Water Authorities (Return on Assets)

HC Deb 07 February 1985 vol 72 cc1127-94

Mr. Speaker

Before I call on the hon. Member to move the motion in the name of the Leader of the Opposition, I should say that today's debate is not one of those in which I am empowered to use my discretion to impose a limit of 10 minutes on speeches in the early evening. However, it is clear that many right hon. and hon. Members wish to speak and, therefore, I appeal for reasonably short speeches.

4.57 pm

Mr. Jeff Rooker (Birmingham, Perry Barr)

I beg to move, That an humble Address be presented to Her Majesty, praying that the Water Authorities (Return on Assets) Order 1984 (S.I., 1984, No. 1995), dated 17th December 1984, a copy of which was laid before this House on 7th January', be annulled. I hope that it is convenient for the House to debate the second motion on the Order Paper: That an humble Address be presented to Her Majesty, praying that the Water Authorities (Return on Assets) Order 1985 (S.I., 1985, No. 78), dated 24th January 1985, a copy of which was laid before this House on 24th January, be annulled. I shall wish to move it formally later, Mr. Speaker, and we shall seek to divide the House upon it.

Mr. Speaker

If that is the wish of the House, so be it.

Mr. Rooker

We should not commence the debate without being aware that water is a natural resource and that we have today received the report of the Health and Safety Commission on the tragedy of the Abbeystead pumping station, in which many people lost their lives. Although we shall argue about finance, we should remember that in that tragic case we paid a high cost in human terms for ensuring that water reached our constituents' taps.

The water authorities are executive boards of Government. Members are appointed by Ministers of the Crown. They are subject to ministerial direction and control, and Ministers are accountable to Parliament. That brief description was given by a Minister at the Dispatch Box last Friday. The first question that will have to be disposed of is why we are here in mid-February—less than two months from the end of the financial year—debating whether to give Ministers retrospective approval for the directions and financial control they gave to water authorities behind closed doors at the end of 1983 and early 1984 for the year 1984–85, which is almost at an end.

The House is simply being asked to act as a rubber stamp on the first order. The effect of annulment within a few weeks of the end of the financial year was never contemplated by Ministers. There have been complaints about that in the past. In response to the complaints, the Government said in February 1984 in Cmnd. 9138: The Government accepts the desirability of laying before Parliament at the earliest opportunity the Orders which set the financial targets for water authorities. That abuse of the House must stop. It is useful to put it on the record that we do not expect the House to be asked in future merely to be a rubber stamp.

We cannot stop the abuse today, but for 1985–86, which is what the debate is about, the award for making Ministers accountable to the House in time for us to take action must go to Mr. Roy Watts, the chairman of Thames water. With single-figure inflation, he and the other chairmen are being asked to increase water charges by double figures. Most want and need increases at about the rate of inflation. Thanks to Mr. Watts's insistence that he would not increase water charges beyond 3 per cent. without an order from Parliament, we are having this debate today. I should add that he is supported by his board of ministerial appointees.

The question that we must ask ourselves today is whether Parliament should give its approval to tax water through the orders. Can we all defend the proposal to our constituents, all of whom use the commodity?

Perhaps we are all here by mistake—a mistake of the Chief Secretary to the Treasury. It was reported in the Financial Times yesterday that during the bilateral negotiations with the Department of the Environment he lost, the Treasury's fall-back position. He stuck to his initial demand because he forgot what his second demand would be, and apparently the Environment Ministers gave way to him. I am sure that some time today we shall be told that a highly respected journalist on the Financial Times, Mr. Robin Pauley, got it wrong. However, we may be here by mistake.

We must decide whether the 1985–86 order taxes water, and I submit that it does. The CBI takes that view, as does the National Farmers Union. In the words of the Water Authorities Association, the water industry is being asked to make more money than is necessary to run the industry. A reason given by a previous Secretary of State for the Environment, now the Secretary of State for Employment, for the reorganisation of the water authorities, and which was repeated in the 1983 Conservative election guide at page 289, was: Customers have not felt that they were really represented."—[Official Report, 7 July 1982; Vol. 27, c. 293.] Following that reorganisation, dozens of water consultative committees were set up. They were meant to be a voice for the consumer, especially the industrial consumer. But they were not consulted about this proposal, and, so far as I am aware, none is in favour of it. Indeed, given that the water authority chairmen learnt of the proposed change only from television and radio after the Chancellor of the Exchequer's autumn statement, it is hardly surprising that the consultative consumer committees were completely ignored.

It is clear—I hope that it will not be a point of argument—that income collected on rateable value, as is half of water authorities' income, is a charge based on a taxing instrument, not a charging device. That is not an unimportant point. This is neither the time nor the place for a seminar or a long debate on current cost accounting. I for one would not be qualified to participate in such a debate, let alone to lead it on behalf of my hon. Friends. Anyone who compares the replacement cost of reservoirs with that of aircraft and says that it should be handled on the same basis will, in many people's view, be nothing less than a water wally. The attempt to revalue assets each year can be futile. There were not too many aircraft around when many reservoirs were under construction. It is easy to check the current value of an aircraft and its replacement — one telephones the British Aircraft Corporation or Boeing. We would need a time machine to do that for the water industry.

I suspect that, as yesterday, we shall be told that Price Waterhouse claims that current cost accounting for the water authorities is, "soundly based and sensible". Of course, as a partnership, Price Waterhouse does not publish accounts, so we cannot tell how it would cope with such a procedure. I rest my case on the report of the Monopolies and Mergers Commission, which in 1981 examined a water authority. That was the year in which the Price Waterhouse report was published. It stated: All the regional water authorities have encountered problems in assessing the present day replacement values of their substantial and in many cases highly specialised fixed assets … Knowledge of the extent and condition of the water industry's mains and sewers is incomplete, and uncertainties surround both the probable operational lives of these assets and the techniques that may be employed to facilitate renewal and refurbishment in situ. That report on the Severn-Trent water authority and two private water undertakings was published as House of Commons Paper 339.

The Labour Government's White Paper on nationalised industries in 1978 cannot be prayed in aid in respect of water authorities. No targets were fixed at that time. In any event, if people wish to use that White Paper to prove their case, why have we not heard about it before? That argument will not stand up. The current cost accounting techniques—I apologise to the House for going into some detail, but several points must be put on the record—involved in the statement of standard accounting practice No. 16, which has just lapsed, might be applicable to fixed assets such as aircraft, computers, machine tools and even buildings, but can they apply to Victorian-laid sewers, mains and reservoirs? The National Water Council, which no longer exists, set up a steering group to consider accounting techniques. It gave different estimates for the life of service reservoirs, mains and boreholes to the accountants Deloitte Haskins and Sells, which did the same job for the statutory private water companies. There was a difference of opinion even before the system began.

It is worth noting that the private water companies, which are not controlled by Ministers and whose borrowing is not included in the PSBR, were planning modest increases in charges of 2 to 3 per cent. The Essex water company is an example of that. But what are they doing? They are tagging along on the coat tails of the regional water authorities and jacking up their prices by double figures. That is Government-led inflation. There can be no other description of what is proposed by the private water companies.

The accounts of Thames water show it to be more profitable than ICI, Esso or Bowater, on any system of conventional accounting. That cannot be denied. Current cost accounting is disliked by private industry, and it has not gone unnoticed by the water authorities that, on the privatisation of British Telecom, one of the first actions was to scrap current cost accounting and to return to historic accounting.

Mr. Richard Tracey (Surbiton)

Before 1979, did the Labour Government accept the principles of current cost accounting in relation to water authorities?

Mr. Rooker

The White Paper published by the Labour Government at the end of 1978 forecast changes in the financial structure of nationalised industries. That was never put into operation, but there was nothing in the White Paper about water authorities. No targets were set, as they are now, for a return on the assets of the water authorities. Since then, the water authorities have been reorganised. The system for those authorities was completely different before reorganisation.

I do not know—I challenge any hon. Member sitting on the Government Front Bench or on the Back Benches to give the House examples — of a private sector company that bases the figures on which it arrives at the prices of its products on a system of current cost accounting. They would not have a market for their products, whether it was ICI or British Steel or anybody in the private sector. Nobody does it. If they do, I think that we should have some examples today.

The system of current cost accounting is used—and in this case, we think, abused—as a cash generator, and in respect of a monopoly, of course, even more cash can be generated. Price is not a factor for water authorities. It is not for my constituents, and I doubt whether it is for the constituents of any hon. Member on the Government Benches. Obviously, in terms of industrial use, where there is large-scale metering, it would be. But the charge for water is not based on consumption, and the provision of water is a monopoly—this was reinforced by the Prime Minister in a written answer last week, in column 292 of the Official Report for 31 January, when she described it as a natural monopoly. She then seemed to dismiss privatisation of the water authorities because they were a natural monopoly of a crucial commodity.

From 11 million people, which is a quarter of the English electorate, in the Thames area, their water authority needs to collect and generate only £292 million in the coming financial year. This order demands that those 11 million consumers be charged £505 million, and this will still leave £12 million less for capital spending than had been originally planned. It is absolutely crazy.

