HC Deb 08 May 1984 vol 59 cc859-64

Motion made, and Question proposed, That this House do now adjourn.[Mr. Mather.]

12.47 am
Mr.Michael Fallon (Darlington)

I thank my hon. Friend the Minister not only for volunteering to reply to the debate but for the personal attention and time that he has given to the Northumbrian water authority. His visit to Broken Scar in my constituency and to other installations was much appreciated. I hope that my hon. Friend will accept that the twin sources of funding of the authority from the taxpayer and, last year, from the Government are of great concern.

I begin with the authority's funding by its users. My hon. Friend will be aware of the enormous increase in charges this year. Charges have increased to my constituents and to other consumers in the north by an average 18 per cent. this year, following an increase of 12 per cent. last year. I said average, because average is how the Northumbrian water authority describes it. What it calls a typical household is one with a rateable value of £150. Below that, the increases are even greater. A property with a rateable value of £55 will have an increase this year of 39 per cent; for a property with a rateable value of £67 the increase will be 34 per cent. and for a rateable value of £80 the increase will be 29 per cent.

My own modest terraced house in Darlington is well below the water authority's idea of an average house with a rateable value of only £107. The increase for my house this year will be 50 per cent. My water bill went up from £48.62 last year to £59.57—an increase of 23 per cent. Worst of all are the standing charges, which I discussed in a debate last July. The standing charge for all domestic consumers in the area has increased from £6 to £16 this year. That is a 166 per cent. increase.

In a leaflet the Northumbrian water authority declares that it provides a non-stop, round-the-clock water service—that's a bargain". At over £50 a year for a modest terraced house, that is no bargain.

For the first time in many years, water issue now an expensive commodity. For the average family in a modest terraced house in Darlington, water is now a more expensive part of a family's budget than milk. Pensioners, single people and others who live on their own and consume little water are at the mercy of the monopoly supplier which can, of course, charge monopoly prices.

It is right to ask at least one searching question on behalf of my constituents about the funding of the water authority. Why have operating costs increased by about 20 per cent. annually in the last five years? The water authority owes it to its consumers to ensure that this year it meets the Government's target of a 5 per cent. reduction in operating costs. I suggest that it should beat that target—and do better—by searching for more efficiency, by the better use of its manpower, by a more flexible approach to contract work where necessary and by selling more water overseas.

I do not dispute the size of the authority's financing problem. Over half its revenue—about £51 million—must go to service its debts. Interest charges alone are twice as high as those of the next largest English water authority.

Nobody disputes that, in the Northumbrian water authority area, the drop in industrial demand because of the recession has caused problems. The demand is half that forecast when the Kielder dam and its associated schemes were originally planned in the early 1970s. Nobody disputes that industrial demand is peculiarly important for the authority, because 40 per cent. of its volume is for industrial use, compared with 20 per cent. on average for the other English water authorities. The Northumbrian water authority is particularly vulnerable to the recession.

The Government do not dispute the facts. Last year they made a special repayable grant of about £5 million to the authority, in recognition of its special problems. This year, despite appeals, special working parties and reports, no such help has been forthcoming. No permission has been granted to the authority to restructure its debt to allow it to do what any commercial company faced with such a position would have done—locked into interest rates of 17 per cent. negotiated in the early 1970s, any commercial company would have gone to its bankers and been allowed to reschedule its debt over a different period at different rates of interest.

Nor has there been any agreement on the refinancing of the Kielder dam project and the associated investment. I understand that it was suggested that such refinancing might have been possible with the co-operation of some City institutions. An equity loan might have been arranged whereby the Government would have recovered some dividend based on the use of the assets. The rescheduling would not have cost the Treasury anything. An equity loan might have cost it some money, depending on the extent to which the Kielder dam project was fully utilised. Either way, a more imaginative response is required, although not from my hon. Friend, who I know has wrestled with these matters during the past few months. His Department has co-operated with the authority in seeking ways to resolve the problems.

