Construction Contracts (England) Exclusion Order 2022

Lord Berkeley Excerpts

Monday 13th June 2022 Grand Committee

[Lord Berkeley (Lab)]

My Lords, I too am grateful to the Minister for his explanation—I tried to understand most of it. I too am interested in paragraph 7.3, to which the noble Baroness referred, because it comes back to the question of the best way of achieving fair competition when there is going to be a massive new project to provide better services in the water sector. One has to look perhaps at the example of the Thames Tideway tunnel—that probably comes under the category of being large. Whether it will deliver what Thames Water thinks that it will at a price that customers can afford remains to be seen. I do not quite see why these two large projects should be dealt with separately. Could the Minister name them and give us some idea of what they are about and what the risks might be? I will not go into them now, because they could be anything.

The regulator is apparently in charge of all of this and will vet contracts that it seems to me will be to design, construct and operate—why can these not be done by competitive tendering, with the usual construction industry fallbacks if things go wrong? It would be interesting if the Minister could give us more information about not only the two big ones but the 18 strategic water resources ones. How will anyone be able to tell or believe—we hope that we will be able to believe—that the regulator has delivered for the customer as well as for shareholders?

[Lord Fox (LD)]

As the Minister knows, I am no lawyer—perhaps I should have taken a law degree before attempting this statutory instrument. I note that it is not just the European Union that can amass red tape; we seem to be doing it very well on our own, so I am not sure it can refer us to the WTO for competition.

This is a very complex model. I was caught by the idea that we appear to have been progressing without it for a while. In a sense, is this closing a loophole that has been spotted, or does this reflect a trend in how the market is going about delivering these projects? What drove the decision to table this statutory instrument now? In other words, what has caused this to happen now when it clearly could have happened some time before or in future?

In passing, the Minister mentioned benefits to consumers. I think he outlined that there would be some sort of competitive tendering process, and therefore the price of a particular project would go down in cost. I am interested in the very sharp end of the consumer experience—the connection and that kind of thing. I assume that this applies to that as well as to the larger projects. If it does not, how will a new consumer attempting to join the system experience it? As I understand it, at the moment they are given a “take it or leave it” price by the water supplier. Does that continue to be the case? Will there be an opportunity for consumers to drive down the cost to them of an individual connection or is this focusing only on much larger projects?

The other point is how this flows through the supply chain. The Minister mentioned that the tier 1 contractors are potentially liable to be most affected. However, this marks a change right down through the chain to tiers 2, 3 and others. I would be interested to know how low down their tier structure the department intends to bring suppliers up to speed on how they address their role in this change in the supply chain. Other than that, I think I welcome this and certainly look forward to the Minister’s answers.

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[Lord Callanan (Con)]

I thank noble Lords for their valuable contributions to the debate. Let me start by emphasising, as I did initially, that this exclusion order is very narrow in scope. It is well defined to ensure that it is used only for the intended and very specific contracts that I referred to. These are the two specific construction contracts that are used to deliver the direct procurement for customers model for high-value infrastructure assets in the regulated water and sewerage sector.

Let me also emphasise that the creation of an exclusion under this Act is very much an exception and not the rule. DPC is a competitive delivery model focused on accelerating the delivery of strategic infrastructure in this particular sector. The current absence of an exclusion for these specific contracts threatens the viability of DPC and the very great benefits it could bring to consumers. That position has been confirmed through consultations with appropriate stakeholders. That is the reason the Government have chosen to use the powers conferred on them to make exclusions from the provisions of the construction Act in this particular, limited, isolated case.

I shall now deal with the questions I was asked. First, to my noble friend Lady McIntosh: SUDS are not currently associated with the schemes being developed but may be, in the future, if they are of sufficient size to be required.

The noble Lord, Lord Berkeley, asked for details of the projects. The first project is United Utilities Water’s Haweswater aqueduct resilience programme, which I am sure the noble Lord is very familiar with. It is to replace the existing Haweswater aqueduct, which is at risk of failing, which currently transfers water from the Lake District to north-west England, especially Manchester. The second English project is sponsored by Southern Water, and it is to deliver water to the south-east of England. United Utilities Water’s Haweswater aqueduct resilience programme, a very large project, will replace parts of the Haweswater aqueduct, which brings water to Cumbria and Lancashire. Southern Water’s Hampshire water transfer and water recycling project is required to ensure supplies to the Hampshire region. It is able to meet, apparently, one-in-500-year droughts. That is the second scheme I referred to.

In response to the question asked by the noble Lord, Lord Fox, as I emphasised again, the exclusion order is narrow in scope, and it is well defined to ensure that it is used for these particular, intended contracts only—the two specific construction contracts that are used to deliver the DPC procurement model for high-value infrastructure assets. Those entering into the procurement mechanism will, of course, have full knowledge of the terms including that payments during the construction phase will be made at specified intervals and that payments made through the unitary charge will commence only once the asset is capable of operating. Importantly, alternative dispute resolution mechanisms will also be included within the CAP contracts. All remaining construction contracts through the supply chain of the DPC projects—and, let me emphasise, in particular those appertaining to SMEs—would, of course, remain subject to all the relevant provisions within the construction Act.

In response to the question from the noble Lord, Lord McNicol, this instrument is limited—

[Lord Berkeley (Lab)]

I am grateful to the Minister, but before he moves on, could he explain why the regulator, or the Government, thinks these very large contracts should be treated separately and differently, rather than having several smaller ones, as it may be, where the risk of things going wrong might be lower?

[Lord Callanan (Con)]

As I said, these are specific to a unique procurement model which is being trialled and which we think will be appropriate in the water and sewerage sector. We therefore think it appropriate to exempt these particular, very large contracts to enable the model which effectively, as far as the companies are concerned, delivers the construction, management, maintenance, et cetera of very large construction projects. It is a unique procurement mechanism which we think has the potential to benefit customers in the future, so in this very limited case it was deemed appropriate by the Secretary of State to exempt them from the regulations.

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[Lord Callanan (Con)]

Ultimately, of course, previous contracts have delivered and been successful, but we think that a different model, involving more competition, could deliver better value for consumers, which is why we have produced these regulations. I therefore commend them to the Committee.

[Lord Berkeley (Lab)]

I am grateful to the noble Lord again. Following his last comment—

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, I think the Minister has now taken his seat.

[Lord Berkeley (Lab)]

The noble Lord mentioned Southern Water as an example of the need for competition, and I am sure he is right about the need for competition—but who is competing? Is Southern Water competing against somebody else or are two contractors that are reporting to Southern Water, as the principal, competing? How does it work?

[Lord Callanan (Con)]

I will write to the noble Lord if my answer is not correct, but my understanding is that Southern Water is the procurer and will be regulated by Ofwat within the overall monopoly structure of the water industry. This is why strict regulation and price controls are imposed on water companies. The idea is that a company will be able to involve competition in selecting contractors for the delivery of particular projects. So the company will be the procurer, albeit under the overall model regulated by Ofwat.