Under this order, present-day customers will definitely pay more than the true cost of the service. That is taxation; it cannot be denied; it is a tax on taps; it is even a tax on toilets. We know that the Government's aims are lower inflation, increased capital spending and, we thought, more commercial freedom for the public sector. We are all aware that the Treasury has a Bill—or an owner's charter, as it has been described by some nationalised industry chairmen—to get even more control over the public sector than it has at present. The Bill was not mentioned in the Gracious Speech, but it is quite clear that one is being prepared for the next one. So we must take as our criteria for today, as the present state of the art, the five objectives for water authorities set out by the Parliamentary Under-Secretary for the Environment, the hon. Member for Sutton and Cheam (Mr. Macfarlane), in the Adjournment debate on 19 December 1984, at column 454. These were higher investment, greater efficiency, a reasonable rate of return, moderate charges increases, and a reduction in borrowing.

As far as higher investment is concerned, the Thames water authority, for 1985–86, will be able to invest under this order only £114 million against its planned £126 million—a drop of £12 million. In 1987–88 it will be able to invest only £129 million against its planned £166 million—a drop of £37 million.

For the North-West water authority, planned investment of £195 million in 1987–88 is cut under this order to £170 million, which is a drop of £25 million. That is what the chairman told me—I say this in case there is any argument about it— in writing before Christmas. The chairman of the North-West water authority, George Mann, says that the effect of the order in view of the state of the economy here in the north-west is extremely worrying". The Lancashire water services council has told the CBI and right hon. and hon. Members that without this order charges in the north-west would be increased by an amount only marginally above the forecast for inflation. With this order it will be over 13 per cent. What a slap in the face for the north-west.

On the second point, greater efficiency, no one denies—and we applaud the fact— that virtually every water authority has achieved greater operating efficiency in the last two or three years. We congratulate them on that.

The third point which the Minister made was about the rate of return. This can deliberately be made to look artificially small with current cost accounting, when the assets on which the accounting is based are as specialised and as old as those in the water industry, 80 per cent. of which are under the ground. On profit against turnover water authorities are among the most successful 1 to 2 per cent. of businesses in this country. I repeat that, because it needs saying again and again. It is a tribute to those who run the industry and work in it. The water authorities are among the most successful 1 to 2 per cent. of businesses, based on profit against turnover.

On the fourth point, the Minister's objective of moderate charges increases is destroyed completely by the order. Thames planned 3 per cent., the Minister says 10 per cent.; Yorkshire planned 4 per cent., the Minister says 12 per cent.; the South-West planned 4 to 5 per cent., the Minister says over 10 per cent.; the North-West planned around 5 per cent., the Minister says over 13 per cent. And this goes on and on through every water authority in the country.

All authorities—I qualify this because I am not sure about Wessex—will increase their charges by double figures. I do not know whether the Wessex increase is in double figures or not. This is what each chairman told me in writing before Christmas. I regret that those chairmen, with the notable exception of Roy Watts of Thames, have accepted the Treasury line. I bet that some consumer consultative councils have been asking some very embarrassing questions of their authorities in the past few weeks because of the lead by the Thames water authority.

The Severn-Trent authority is even trying to stop paying its £100,000 rates on its luxury offices, which, if this order and the Government's machinery in respect of financial control go through, will be another £100,000 going to the Treasury instead of paying for home helps and road mending in Birmingham. The idea that water authority luxury head offices can be de-rated because they are somehow connected with the supply of water is ridiculous beyond belief and I certainly hope the Minister will support the line that the Inland Revenue is taking in opposing this kind of change. The Inland Revenue might be doing that, but the Treasury, of course, wants the money back.

Thames water will see its charges rise by a massive 29 per cent. in the next three years—we know that because of what is in the order and the financal figures—when the Government are targeting zero inflation.

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

indicated dissent.

Mr. Rooker

The Minister shakes his head.

Mr. Gow

I did.

Mr. Rooker

I always understood that the Government's target was zero inflation. That is what steady prices mean. Steady prices mean zero inflation. This brings with it many technical problems that we cannot go into today. Thames water is to have a 29 per cent. increase in charges, and North-West water is even worse. The North-West will have cumulative charge increases in the next three years of 40 per cent. That is what the authority is saying to hon. Members.

Mr. Ivor Stanbrook (Orpington)

The hon. Gentleman is basing most of his argument upon the specific example of the Thames water authority—at least, that, for him, provides the most striking example of his thesis. But is it not a fact that we all want greater financing of the infrastructure in this country, and that includes water supply? Therefore, should he not welcome the fact that in these areas where costs are low, where extra revenue can be raised for finance for the infrastructure, charges should be so raised?

Mr. Rooker

I was conscious in preparing my remarks for this debate that I must not concentrate solely on Thames. The North-West, as I have highlighted, will be affected even more badly than Thames over the next three years in the cumulative effect on charges. It is devastated by its capital expenditure. The North-West will have less money for capital expenditure in two to three years' time than it is planning for. We all want increased expenditure on the infrastructure in the water industry, as elsewhere, but my figures show that the authorities I have cited will have less than had been planned even though they have to increase their charges. That is the point of the argument.

Mr. Michael Grylls (Surrey, North-West)

Is not the logic of all the hon. Gentleman's argument pointing towards the flaw in the theory of nationalisation? The real trouble is that while Governments own industries like the water industry Ministers of all parties will be tempted to interfere where perhaps they should not do so. I hope that he will agree that the solution to get everybody off the hook is to take the industry out of the public sector. Investment can then go ahead. If we can privatise the successful authorities the interests of the consumers and the people who work in those authorities will be best served.

Mr. Rooker

I shall await the hon. Gentleman's speech with interest, and I shall look with even more interest at the Lobby that he enters at the end of the debate.

What effect will this policy have on industry? There will be a 40 per cent. increase in the north-west and a 30 per cent. increase in the Thames area. There is a considerable amount of industry in the Thames area, and a quarter of the English electorate lives there. The CBI says that it will be a serious blow to manufacturing industry. That is not exactly bare knuckle stuff, but it is clear that the CBI is not happy about it and considers these increases to be a tax. We cannot understand why the Government are seeking to generate extra cash over and above that required from this vital industry.

We shall no doubt be told that water does not cost very much—only 21p per day for the average consumer. If the order is approved, that will increase by only 2p per day. However, I remind Conservative Members that for many millions of people the need to watch the pennies in order to allow the pounds to take care of themselves is a fact of daily life. The argument, "It is only 2p" simply will not wash.

The fifth target announced by the Minister in the Adjournment debate before Christmas was that of less borrowing, which clearly affects some authorities more than others. I do not deny that. Given the history of the authorities, their borrowing structure varies. I again use Thames as an example because it is a fair one. It is also a foretaste of what will happen to the other authorities in two or three years' time. In addition to the fact that Thames will have to increase its charges vastly over what is needed and cut its capital expenditure plans, it will have to pay back £61 million against a planned £18 million. Will any penalty be involved in early repayment?

In 1987–88, Thames will be required to pay £113 million, but it will have only £1 million of debt. For 11 million water users that will amount to forced lending to the Treasury. That is a tax and there is no other way of describing it. We shall be faced with complete self financing, debt redemption and a nice annual surplus to the Treasury. The 1985–86 order will mean that more than £100 million will be siphoned off from all the water authorities to the Treasury. That is what the Treasury will gain cumulatively. Much of it will come from Thames as some authorities will not be affected in the first year.

Current customers — our constituents — will in the next few years have paid off all the past debts and provided the assets for the 21st century. As well as stupid financing, that is absolutely unfair to elderly people who will not use the assets. It is also unfair on the working poor for whom there is no relief, given that the rateable value based system of water charges carries no rebate arrangement. I emphasise "the working poor" — there are millions of them—as opposed to those on supplementary benefit. So long as we maintain the present crazy rating system for property, those who suffer from that regressive system of taxation, such as single people, widows and small families, will be hit even harder because of the changes in water charges.

I know that we shall also be told that water authorities pay no VAT or corporation tax. Does anyone suggest that they should? Following implementation of the order, everything will be done at arm's length from the Chancellor. This measure flows from the Chancellor's autumn statement and the demands of the Treasury, and VAT is hardly needed when this technique is used. One does not need to introduce a Bill to levy VAT on water if a technique such as this is used, and I warn the House and the country that the same is in store for gas and electricity.

If I am doubted, I suggest that hon. Members look at the paper that the Treasury deposited in the Library on 20 December. No press notice accompanied it, but since then I have discovered that 70 copies went to the Press Gallery and that every political editor received a personally addressed copy. Obviously, on 20 and 21 December, the professional journalists of Britain were otherwise occupied.

Mr. Frank Dobson (Holborn and St. Pancras)

Not with water.

Mr. Rooker

It is quite clear from the proposals that have gone out for consultation that this procedure, which will levy a back door tax on water in order to avoid the need for VAT, will be used in respect of gas and electricity.