The Treasury should by now be able to come up with a more imaginative and flexible solution to the problems. I cannot help wondering whether, if the Treasury's imagination was equal to its wisdom, some of our public utilities would not now be locked into a straitjacket. After all, public utilities in other western countries have faced similar problems, but they have not been bound by artificial straitjackets imposed by central Government, such as the borrowing requirement or the strictures of the national loans fund, but have been financed either in partnership with the private sector or by drawing on the resources of the local community.

I ask my hon. Friend whether there is any way in which the consumers of the Northumbrian water authority, who are now bound to pay the very steep increases for their water, can at least have some stake in the infrastructure that has been provided. I should like to know whether there is any way in which the Kielder dam project could be refinanced at least to give consumers who continue to pay these ridiculous standing charges — a form of rent —some stake in the project for which, year after year, they will have to pay through increased charges and that artificial form of funding to which I have sought to draw the attention of the House tonight.

12.58 am
The Minister for Housing and Construction (Mr. Ian Gow)

I congratulate my hon. Friend the Member for Darlington (Mr. Fallon) on having secured this Adjournment debate, on the characteristic concern that he has shown for his constituents who are customers of the Northumbrian water authority, and on the characteristically lucid way in which he presented his case to the House. I hope that my hon. Friend will accept that the reply that I give on behalf of the Government recognises to the full the strength of his case and the special difficulties that face the Northumbrian water authority.

During his speech, my hon. Friend referred to the potential for exporting water by the Northumbrian water authority. I was pleased to see the report in this month's edition of Water Bulletin, which my hon. Friend may also have seen, that confirms my hon. Friend's hope that the Northumbrian water authority is now in the export business, and that 20,000 tonnes of water are being exported to Gibraltar. It is hoped that that first consignment and later consignments will produce income for the Northumbrian water authority of about £250,000 a year.

There is a tendency for the House to concern itself with matters of national importance and sometimes to overlook the problems of the regions. I hope that my hon. Friend and the House will accept that, in the case of the problems of the north-east, the Government have paid particular and special attention to the problems of the region part of which is represented by my hon. Friend.

The closest consideration has been given by the Government to the problems of the Northumbrian water authority. My right hon. Friend the present Secretary of State for Employment instituted a review of the authority's financial position more than a year ago. As a result of that review, as my hon. Friend reminded us, a repayable grant of £5 million was agreed for 1983–84. In November, the Parliamentary Under-Secretary met Sir Michael Straker, the chairman of the authority, to assess progress. I agreed that further review should take place and I visited Newcastle on 6 January and had discussions with the chairman and the board.

No account of the authority's position would be complete without consideration of the major development, to which my hon. Friend referred, known as the Kielder scheme. Against the background of forecasts that there would be a doubling of demand for water in the north-east by the turn of the century, public inquiries were held in 1972 and 1973 into a proposal by the Northumbrian river authority to develop a major impounding reservoir and associated works at Kielder. The scheme included a tunnel to augment resources at Teesside, where steel and chemicals are important industries using a considerable volume of water.

The Northumbrian water authority was formed in 1973 and assumed responsibility on 1 April 1974. It took over, and continued with, the Kielder scheme. The statutory order was signed by the then Secretary of State for the Environment, the late Mr. Anthony Crosland, on 4 April 1974 confirming the previous Government's consent, which had been given in October 1973.

The final cost of the Kielder scheme was £167 million, a very substantial sum—

Mr.A. J. Beith (Berwick-upon-Tweed)

Absolutely. Mr. Gow: Does the hon. Gentleman wish to intervene?


I was merely lamenting the appalling waste involved in the commitment that was entered into on that fateful day.

Mr. Gow

As I said, it was a substantial sum, and with the benefit of the knowledge that we now have, 1 agree with the hon. Gentleman that an over-provision was made. Of the total of £167 million, £60 million was met from EEC and British Government grants to promote regional development.

The difficulties which Northumbrian water faces today arise principally from two circumstances. First, the authority borrowed heavily in the 1970s to finance major projects, including not only Kielder but the Tyneside sewerage scheme. As a result, the authority's debt stands at over £350 million and interest payments of about £50 million a year have to be met.

