobson]

May I urge the hon. Gentleman not to use the word “earns”, because it has a sensation that they deserve the money? The best way to describe it is probably to say that they are “being paid”.

[Julian Smith]

The right hon. Gentleman’s intervention is very accurate.

Those highly paid—highly compensated—board members showed no contrition about how tough it is at the moment for consumers. They basically said that they would not budge on their stretching of the tax rules to ensure that they paid no tax. We talked about the clause in their commitment to customers where they said that they would be responsible and that they were environmentally and socially engaged, but they just would not listen.

[Andrew Percy]

These figures are incredible. Does my hon. Friend share my concern that these people are being paid these million-pound salaries but they still have not responded to my request, on behalf of my constituents, to pay compensation to people who were flooded because their assets failed when the company failed to manage them?

[Julian Smith]

I absolutely do, because the situation is a kick in the teeth from Yorkshire Water to hard-working people in Brigg and Goole.

We asked the management team about their debt standing at 84.5% of regulated capital value at the end of March in contrast to the figure of 56% when the company was acquired. We asked them how they explained their £63 million of shareholder dividends in 2012 quadrupling to £256 million in 2013. We asked them how they could seriously defend, in these tough financial times, a dividend payment of 27.3% of 2013 revenue. We asked them to enlighten us on the risks of having more than £4 billion in debt and what would happen if things went wrong. We asked them how they explained the quagmire of vested and conflicting interests between the different board structures— between investors and the company and the various Yorkshire Water subsidiaries. And we asked them how they could explain the claim in their annual report that these complex financial arrangements led to lower bills for customers, given that bills actually went up by about 7%. The answers were not weak or woolly—they were non-existent.

I welcome the measures that the Government have taken on tax reform and the general anti-avoidance rule. That is a shift from prescriptive rules to a general rule, which is the right thing to do. However, should Her Majesty’s Revenue and Customs really be having to wage an uphill struggle against a monopoly business that is providing customers with one of the most fundamental services and utilities in the world?

The Government have done a lot on tax, but I urge them to go further. I urge them to use things such as the Water Bill to implant exciting and novel policies from the Treasury and look at whether we can taper the level of deductions received for interest charges in corporation tax as shareholders take on more debt. Can we impose a bank levy on debt? Could we look at how to impose a levy payable by shareholders to customers so that the cost is not simply passed on to customers and instead they gain a share themselves?

Somehow, we must stop this limitless offsetting of interest against tax. We should push on with greater competition and consider ensuring that a percentage of profits goes back to customers. We should knock Ofwat about until it works vigorously in the interests of the consumer first, second and third. We should consider everything in the industry and say clearly to companies such as Yorkshire Water, “No. No more. This has to change.” We should shake this industry up from top to bottom.

[Thomas Docherty (Dunfermline and West Fife) (Lab)]

I am grateful for the opportunity to respond to the debate on behalf of the Opposition, Madam Deputy Speaker, and I apologise for my slight tardiness at the start. I meant no disrespect to the Chair.

I congratulate the hon. Gentlemen on securing this excellent debate, although I suspect that their ministerial colleagues in the Department will be less keen to thank them after hearing some of the issues that they have brought to the House today.

Three and a half years into the life of the Parliament, and with the regulator expected to have completed its price review by the end of next year, it is well worth reviewing the track record of the coalition Government. It is regrettable that, having by general consensus inherited a substantial body of work from the previous Labour Government on how to reform the water industry, the coalition has frittered away so much of the past 40 months. I am at a loss to understand what, if anything, was done in the first year and a half of this Government. When they came to office in 2010, the new ministerial team inherited not one but two reports on the water industry from Anna Walker and Martin Cave. Both reports had been favourably received by consumer groups, customers, regulators, industry commentators and Parliament. The reports, which complemented each other, provided a clear framework for reform. In fact, the only organisations that did not welcome their recommendations were some of the water companies.

It is not surprising that those who were found to have let down their customers—whether domestic, in the public sector or in private business—were the ones who were less than enamoured of the possibility of reform. The stories of poor customer service are legendary—we have heard many such cases today—as are the dividend returns paid out by many of the water companies. The arrogance of the companies has been astonishing. The tax avoidance measures, coupled with a refusal to plough excess profits back into either infrastructure improvements or a lowering of bills, are simply unacceptable.

Even now, when household budgets are continuously squeezed by inflation-busting utility bill increases, many of the water companies show a breathtaking arrogance by refusing to pass back any of their profits to consumers. For example, Thames Water, having recorded eye-watering returns for its investment, now expects hard-pressed customers to foot the cost of the Thames tunnel.