Mr. George Park (Coventry, North-East)

I merely remind my hon. Friend that exactly the same tactics have been used in the case of the Post Office, which has been asked to double its profits despite the fact that the Government have already creamed off scores of millions of pounds in excess of what the Post Office needs.

Mr. Rooker

I remind my hon. Friend that the Post Office is on the list in the consultative paper. It is clear that the Treasury intends to tighten the screw even further.

Water charges are based on rates, and for the vast majority of the British people rates are a tax. Is it seriously suggested that we should tax a tax? That is what the order amounts to.

The Government got control of the water authorities —in reality, consumer co-operatives—in 1973 without giving a penny of compensation to the many local authorities which ran the previous set-up. In exchange, half the membership of the boards were allocated to councillors. But now we have executive boards which are all appointed by Ministers and which meet behind closed doors. Someone in the Treasury has decided that they are ripe for plucking, and consequently they are asked to levy a tax on water. I invite the Minister to bluff his way out of this and the House to reject the second order.

5.27 pm

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

I begin by responding to the request of the hon. Member for Birmingham, Perry Barr (Mr. Rooker) in relation to the dates on which the House is invited to approve these orders. I give the hon. Gentleman and the House an undertaking that in future these orders will be introduced before the start of the financial year to which they relate.

I also wish to comment—some of my hon. Friends would want me to do so—on the story which appeared in yesterday's Financial Times. It was a hilarious story. Neither the author of the article nor the hon. Member for Perry Barr was present when these discussions took place. I have the advantage of having been present. I must tell the House that I have never known a Treasury Minister to mislay a paper of that kind, and most certainly my right hon. and learned Friend the Chief Secretary to the Treasury would not, and did not, mislay the paper.

This is a serious debate. It is one about which many of my right hon. and hon. Friends feel deeply. It is clear from the speech of the hon. Member for Perry Barr that it is an issue on which he too feels deeply.

The debate is essentially about four issues. First, it is about the rate of return which should be earned by the water authorities. Secondly, it is about higher investment in the water industry, something for which hon. Members on both sides of the House have been calling. Thirdly, it is about the reduction in borrowing by the water authorities. Fourthly — a matter to which the hon. Gentleman rightly referred—it is about charges.

Mr. Andrew Bowden (Brighton, Kemptown)

I apologise for intervening so early in my hon. Friend's speech. When he was talking about the substance of the debate, he mentioned charges and those who have to pay the charges. Many of his hon. Friends wish to go into the Lobby with him tonight, but, unless he can give an assurance that he will consider carefully the possibility of introducing rebates for water rates, it will be difficult for me, and I believe for some of my hon. Friends, to join him in the Lobby. The proposed increases will have a devastating effect upon many pensioners and those on low incomes. Under the previous system in which rate rebates were applicable, general rates and water rates were taken together, so that rate rebates were available to pensioners and others on low incomes. Will he not at least consider and discuss this with his right hon. and learned Friends?

Mr. Gow

My hon. Friend is characteristically persuasive, and of course I shall consider what he says. However, I must remind the House of one matter, which will be the subject of part of my speech later. I think that a distinction can be made between general rates and water charges. The charge made for water is for services provided. My hon. Friend will know also that, in the calculation of entitlement to supplementary benefit, water charges are taken fully into account and some 3 million households already receive help with their water charges through the supplementary benefit system.

Mr. Simon Hughes (Southwark and Bermondsey)

I think that the hon. Gentleman is misleading the House in two ways. First, although it is a charge for service, everybody in Britain receives the service. Secondly, it is only partly and not entirely in relation to supplementary benefit that the charges are taken into account and, as the Minister well knows, for those not on supplementary benefit, as his hon. Friend the Member for Brighton, Kemptown (Mr. Bowden) said, there is no rebate. On that basis, the premise of the Minister is inaccurate and, at least in part, misleading.

Mr. Gow

I accept of course that almost everybody in the United Kingdom is in receipt of piped water, although many are not on mains drainage. That is not in dispute. I repeat that, when entitlement to supplementary benefit is calculated, water charges are taken into account, and some 3 million households receive help in that way.

Mr. Anthony Steen (South Hams)

I am sure that the Minister will wish to enhance his reputation by helping the House in this way. If old-age pensioners will not, or may not, receive a rebate, can he assure the House that they will not pay more and that an upward adjustment will be made? Can he also say something about those who are retired and on fixed incomes, because they too will suffer extreme hardship unless there is provision in the Budget for a tax rebate for those who just do not have the money to pay a 12 per cent. increase?

Mr. Gow

It is of course the case that increases in charges for water in the coming financial year will have to be paid by pensioners. I was referring only to the 3 million households which already receive help through supplementary benefit. For them, supplementary benefit will reflect the higher charges that will be imposed next year.

Mr. Gordon Oakes (Halton)

Will the Minister give an undertaking to the House that he will introduce a rebate on the water rates of those pensioners and other poor people who currently receive rebates on their general rate and are not on supplementary benefit?

Mr. Gow

No. I made clear in response to my hon. Friend the Member for Kemptown that I was not able to give that assurance. Indeed, the position is that, although rate rebates are given because rates are regarded as a kind of taxation, there is no rebate of water rates. Water charges, as I prefer to call them, are taken into account when calculating entitlement to supplementary benefit.

Mr. Michael Shersby (Uxbridge)

Is my hon. Friend aware that many pensioners who live on fixed incomes just above the level of entitlement for supplementary benefit, housing benefit and, no doubt, other benefits will find an increase of 9 per cent. intolerable? What justification can there be for imposing such a charge on them when the Government have a policy of reducing inflation?

Mr. Gow

As my hon. Friend knows, the charges made for water are included in the retail price index. An increase of 1 per cent. in water charges has the effect of one hundredth of 1 per cent. on the RPI. I shall return to that matter later.

I deal with the rate of return. This afternoon we are debating the fourth and fifth orders which have been laid under section 29 of the Water Act 1973. That section enables my right hon. Friend to direct that water authorities shall achieve such a rate of return on the value of their net assets as he considers to be reasonable.

The first order was made in respect of the financial year 1981–82. In that order, the current cost value of net assets was adopted as the basis of the calculation, and that change was agreed by the House without dissent. Since 1981, the same basis of asset valuation has been used in all subsequent orders, including those before the House today.

The House will have noted, not with surprise, that the hon. Member for Perry Barr made only a passing reference to the Labour Government's White Paper on the nationalised industries presented to Parliament by the right hon. Member for Leeds, East (Mr. Healey) in March 1978. I wish to repair his omission.

Paragraph 3 of the White Paper affirmed: The Government must be concerned…in ensuring that there is an acceptable return on the public capital invested".

Mr. Rooker

Yes, they must.

Mr. Gow

I am glad to have the support of the Opposition.

Paragraph 4 affirmed: It was the Government's policy to treat the nationalized industries as commercial bodies so far as the expected return on investment was concerned". My third and last quotation from the 1978 White Paper comes from paragraph 55: An adequate level of nationalised industry profits is essential to the continuing well-being of the industries and their customers and of the economy as a whole. They provide some of the funds for the very large investment programmes necessary to maintain supplies and services to the public. This keeps down the industries' new borrowing requirements, thus helping to reduce the burden of taxation and enabling the Government to maintain other important public expenditure priorities. The House may think that the hon. Member for Perry Barr would have been more candid if he had pointed out that the Government are now following policies on water authorities that are precisely the same as those that I have quoted from the 1978 White Paper — a White Paper fashioned after even the Labour party had learned, with some humiliation, lessons taught it by the International Monetary Fund.

The average rate of return set for the water authorities in the 1984 order, for the current financial year, is 1 per cent. The 1985 order increases the average rate of return to about 1.4 per cent. for the coming year.

Mr. Robert Jackson (Wantage)

The White Paper that my hon. Friend has been quoting talks about a 5 per cent. rate of return being expected from the nationalised industries. When does my hon. Friend envisage that the water authorities will have such a rate of return, and how much will charges have to be increased to bring such a rate of return about?

Mr. Gow

The Government have set targets, as my hon. Friend knows, only for the next three financial years. For the year 1985–86, the average rate of return for the water authorities goes up from 1 per cent. to 1.4 per cent. In the following year, the average goes up from 1.4 per cent to 1.7 per cent. and in the third year it goes up to 1.9 per cent. Thereafter the Government have set no targets.

Sir Kenneth Lewis (Stamford and Spalding)

The Government reorganised water authorities. Arising out of that reorganisation, they expected greater efficiency and productivity. I am assured by my water authority that it is providing greater efficiency and production, and that this will increase. Therefore, why should it not be able to increase its return on capital, arising out of that reorganisation and increased productivity and efficiency, without interference from the Government? What is the use of that increased productivity and efficiency if the water consumer gets no advantage?

Mr. Gow

I understand my hon. Friend's point. There is a passage later in my speech which deals with efficiency. I give him an undertaking. If, after that passage, my hon. Friend is still dissatisfied, I shall give way to him again. I wish to make a little progress in my speech, not least because some of my right hon. and hon. Friends may want to catch your eye, Mr. Deputy Speaker.