Secondly, there has been a 20 per cent. drop in industrial demand for water in the region, and the industrial demand is a higher proportion of total demand in that region than in any other. This means that the authority's costs, which are largely fixed, must be recovered on a reduced charging base, leading to increases in charges well above the national average. When the position was reviewed again early this year, the Government decided with great reluctance that they were not able to give further assistance. In reaching that decision, the Government took account of the following factors: first, the major projects undertaken by the authority had benefited from substantial regional grants and other assistance so that the costs remaining with the authority have already been mitigated to a significant extent—about one third of the full cost; secondly, even after this year's increases water charges in the Northumbrian region will still be below the national average; thirdly, the increases are significant in percentage terms but less so in cash terms — the increase for a typical household is about 22p a week; fourthly, the authority has, in my view wisely, structured its tariff to minimise the adverse effect on industry in the region. It is unfortunate that the authority has had to face these difficulties for reasons largely outside its control, but in the Government's view it would not have been appropriate to ask taxpayers generally to bear the burden that would have been involved in further relief or assistance from the Treasury.

When we consider water authorities' charges, the House has rightly asked whether an authority can do more to control its own costs—this issue was raised by my hon. Friend—and in so doing moderate its own charges. Improved efficiency has been our first priority in dealing with water authorities since 1979. Their budgets have been reviewed by consultants, there have been two reports from the Monopolies and Mergers Commission and most recently the Water Act 1983 has established smaller more business-like boards. There has been a most encouraging response from the industry and real progress is being made. For the industry as a whole, there has been a reduction of over 13 per cent. in manpower since 1979 and performance last year met the targets agreed with the Government. Performance aims for the three-year period to 1986–87 have recently been agreed and these will secure a reduction in operating costs of about 7 per cent. in real terms since 1979–80.

The Northumbrian water authority has made significant progress in achieving greater efficiency. The consultants who reviewed its budgets for 1981–82 and 1982–83 reported favourably on the authority's efficiency. The performance aim agreed with the authority for 1983–84 resulted in a 4 per cent. reduction in real operating costs.

compared with 1979–80. The authority's manpower has decreased by 20 per cent. since March 1979, and the performance aim agreed for 1986–87 will bring about a further 5 per cent. reduction in operating costs. In an industry in which services must be maintained throughout each region because they are vital to the community, I consider that the performance of the Northumbrian authority is very creditable.

Nor has the authority neglected revenue-raising possibilities. The recreational potential of Kielder is being developed and a hydroelectric station to supply power to the national grid has been established there. I have referred already to the exports to Gibraltar which have been achieved by the authority.

My hon. Friend asked why the authority could not be permitted to renegotiate its borrowing from the national loans fund. That is a proposition with which I have considerable sympathy, but water authorities, like the nationalised industries, have access through the national loans fund to long-term capital finance on terms that are usually more favourable than they would be able to obtain if they went to the market direct. In fact, I doubt whether 25-year debentures at a rate of interest only a fraction above the rate at which the Government themselves borrow would be available at all. Such finance is appropriate to the long-term investments which make up the bulk of the authority's programme. For its part, the national loans fund is required by statute to conduct its affairs so that no loss is incurred.

If the fund were to allow renegotiation whenever there was a favourable movement in rates it would be left with an uncovered difference. For that reason, the fund requires a premium on early repayment of loans so that no loss is incurred on the unexpired portion of the loan.

Another question asked by my hon. Friend was why the authority could not be permitted to substitute commercial borrowing in the market for its national loans fund borrowing. Apart from the difficulty about early repayment which I have mentioned, that would be contrary to the Government's general policy that borrowing by public sector bodies for capital purposes should be within the public sector for reasons for PSBR management. Access to private sector finance is considered only where there has been a clear transfer of risk to the private sector and where there are efficiency gains commensurate with the extra cost of that method of financing. Those conditions are not met in this case.

I know that the Northumbrian water authority may be making further suggestions, perhaps through the Water Authorities Association. I assure my hon. Friend that the Government will give sympathetic consideration to any further proposals made to us. I am grateful to my hon. Friend for having drawn this important matter to the attention of the House. I assure him and his constituents that we shall continue to watch the authority's progress and the interests of its customers with the greatest care.

Question put and agreed to.

Adjourned accordingly at eleven minutes past One o' clock.