Water companies are some of the most profitable in the utilities sector, earning even more than energy companies. Energy companies make operating profits of approximately 9% whereas water companies make operating profits of approximately 30%. While shareholders have seen their dividends increase, families across the country have suffered. Last year, regional water companies made a pre-tax profit of £1.9 billion, paying out dividends totalling £1.8 billion to shareholders, yet they have not seen the need to pay their fair share in taxes. As The Sunday Times revealed, in 2012-13 Thames Water, which, as we have already discussed, has asked to increase bills by a further 8%, made £127 million of pre-tax profit and paid zero corporation tax.

There are further examples, as we have heard from the hon. Member for Skipton and Ripon (Julian Smith) and others. Yorkshire Water made £184 million and paid no tax, and Southern Water paid just £6.5 million tax on profits of £172 million.

Water companies have been able to reduce their tax liabilities to such tiny levels by substantially increasing their levels of debt. Some water companies have reduced their tax bills by offsetting the interest payments on debt, often inter-company and involving tax havens, while claiming allowances for spending on infrastructure. Shareholders and bosses, as we have heard, have benefited from that aggressive tax avoidance, with eye-watering salaries going to those at the top. Peter Simpson, chief executive of Anglian Water, received a package worth £1.27 million in the last year, up from a mere £1.06 million the year before. The complex nature of tax governance and the growth in debt has been recognised by Jonson Cox, the chairman of Ofwat, who described the ownership of these companies as complex and “opaque” structures.

[Julian Smith]

Will the hon. Gentleman give way?

[Thomas Docherty]

I will not, because there were so many speakers and we have very little time for the Minister to speak.

Ofwat has highlighted that the overall proportion of equity has diminished from 42.5% in 2006 to 30% of regulatory capital today, with some companies obtaining only one fifth of their financing from equity.

So why the delay in reform? Why has the coalition dragged its feet? Why have the coalition parties seemed so unwilling to champion the household customer, small businesses and the taxpayer? It is because this coalition Government serve the vested interests, not the interests of ordinary Britons. Ministers have done nothing to help hard-pressed small and medium-sized enterprises because they are too busy cosying up to their friends in the City. Labour understands that when small businesses are struggling to survive thanks to the failed economic policies of the Chancellor, the Government should be standing up for them, not their fat cat friends.

After three wasted years, we have no progress on social tariffs for those who are struggling the most and can afford to pay the least; no pressure brought to bear on water companies to adopt permanent solutions to flood insurance, without which hundreds of thousands of families up and down the country face uncertainty; and, as we heard earlier, no substantial progress on water competition—a series of measures that would help our cash-strapped businesses grow our economy.

It has been four months; 16 weeks; one hundred and sixteen days since the Secretary of State met the water companies. Last week, we had the unseemly spectacle of the Prime Minister briefing against his own Ministers and officials as panic set in on the Downing street spin operation, which reacted to the pressure placed on it by my right hon. Friend the Leader of the Opposition, and the Labour party, to stand up to the water companies. We had days of Downing street briefing that action would be taken, either through regulation or by instructing Ofwat to take action on water bills.

In short, we were all anticipating a big announcement from the coalition parties. And in the end, what did we get? A letter. One thousand words. A missive to the water companies from a Mr Paterson, of North Shropshire, which said, in effect: “Dear chief executive, Thanks for coming along in July for cream tea; our last discussion was so riveting that I clean forgot to write about it until now! I know that times are awfully hard for you at the moment, with your offshore investors demanding an even greater return on their money than last year, but it would be awfully splendid, as we’re all such good chaps, if you could not put your bills up by quite as much next year as you were thinking about doing. It would really help me out of this political pickle the Prime Minister has put me in, and I know that you’re all such good eggs. Best wishes, Mr Paterson.”

The Secretary of State’s letter is clear evidence that the Government do not understand the cost of living crisis here in Britain today. For 39 out of 40 months under this coalition, prices have risen faster than salaries. Until this weekend, water bills were not a priority for the Prime Minister or the Department. After three and a half squandered years, a hastily cobbled together statement of vague promises of future action is simply not enough. It is clear that the Prime Minister is unwilling or unable to stand up to the vested interests that have placed the needs of offshore tax haven investors ahead of those of hard-pressed householders and businesses.

Families deserve better than this; small businesses deserve better than this; Britain deserves better than this. Since privatisation in 1989, water bills have increased by almost 50% in real terms. The Secretary of State has the guile to call the water industry one of the great successes of privatisation. Madam Deputy Speaker, it is only a success story if you are fortunate enough to own shares in one of those companies.