The targets differ from authority to authority because of differences in the rates of return presently being earned, and because of differences in investment levels, but the general policy will be the same for all authorities. Even next year's average of 1.4 per cent. is low when compared with a rate of return of 2.75 per cent. for the electricity supply industry and 4 per cent. for British Gas. As for the private sector, the Bank of England recorded that in 1983, for major non-oil industrial and commercial companies, the current cost return was 9 per cent.

The higher financial targets set by the Government will fund higher investment next year of about £90 million, bringing the total to £814 million, an increase of 12.5 per cent., as compared with the provision for this year. This extra investment in the infrastructure is something for which demands have been made within and without the House, and not least after last year's drought. Those demands have come from Labour Members, including the Leader of the Opposition, and from my right hon. and hon. Friends.

On 1 August last year, in a debate in the House, my hon. Friends the Members for St. Ives (Mr. Harris) and for Devon, North (Mr. Speller) and the hon. Member or Truro (Mr. Penhaligon), who uncharacteristically is not in his place, called for greater investment by the South-West water authority. This is exactly what the South-West will now get. Investment next year will increase by 15 per cent. from £33 million to £38 million. Investment in the North-West water authority, mentioned by the hon. Member for Perry Barr, will rise by 11 per cent. or £16 million. For Wessex, investment will rise by 40 per cent., from £35 million to £49 million. For the Welsh water authority, investment will rise by 19 per cent., from £47 million to £56 million.

Mr. Dafydd Wigley (Caernarfon)

I note what the hon. Gentleman says about investment increasing in the Welsh water authority area. Is it not true that the rate of return for which he is now looking is similar to that of last year, and that the borrowing limits are being substantially lowered? The lowering of the borrowing limits, together with the allowing of the capital investment, will lead to an increase in water prices of 12 per cent. next year and of 30 per cent. over the next three years.

Mr. Gow

I hope that the House will understand that I have ministerial responsibility only for the nine water authorities in England. My hon. Friend the Under-Secretary of State for Wales, who has responsibility for the Welsh water authority, will, if he catches your eye, Mr. Deputy Speaker, wind up the debate. I would prefer it if he dealt with the Welsh water authority.

Mr. David Harris (St. Ives)

My hon. Friend mentioned that I and some of my colleagues from the south-west called for extra investment in infrastructure. Can he confirm that, although the capital programme of the South-West water authority may be increased, that increase will be used mainly for meeting the extra burdens that central Government have put on the authority through the Control of Pollution Act? It will not improve the basic infrastructure for the ordinary consumer.

Mr. Gow

Mercifully, I am able to say that to diminish pollution is one of the most worthwhile tasks that can be carried out by water authorities.

The extra investment to which I referred will enable the water authorities to make more progress with the maintenance and renewal of sewers and water mains and further improvement in the quality of rivers, estuaries and coastal waters. Those who call for higher investment in the water industry are sometimes too ready to overlook the truth that, if money is to be spent, it has first to be found. That brings me to my third point about lower borrowing.

When the Labour party was in power, one of its most disastrous characteristics was that it believed that it was possible to finance extra spending by resorting to deficit financing on a massive scale. The author of the 1978 White Paper, from which I have quoted with approval, was the same right hon. Gentleman who, when Chancellor of the Exchequer, wrote his celebrated letter to the International Monetary Fund 15 months earlier. In that letter — [Interruption.] It is all very well for Labour Members to yawn. I want to remind them what happened when the right hon. Member for Leeds, East wrote to Dr. Johannes Witteveen on 15 December 1976.

Mr. Dobson

Does the hon. Gentleman propose sending details of this letter with every water rate demand?

Mr. Gow

That intervention makes me realise that I should not have given way.

I shall quote from the letter. It says: It is also essential to reduce the public sector borrowing requirement in order to create monetary conditions which will encourage investment and support sustained growth and the control of inflation". Next year's higher rate of return permits the external finance limit for water authorities to be set at £203 million compared with £284 million this year. That is to say that there will be £203 million of additional borrowing next year by the water authorities as a whole. Only in the case of Thames, to which I shall turn in a moment, will there be a reduction in borrowing. By the end of this financial year, the total debt of the water authorities as a whole will be no less than £4.75 billion.

My fourth point is about charges. Understandably, there has been concern. Increases for next year will vary from authority to authority. So far, only three authorities have fixed their budgets. Our estimate is that the average increase will be rather more than 10 per cent. As I explained in reply to my hon. Friend the Member for Brighton, Kemptown (Mr. Bowden), a 1 per cent. increase in water charges adds one hundreth of 1 per cent. to the retail price index. For this year, the average bill for domestic customers of water authorities is £77 a year, or 21p a day. Assuming an increase in charges of 10 per cent. next year, the average bill would rise from £77 a year to £85 a year, or from 21p to 23p a day.

In the case of Thames—easily the largest authority, serving 11.5 million people — the average bill for domestic customers is at present £73.41, or 20p a day. If next year's increase for the domestic customer should turn out to be 9 per cent., that would mean an annual bill of £80, or 22p a day. Even then, the charges made by Thames to its domestic customers would be below the average in England and Wales.

Mr. Roger Freeman (Kettering)

Is the Minister aware that the Thames water authority has considered the introduction of compulsory metering for all households? Is not this the sensible solution to the problem? It would provide a fairer, more equitable basis for charges and would enable investment decisions to be more sensibly made.

Mr. Gow

At my invitation, the chairman of the Thames water authority has agreed to serve on a committee that is considering the introduction of metering.I hope to receive the first report from the committee chaired by Mr. Roy Watts before the end of next month. Both the Government and this committee are considering the introduction of metering. Of course, water authorities' charges also reflect their operating costs.

I wish to deal with the point raised by my hon. Friend the Member for Stamford and Spalding (Sir K. Lewis). The House will remember that, under the Water Act 1983, we reconstituted the authorities with small, businesslike boards. We have taken vigorous action to improve efficiency. We have agreed objectives with water authority chairmen. We have set performance aims which are agreed targets for reductions in operating costs. Efficiency as been improved, as the hon. Member for Perry Barr acknowledged. In the three years to 31 March 1984, all 10 authorities reduced their operating costs in real terms. All have reviewed their organisations, streamlining their headquarters staff and in most cases cutting the number of their divisions. Since 31 March 1979, the numbers employed have been reduced by 10,400 to 52,000. The largest reduction, of nearly 3,500, was achieved last year.

The Monopolies and Mergers Commission has just reported on the Yorkshire water authority. The report said: We have no doubt that the level of efficiency achieved by the Yorkshire water authority in its early years"— that is when the Labour party was in power— fell far short of what might reasonably be expected in a large public enterprise. However, we are satisfied that there has been a substantial improvement in recent years and that the pace of improvements has increased since the authority was reconstituted in October 1983.

Mr. Geraint Howells (Ceredigion and Pembroke, North)

I am sure the Minister is well aware that in 1973 many water authorities inherited a large debt. If the proposals are put into effect, when does the Minister envisage that the Welsh water authority will pay back to the Treasury its debt of £100 million?

Mr. Gow

If I may, I shall leave that question to my hon. Friend the Under-Secretary of State for Wales, as he has responsibility for the Welsh water authority. I shall deal later in my speech with the general point about repayment of debt.

Mr. William O'Brien (Normanton)

The Minister referred to the Yorkshire water authority. As a member of that authority, may I ask the Minister to be honest with the House and explain the work that the authority had to do because of the introduction of new technology and the grid system? It also had to ensure that sufficient water supplies were made available in the county. Will the Minister also explain that it took a number of years, because of the resources that were available upon reorganisation, to achieve those results? The Minister ought to be fairer to the Yorkshire water authority.

Mr. Gow

I was quoting with approval from the recent report of the Monopolies and Mergers Commission. Following the quotation that I have just read out, I hope that the House will join me in paying tribute to the chairman of the Yorkshire water authority, who is a doughty Welshman, Mr. Gordon Jones, to his board and to his employees for what they have achieved. The same tribute can be paid to all of the water authorities.

I turn now to the system of current cost accounting adopted by the water authorities.

Mr. Frank Field (Birkenhead)

Before he leases this point, could I remind the Minister that he has not answered the question asked by his hon. Friend the Member for Stamford and Spalding (Sir K. Lewis) about why increased efficiency has not resulted in lower charges?

Mr. Gow

I said that I was going to deal with that point later in my speech. I gave an undertaking to my hon. Friend and I give a similar undertaking to the hon. Gentleman. If he is still unhappy when I have dealt with that matter I shall give way to him again.

Prior to 1981, the authorities produced historical cost accounts only. Those accounts suffered from two limitations. First, in common with all historical cost accounts they failed to reflect inflation — a factor of special importance in the case of water authorities with their very long-lived assets. Secondly—this applies to water authorities only — the way in which assets inherited from predecessor organisations in 1974 had been valued for accounting purposes compounded this weakness.

The following note appears in the accounts of Thames for the year ended 31 March 1984— accounts which were approved by the board, signed by the chairman and the director of finance and audited by Arthur Andersen and Co.: Pre-vesting tangible assets are included at the net book value recorded by the various predecessor authorities at 1 April 1984. In the majority of cases these values represented only the amount of loans outstanding on debt-financed assets, thus excluding assets that had been financed from revenue, internal funds and capital grants and contributions, or for which doubt had been redeemed. A similar note—I believe that this is the point which the hon. Member for Perry Barr raised—appears in the accounts of the other nine authorities.

What that means in plain English is that a significant part of the assets of water authorities do not appear at all in their historical cost accounts. Calculated on that basis, it is hardly surprising that water authorities appear to show a reasonable rate of return. It is equally clear that historical cost accounts are not a sound basis for assessing a water authority's financial performance.

There is no need to take my word for that. Hearken to the present Chairman of the Public Accounts Committee when, in an earlier incarnation, he was Financial Secretary to the Treasury. On 1 August 1978, replying to a debate in this House on accounting practice in the nationalised industries, he said: For the avoidance of doubt, let me reaffirm what my colleagues have said on previous occasions — that the Government wholeheartedly support the concept of current cost accounting in the private and public sectors". — [Official Report, 1 August 1978; Vol. 955, c. 670.] The shortcomings of historical cost accounts were recognised by the water authorities themselves. In 1980, it was decided that water authorities should publish supplementary current cost accounts in accordance with the inflation accounting standards issued in that year. In the following year, the Department of the Environment, with the approval of all 10 water authorities and all of their auditors, asked Price Waterhouse to review the current cost accounting principles adopted by the authorities. Price Waterhouse, as the House would expect, carried out a most thorough review. In its report dated November 1981 it concluded: The approach to current cost accounting which has been adopted is both soundly based and sensible. The report acknowledged that a considerable amount of further CCA research and refinement needed to take place in future years. That is a continuing process and a further element of it is the working party on CCA asset valuation, whose chairman is Thames's director of finance. I hope that the working party's report will be available in the summer.

In setting the financial targets of individual water authorities for 1985–86, the Government have been guided by three considerations. The first is the need to bring the various rates of return on existing assets from their present level to a common figure over the next three years. That is a policy of convergence. Secondly, there is a need to ensure that new investment earns a rate of return of 5 per cent. The third consideration is to allocate the investment levels broadly in line with the differing needs of each authority as expressed in its corporate plan.

I do not think that I am overstating the case when I report to the House that none of the authorities was enthusiastic about the Government's policy of raising rates of return. However, all save Thames have accepted our decision and most have welcomed the scope for increased investment, which they see as necessary to improve services and standards in their regions.

I promised earlier to return to Thames, and I shall do so. The current cost valuation placed on its tangible fixed assets by Thames, and confirmed by its auditors, was £4,425 million at 31 March 1984. At the same date, the value of its tangible fixed assets at historical cost was £826 million and its debt amounted to £423 million. It is fair to say that neither my right hon. Friend the Secretary of State nor I was aware of any dissatisfaction by any of the water authorities with the system of current cost accounting until after the Government had announced that they would seek a higher return next year. The proportion of the debt of Thames to its assets is very much less than that of any other authority. That is why the setting of a higher rate of return for Thames and for all the other authorities—Thames has been repaying debts since last year—takes the form of an earlier repayment of debt next year. Debt repayment in 1985–86 will be £60 million compared with £34 million in the current year.

Mr. David Howell (Guildford)

It is true that Price Waterhouse recommended current cost accounting in 1981. Whether it was right to do so is a matter for debate, but surely it did not recommend also the imposition of a financial target on the basis of CCA, which when translated into historic costs, as is the system in most of private industry, would lead to a rate of profit above that earned by ICI, even though Thames is a monopoly. Surely Price Waterhouse did not do that.

Mr. Gow

In 1973 my right hon. Friend was a Member of this place and I was not; he was also a member of the Government and I was not. Under section 29 of the Water Act 1973, my right hon. Friend the Secretary of State is empowered to set the rate of return for water authorities. If my right hon. Friend and his colleagues were right to introduce that measure, I think he might accept that which appears in the recently published report of the Comptroller and Auditor-General. If the Comptroller and Auditor-General had thought we were wrong to set financial targets on the basis of current cost accounts, possibly he would have referred to it. However, my right hon. Friend will have studied the report closely and he will know that the Comptroller and Auditor-General made no such reference.

Some of my right hon. and hon. Friends have suggested that the water authorities might be transferred to the private sector, and I understand that that prospect would not be unwelcome to the chairman of Thames. There is a precedent, at least in part, for such a course. There are 30 private water companies in England and Wales supplying 25 per cent. of that area's customers wth fresh water. Although the companies are subject to financial controls by statute, they raise their money in the market place. Their funding is not included in the public sector borrowing requirement.

In our manifesto, we promised to transfer more public sector businesses to independent ownership. The transfer of water authorities, which form a natural monopoly, presents special problems, not least because of their regulatory functions. Nevertheless, my right hon. Friends and I will be examining the possibility of a measure of privatisation in the industry.

Mr. Nigel Spearing (Newham, South)

I am grateful to the Minister for allowing me to intervene. It is unfortunate that his political views on these matters are not up to his courtesy.

The measure to which he referred when responding to the right hon. Member for Guildford (Mr. Howell) put together for the first time the organisation of water supply, water disposal and sewerage. All that we have been discussing applies as much to water disposal and sewerage as it does to water supply. Is the Minister suggesting that the regional water authorities and their subsidiary parts, which used to be local authority operations and funded by the Exchequer to the extent of £100 million a year in rate support grant up to 1974, be similarly transferred to private enterprise?

Mr. Gow

The House knows that the function of the 30 water companies is only to provide fresh water and that the function of the water authorities is to provide fresh water, take away foul water and deal with other environmental and regulatory services. My right hon. Friends and I will be examining the possibility of a measure of privatisation in the water industry, and that means the water authorities.

Mr. Spearing

Fresh water or foul water?

Mr. Gow

Fresh and foul.

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

I represent an area which is largely supplied with water by an efficient private enterprise company. I hope that the Minister will not delude his hon. Friends into thinking that private enterprise water companies within the present system are immune from the burden of debt which is brought to them by the regional water authorities. For example, the Newcastle and Gateshead water company has to increase its charges to consumers because of the amount that it has to pay for what is provided to them, supposedly in capital, by the regional water authority.

Mr. Gow

I take the hon. Gentleman's point, which is well known to the House.

The House has been patient and I am almost done. I have something to say particularly to my right hon. and hon. Friends. All of us, faced with a choice between lower or higher increases in charges, would opt for lower. But the Government have to take a broader view, not least because of the principles set out in the 1978 White Paper, which have been endorsed by this Government—and not by this Government alone but by Parliament.

On 6 December, the House approved the autumn statement presented to Parliament by my right hon. Friend the Chancellor. On page 21 of that statement, the external financing limits for the nationalised industries were set, including £203 million for the water authorities. Having approved the whole, we have also approved the parts.

So far as the water authorities are concerned, we have followed a policy which has been consistent and persistent. It is a policy which has meant streamlined boards, a commitment to greater efficiency, better service, a realistic return on public assets, and now more investment.

The journey to a Britain of sound money and honest finance is, in many respects, a painful one, but that journey has to be made and these orders are an essential part of that strategy.

6.11 pm

Mr. Gordon Oakes (Halton)

As my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) so clearly told the House, for the first time in the history of the realm the Government are imposing a tax on water — a basic commodity. That is what the orders mean. Conservative Members are as worried about that as we are. In the Minister's final words he sought to sell the concept of a tax on water on the basis that he would privatise the nationalised water industry. A tax on water is as repulsive to Conservative Members as it is to us.

The Minister talked about water companies and the extent of their operations. It occurred to me to ask whether the order is hybrid. Does it affect the water companies or only the water boards?

Mr. Gow

The orders apply only to the water authorities.

Mr. Oakes

Some of the water companies supply water. One part of the supply of water is involved, but not the other. That smacks of hybridity.

Government Back Benchers must be puzzled at the Government's action. Last night there was a three-line Whip on the rate capping of local authorities because they are spending too much. Today Tory Members are operating on a three-line Whip to order water authorities to charge the consumer more.

I shall be brief because many right hon. and hon. Members wish to take part in the debate. I want to discuss the nature of water rates. One has control over the consumption of gas or electricity, but no control over the consumption of water. Even if one does not limit the amount of water one uses, one still pays the same rate. The whole rating system tends to be regressive, but water rates are particularly so.

I sympathise with the poor people who are not on supplementary benefit and who will have to pay this Government-imposd levy without rebate. The Minister said that he is unable to allow rebates. For the average household the increase will be £11 or £12 a year. That will be a considerable increase for all our constituents.

People are being taxed but cannot fight back. That is why hon. Members will resist the order. In a cowardly way the Government are trying to place responsibility for their tax on the already unpopular water authorities. The public should realise that we are talking about a tax. For the first time a Government are taxing water. They are trying to push it through the Lobbies tonight by promising their hon. Friends privatisation.

6.15 pm

Mr. David Howell (Guildford)

I hope that my hon. Friend the Minister for Housing and Construction will take the Government's proposal for 1985–86 back to the Treasury and change it, although I realise that he cannot because he is bound by the writ of the autumn statement on public spending.

I regard the Minister as one of the most courteous in the Government. He is scrupulously attentive to the worries of the House, but this time he has been sold a pup by the Treasury. He now has the miserable duty of trying to sell it to the House. I should have no qualms if we were dealing with a matter which was unpopular but for which the intellectual foundations were right. All Governments have to put forward unpopular measures which are difficult to sell and it would be absurd if Government supporters ran away every time that that happened, no matter how difficult the sales task.

I do not hesitate to support a policy that seeks to improve the financial organisation of nationalised industries and to establish a proper basis for recovering their long-term costs, provided that those costs and the assets which have to be financed are properly valued. I fear that in this case that proper evaluation has not been worked out.

As the Minister said, Price Waterhouse recommended current Government accounting for nationalised industries in 1981, and that was accepted by the Government at the time. However, that is four years ago and since then the accounting profession has split about the virtue of CCA. We are also living in a far less inflationary age—thank goodness—so the situation is different.

It was agreed four years ago that CCA was right and the water boards accepted it. However, there was no agreement about setting a financial target which produces, when translated into historic costs, a rate of return on capital higher than that earned by ICI and other major industrial companies when that organisation is a monopoly. CCA has the effect of vastly uprating the value of the capital assets of any organisation, particularly a water authority.

What would happen if those rules were applied in the private sector? Parts of ICI have a natural monopoly, but great care is taken not to push up to astronomical heights the rates of return on a historical basis. The question of whether CCA should be used involves a different debate. The key difficulty lies in the use by the Government of the words "adequate rate of return." The figure of 1 per cent. sounds miserable when applied through current cost accounting to the colossally inflated value of the assets of some gigantic organisation such as the Thames water authority. However, in the language of historical costs, that produces a return higher than that earned by ICI. In applying financial targets, caution and balance have to be used. I cannot see where the caution and balance are being used in this application of policy.

The current cost accounting method, which is now under intensive dispute among accountants, must be treated cautiously. It inflates asset values enormously and it inflates the depreciation which must then be covered by income to finance those asset values. In the case of the Thames water authority — I am concentrating on that authority not only because my constituency comes within it but because it is such a glaring case of all that can go wrong when one applies this sort of policy too rigidly—the amount of depreciation that is required by what is proposed is three times what Thames believes it needs fully to replace its assets and maintain them in high quality order.

Under the Government's plans, the authority will be investing less than it would otherwise wish to do.

Mr. Jackson

Is my right hon. Friend aware that the net asset value of British Telecom is £8.4 billion, which, on the basis of the valuation of Thames water authority's assets, means that that authority is more than half the size of BT?

Mr. Howell

That illustrates the absurdity of the approach. CCA may be the general basis on which nationalised industries operate, but it must be applied with great sensitivity to different types of industries.

Even in the case of water authorities, there is a convention by which the value of assets, certainly those in place before 1981, is abated by 40 per cent. I suspect, however, that even that asset valuation is highly doubtful because one must bear in mind the replacement cost of a sewer, reservoir or installation, which has a life of perhaps 800 years. Is the replacement cost to include the cost of digging another hole for another reservoir or a new sewer?

One need only ask such questions to see the basic absurdity of building up a gigantic capital value, on which a rate of return is then calculated and which inevitably looks minuscule. It is clear that a mistake has been made somewhere in the Whitehall machine. I do not blame Ministers at the Department of the Environment in particular—they have had a heavy load to bear in other areas—but it looks as though they missed this one.

The Minister of State says that he has been even-handed as between water authorities, and I see his feeling about the virtue in that. But why was the Treasury even-handed as between what are very different concerns? The Thames water authority is by far the largest. It is a gigantic outfit and a wholly different business proposition. It is much better equipped than the other water authorities and, above all, it is paying off its debt and returning money to the Government. It has what is called in the jargon a negative EFL—a negative external financing limit—so that it is a different proposition.

It would have been a happier outcome for these affairs if, instead of even-handedness in the literal sense of applying a broad and unsatisfactory formula to all authorities, more sensitivity had been shown as between the different water authorities, some of which operate under completely different conditions. Hon. Members in all parts of the House could speak of the different problems that affect water authorities in different parts of the country.

I fear that this issue has been handled carelessly in the bowels of Whitehall. I do not like to see the Minister of State loaded with the duty of having to present such a weak case. It sounds as though it has been formulated not on the basis of rational argument, discussion and understanding of the nature of the industries concerned, and not even on the basis of trying to establish, within the overall framework of the Government's correct policy for the nationalised industries, different details for different industries. It has been settled on the basis of saying, "Do not bother me with facts. These are the figures. You make them fit." I do not like to see policy made on that basis and I hope that it is not symptomatic of anything deeper inside the policy-making machine in the Treasury and Whitehall. The position should be corrected, although the Minister explained that unfortunately he is not free to correct it. At least let us hope that next year the same unhappy and intellectually unsound basis for dealing with the accounts of a body such as the Thames water authority are corrected. In the meantime, I would find it impossible to support the Government in the proposals as set before us.

6.26 pm

Mr. William O'Brien (Normanton)

I join the right hon. Member for Guildford (Mr. Howell) in saying that some gross errors have been made in the Treasury's bookkeeping relating to the water industry. I hope that his hon. Friends noted what he said about the financing of regional water authorities.

I support the motion for a number of reasons, not least because of the 4.5 million people in the Yorkshire and Humberside area who will be affected by this legislation a substantial number will suffer hardship. The Labour group for the region is strongly opposed to the order because, as has been pointed out, many householders will not qualify for supplementary benefit or other help towards the additional costs that will be imposed upon them. Housing benefit does not include a refund in respect of water charges. It is clear that the Government are deliberately creating hardship for many people.

Hon. Members, including Conservative Members who represent Yorkshire constituencies, have been asked to oppose the order. I hope that they will heed that appeal. Whatever may be said about the possibility of privatising the water authorities in the future, we must consider the costs that will fall on consumers now. There was no more than a hint from the Minister that privatisation might come in due course. It is clear that before that stage is reached the consumers will be paying dearly.

Even the CBI, a friend of the Government, states in its parliamentary brief that industry, already struggling for survival in the competitive world in which we live, will be caused additional expense, perhaps of as much as £100 million a year, as a result of the order. The Minister said that it was hoped that in future years the regional water authorities would be given more notice of orders such as this. It is clear, therefore, that water charges will increase and that there will be greater hardship for those who rely on the regional water authorities.

The CBI warns that, unless industry is buttressed against the proposed increases, the additional cost could cause further unemployment. That is a stark warning from an organisation which has supported the Government throughout. The CBI confirms what my right hon. Friend the Member for Halton (Mr. Oakes) said about this being a tax on water. It says that the regional water authorities will be tax collectors for the Government. One way to change, the proposal is by supporting the motion, and I hope that Conservative Members will give that serious consideration.

Reference has been made to average increases and the way that they will affect householders. 'The Minister mentioned averages. We were not told the average rate assessment that was taken into consideration. In the Yorkshire area the increase is based on an average rateable value of £135. What will happen to people on fixed incomes, and pensioners who will not qualify for rebate and whose rateable assessment is above that? Their increases will be substantially more.

The Minister said that the increase for domestic consumers in Yorkshire would be 12.5 per cent. and that the overall increase would be 10.5 per cent. Some Yorkshire domestic ratepayers will have an increase of 19.6 per cent. in their water charges because of the way in which the rating system is applied. Is that a fair or just tax to impose upon consumers?

Consumer councils have been mentioned. When the local consumer council was told that the decision had been taken to increase charges, there was a call from the consumer council for all members of the Yorkshire water authority to resign because the increases would have serious consequences for users in the Yorkshire area. The anxiety expressed by the consumer council should not be underestimated. Consumer councils were set up to tell water authorities of the views of consumers, but no notice has been taken of the anxiety that they have expressed.

Consumers in Yorkshire are worried about the way in which the regional water authority and the Government are attacking consumers. Domestic consumers will suffer in a number of ways from the increases. First, there is an average charge, and it has been pointed out that the average increase in many cases will be three times greater than the rate of inflation. On numerous occasions we have been told by the Prime Minister and other Ministers of the importance of keeping inflation low and under control. In some areas the increase will be five times greater than the rate of inflation. Where is the justice and fairness in that approach to water consumers?

I should like the Minister to take note of a further injustice being caused to domestic ratepayers. The Yorkshire regional water authority is transferring charges for treating foul water and sewage from commercial undertakings to the domestic consumer. That kind of decision can be made without any explanation or notice because the public and press have no right of admission to the meetings of the regional water authorities. Ratepayers and consumers in Yorkshire should be given an explanation of why that transfer is necessary. I ask the Minister to inquire into the circumstances of that decision in the area.

Domestic consumers suffer more than others because they have to pay two standing charges. One is for water, and one for sewerage. We have been told that in the Thames area there is a suggestion that the installation of meters should be mandatory. When I was a member of the Yorkshire water authority, we talked about meters. We said that by using a percentage of the water that had gone through the meter we could assess charges for sewerage and for treating foul water. If that is done, the domestic consumer has to pay one standing charge only. Two standing charges are a great injustice to domestic consumers.

The Minister talked about the Water Act 1973. Section 30 gives water authorities comprehensive powers to fix, and to demand, take and recover such charges for the services performed, facilities provided or rights made available by them". That section has been superseded by the Government's action and by the way in which they are instructing water authorities to fiddle the charges that they are imposing on industry, commercial undertakings and domestic consumers.

The Minister also mentioned the matters that affect charges throughout the nine English regions and the area of the Welsh water authority. I received a copy of a newspaper which highlighted the dramatic rise in water charges and spoke of them as being double the rate of inflation, and referred to consumers paying more towards capital investment. That was not the Daily Mirror or The Sun; it was the Yorkshire water authority's newspaper. The author of the article was the chairman of the authority. The Minister paid him a tribute. The chairman decried the Government's action and the way that they are forcing all water authorities to increase charges by more than they want to.

I find it strange that Gordon Jones, the chairman of the Yorkshire water authority, is criticising the Government for the way in which they are imposing their wishes upon regional water authorities, because the Minister said that, although some water authorities were reluctant to accept the increases, his own chairman had done so without reservation. The chairmen of water authorities must decide whether to support the consumers or the Government. They cannot tell the Minister that they accept the increase and then go back to their regions and criticise the Government. That is why I take off my hat to the chairman of the Thames water authority for his action on this issue.

I remind Conservative Members that their constituents, too, expect their support in seeking to annul the order. I appeal to all of them to vote accordingly today.

6.40 pm

Mrs. Edwina Currie (Derbyshire, South)

I have the good fortune—or misfortune, however one cares to look at it—of being a graduate of Oxford university. One of the intellectual games that we played when I was there was to take a subject to which one felt strong emotional hostility and try to argue in favour of it. That was my approach to today's debate. Having done some reading on the matter, I now conclude that there is a great deal of sense in what the Government are trying to do.

When I used to serve in local government I was responsible for some very large capital programmes, some of over £100 million. But the capital expenditure levels in some water authority reports show an astonishing complacency about the need to repair and replace existing systems, and particularly about the need to provide new systems in areas of population growth and new industrial development. The figures for the past 10 years show no growth at all. Most water authorities seem to have gone backwards.

My husband's family lives in the area of the South-West water authority. Ten years ago that authority's capital expenditure was £18 million and it blithely went on spending roughly that amount for the next decade, although to maintain its programmes at 1974 levels it should have been spending about £38 million by 1979–80.

Mr. Robin Maxwell-Hyslop (Tiverton)

Will my hon. Friend give way as she is referring to my area?

Mrs. Currie

No, I should like to get on. When we spent our holidays there and visited Lundy Island, there was not even any water for the sheep.

Mr. Maxwell-Hyslop

If my hon. Friend knew anything whatever about the south-west, she would know that the water authority's programme of reservoir building was disrupted time and time again by objectors to new reservoirs.

Mrs. Currie

I defer absolutely to my hon. Friend's knowledge of the area, but I took the trouble to read the authority's annual report. The report for the subsequent year, 1977–78, is full of photographs of the chairman, who referred to a feeling of anti-climax and pointed out with great complacency that the reservoirs of Devon were still half full at the end of the subsequent rather wet summer. The figures do not bear out his complacency. I suspect that the £20 million per year being spent would be just about enough to provide a water service for a place like Lundy without taking account of the increase in housing and industry in the area.

Last summer there was another drought and my family and friends again had to use standpipes.

Mr. Maxwell-Hyslop

Sheer ignorance.

Mrs. Currie

My hon. Friend should ask his constituents what they think of the water authority.

Mr. Harris

Will my hon. Friend give way as she is referring to my water authority, too?

Mrs. Currie

No. I have sat through several debates in the past couple of weeks and no one has given way to me. Not one water authority has managed to maintain its 1974–75 capital programme in real terms.

Mr. Steen

Will my hon. Friend give way?

Mrs. Currie

The worst region is Wales, which is spending about £50 million per year when merely to maintain the 1974–75 level would require more than £100 million. It is no wonder that there are problems there. All the water authorities are culpable and it is worth considering why.

In the past, the water authorities' finance has been split between the consumer and the Government. Effectively, the consumer has paid for current expenditure, including debt charges, but as this is not a labour-intensive industry and much of the debt has been written off over the years, we have had cheap water and sewerage on a day-to-day basis. Capital expenditure has been financed at least in part by borrowing. That is part of the public sector borrowing requirement whether we like it or not, and I certainly do not.

Part of the reason why the water authorities have failed to respond to need is that throughout the 1970s pressure on the public sector borrowing requirement by the Labour Government, who had to go cap in hand to the IMF, led to sharp cuts in capital expenditure, not just for the water authorities but for the Health Service, housing and virtually everything else. As my hon. Friend the Minister for Housing and Construction said, in 1978 the Labour Government introduced a White Paper putting the first financial restrictions and constraints on the activities of water authorities. It is sheer humbug for Labour Members to talk about hardship, because they started it.

It has therefore been decided, as I understand it, to cut the water authorities loose from the public sector borrowing requirement. There are several ways of doing that. The Government have chosen to shift the burden of finance entirely from the Government to the consumer and to reduce the present borrowing requirement of £286 million to nil by 1986–87. That is quite neat. It is claimed that it is not inflationary. On the figures that we have heard today, a 12 per cent. increase in water charges will add just one tenth of 1 per cent. to the retail prices index and only £7 to the average domestic bill, so talk of hardship is to a large extent sheer humbug. The effect is certainly far less than that of the recent increase in mortgage interest rates.

The rate of return chosen is 1.9 per cent. by 1987–88 on current cost accounting. That is extremely modest compared with the levels set for other public utilities. The electricity supply industry is being asked to find 2.75 per cent., the gas industry 4 per cent. and British Airways 5.75 per cent. in 1983–84. It is certainly far lower than the 9 per cent. average on current cost accounting reported in the Bank of England Quarterly Bulletin last September for the average of all industries and sectors. The best in the consumer goods sector is the health side, which is returning 16 per cent. in current cost accounting terms and 25 per cent. in historic cost terms; so much for the worries of my hon. Friends about the effect on this sector of limited list prescribing.

I do not know where my right hon. Friend the Member for Guildford (Mr. Howell) got his figures for ICI, but if he got them from the Thames water authority he might consider asking that authority to read the accounts again, as the latest available return for ICI—1983–84—was 6.2 per cent. in current cost terms, which is a great deal more than is being asked of the water authorities.

Mr. David Howell

I got them from Conservative Central Office.

Mrs. Currie

That might explain a good deal.

The only industrial sector to show a return of around 1 per cent. is the car industry. The best that one can say about that is that at least that industry is now beginning to make a profit, and thus a positive return rather than a negative one.

Mr. Freeman

I am following with great attention what my hon. Friend is saying. Can she explain how the water authorities can make sensible judgments about investment decisions without a sensible basis of charging? Without some price-sensitive method of charging, how can the industry judge whether or not to build a reservoir in a particular area?

Mrs. Currie

The water authorities, with their background knowledge of what it costs to replace their assets, are in a better position than anyone else to make such judgments. That is the root of the problem. If they do not allow for adequate depreciation in the cost of replacing their assets, they have to come cap-in-hand to the Government for the money.

I understand—I defer to the professional competence of my hon. Friend the Member for Kettering (Mr. Freeman)—that we are trying to shift the burden from the Government to the consumer. There are other ways of doing that, and perhaps we should ask our hon. Friends to consider them. I suggest that it is intelligent to borrow long term to finance long-term assets. In housing, we borrow over 60 years. I am not the only hon. Member who has had the privilege of climbing on to a JCB machine and pulling down property for which we will still be paying well into the next century.

We could, and should, take the water authorities out of the PSBR all together. I suspect that we could do that by fiat, in much the same way as we decide week by week which measurement of money supply—M1, M2 or M3 —we will use that week to make a judgment about the growth or decline in the money supply.

However, it would be better to do it properly. I should prefer to see those bodies returned to the private sector altogether. They could then borrow to their hearts content at whatever rate they could get. They could make a profit, and that would be financially lucrative for the Government —if the water authorities are as profitable as they say they are—because they would then pay corporation tax, which they do not now pay.

If we were to privatise the water authorities, irate consumers could become shareholders. Nobody loves the water authorities. There might even be lower charges. Much of my constituency is served by the South Staffordshire water company. That company's charges for water supply are increasing by only 2 per cent. in 1985–86. I commend the company. We might avoid the silly situation that often arises in Derbyshire, which is blessed with the sweetest water in the world, in which local users of traditional springs have to pay a tithe to the Severn-Trent water authority before they can use them. The effects of privatisation on other industries such as freight and shipbuilding have been entirely beneficial.

The Government should decide whether the water authorities are part of Government—in which case they do not need to make a profit, but they should be public and allow the public into their meetings — or they are businesses. If they are businesses, why do the Government own all the capital and set targets of any kind, whether spurious or worth while? I call on the Government to make up their mind.

I set myself a target and I have tried to fulfil it. In all honesty, I say that a Government who are committed to keeping down inflation should be cautious of any price rises and of any increases in taxation, in whatever form they masquerade. The public services require a steady, well-organised and well-funded programme of investment. We should beware of fiddling around with the accounts at the behest of the annuality fiends in the Treasury. The Government have my support tonight, but I look forward to more radical thinking in future.

6.55 pm

Mr. Simon Hughes (Southwark and Bermondsey)

This debate is about the Government's proposal to tax people more for what they drink and, among other things, what they flush. It raises significant constitutional issues about how we should deal with proposals for taxation. The Minister was right to say that on the first three occasions when orders under the 1973 Act came before the House they went through without debate. This is the first occasion on which there has been a challenge to the executive action of fixing the real rate of return — the Government's power to decide how much profit the water authorities should make in the coming year.

There have been protests in the past. Those protests have mounted. The most recent protests were heard, I believe, in the Treasury and Civil Service Select Committee at the end of last year, when my hon. Friend the Member for Colne Valley (Mr. Wainwright) asked the civil servants who were giving evidence for the Treasury in answer to questions on the Chancellor's autumn statement what was the basis of the accounting for the water industry. It seemed to my hon. Friend and to others, including the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark), that it was inappropriate to apply the same tests as elsewhere. Amazingly, the civil servants did not know the basis of the accounting method. If the Minister does not believe me, I refer him to page 34 of the Select Committee minutes of 26 November 1984. That is a worrying start.

As newspapers have made clear, by these orders the Government are taxing through the back door. This is yet another example. They have gradually increased backdoor taxation in the cases of gas and electricity and they are now increasing the proportion of it in the case of the Post Office. When, instead of the finite or relatively finite resources of gas and electricity, or the commercial context of the Post Office, what is involved is—thank God—an infinite resource, people feel that the sticking point has been reached. Water is a resource that everyone gratefully receives and uses. The same principles, therefore, do not necessarily or properly apply to water as apply to gas or electricity.

Some people do not use gas. A few people are not customers for electricity.

Mr. Jackson

The hon. Gentleman says that everybody uses water. Would he not agree that if we were considering this measure as a form of tax it would be highly undesirable, because it would hit the businesses that are heavy consumers of water and discriminate against them in comparison with businesses that are not heavy users?

Mr. Hughes

Yes. There is also a valid question about the relation between how much a customer uses and how much he should pay. However, the fundamental point of the present debate is that what the customers are being asked to pay is far more than the cost of running the service at a profit—the cost of properly managing the water authorities that process and supply the water.

There is another constitutional point. The Minister referred to it in his opening speech. The proposals involve differential levels of taxation. I accept that there may by an argument for making sure that the real rate of return in different water authority areas is similar. It could be justifiably claimed, however — no doubt the hon. Member for Caernarfon (Mr. Wigley) will do so in a moment—that the Welsh people should be asked to pay for what they receive but should not be asked to subsidise what other people across the border receive. There are arguments about the proper relationship between services received and the charges paid. My hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) has told me that, in his area, customers of the private water company in Newcastle contribute half what they pay to the regional water authority's costs of the Kielder dam and all its works, which do not benefit them at all.

There are many discrepancies. However, if there is to be an equivalence of charges, why should it be at an ultimate rate of 5 per cent. in real rate of return as opposed to 1.5 per cent. or 2 per cent., which would itself be more than the rate of return for any water authorities at the moment?

The House normally deals carefully with taxation matters. To protect the rights of citizens, we ensure that we scrutinise carefully anything to do with finance. The injustice here is that we have only an order, debatable for a little more than one hour, concerning a form of taxation that is at its highest ever level for unjustifable reasons. Moreover, the taxation is not being imposed by the Government, who are chosen from Parliament — an elected body—but by bodies that are appointed and the meetings of which, with the excepton of Wales, are closed to the public. The consumer consultative bodies that have been set up to protect consumer interests oppose the tax and we cannot resort to the Audit Commission to get it to investigate what is going on. The only accountability that is available is through the House, and we are given invalid arguments.

The Minister has to make much of the accountancy techniques. Current cost accounting has been used in the past too, but that does not make it any more valid. In the gas industry, pipes must be identified because of dangers that might arise from them. As the hon. Member for Derbyshire, South (Mrs. Currie) said, the assets of the aviation industry are obvious. The assets of water authorities—in the case of Thames, 80 per cent.—are underground. Many water authorities do not have plans of their assets and they certainly do not have detailed knowledge of them. The Government are applying an unrealistic exaggeration of the value of such assets in assessing the current cost. It is no more than an estimate and it is based on an inaccurate and unverifiable premise.

The proposals are amazingly inconsistent with Government policy. The Minister said that everyone must increase their payments to reduce their borrowing. I should like to quote from a letter that the chairman of Thames water sent to hon. Members. He wrote: Ministers frequently argue that repayments of debt followed by a continuing paying to Treasury are only to be expected in the case of Thames because we have a relatively low level of outstanding debt—in other words a low interest burden. The impression is given that we enjoy a 'windfall' advantage. The simple reason why Thames has a low level of borrowing is because Thames and its predecessors followed prudent spending and financing policies for years. We avoided the costs of borrowing. Ministers appear to be saying that past efforts don't count. It is rather like saying that I have a low mortgage, partly paid off. My neighbour has a newer and higher mortgage. Since we are equally wealthy we should pay the same. My mortgage is quickly paid off but since I can obviously afford to pay I have to continue to pay out the money. It is also inconsistent to argue that, although Thames water has a lower debt burden, it must accelerate its rate of repayment. Like other water authorities, Thames is a commercial enterprise and does not need to repay that amount of money.

There is another constitutional argument which shows how flawed the Government's arguments are. We still have private water companies. If, with the same level of profits, they increased their charges to their consumers by the same level — 10 per cent. — they would be acting illegally. It is wrong to have different standards and the Government should ensure that the monopolies—water authorities—do not exploit their position.

Like other water authorities, Thames water has made it clear that it needs money to invest in infrastructure. We know that 25 per cent. of the water that is gathered is lost as it flows round the pipes. It is ludicrous to require water authorities to reduce capital investment because the Government want money to be paid back. All the demands are for investment in infrastructure to increase. All hon. Members will have seen local press reports outlining water authorities' need for more money to spend on infrastructure. I have a press cutting for 30 January which says: Huge spending cuts in flood-protection and land-drainage by the Severn-Trent Water Authority have come under attack. The Lynn News and Advertiser reported: Threats of delays in providing long-awaited sewerage schemes in West Norfolk have been strongly criticised … Anglian Water has suggested that schemes at Castle Acre … could be postponed". The Grantham Journal reported: A major review of all new water supply, sewerage and sewage treatment projects in the region is being carried out by Anglian Water because of the financial squeeze. Sheffield's Morning Telegraph reported: Repairs to Sheffield's Victorian sewerage system have been delayed by cash shortages. Building reported: Sutton is having talks with Thames Water Authority to ask it to divert more money because there is not enough money for the sewage replacement works in its area. During the recent freezing weather, people in Rotherhithe had to use standpipes in part at least because we have not the investment necessary to provide the perfect service.

The Government's policy does not work socially or economically. Consultative committees have written to hon. Members saying that, although they were set up to be consulted by the Government, the Government seemed determined to ignore their views. We also conclude that the Government's policy has no logic in economic terms. They rate cap local authorities one minute and then rate up water authorities the next. There is no incentive for management in water authorities to do the job that they have set out competently and professionally to do. The fight against inflation will suffer, the commitment of board members in water authorities will be impaired, employee motivation will suffer and eventually customers will suffer as they will have to pay more. The Government will be the only possible beneficiary. They are making an unjustified claim and I hope that the Minister realises that the logic of the Government's case is clearly flawed.

7.7 pm

Mr. Robin Maxwell-Hyslop (Tiverton)

I was interested to hear from my hon. Friend the Minister the advice that that eminent firm of consulting engineers—Price Waterhouse — has given. Its knowledge of the condition of mains pipes throughout the United Kingdom must be second to none. That is what we are talking about —wholly spurious figures which might seem convincing to Messrs. Price Waterhouse but which are meant to represent a perceptible reality when they appear in the books of water authorities. If they are not meant to represent a perceptible reality, they are not a sensible base on which to attach a return, whatever the figure might be.

I am grateful to my hon. Friend the Minister for bringing me a glass of water.

Mr. Harris

No charge.

Mr. Maxwell-Hyslop

We need not waste time on absurd speeches such as that we have heard from my hon. Friend the Member for Derbyshire, South (Mrs. Currie), who seems to be under the impression that Lundy is the responsibility of the South-West water authority. If she reads the Water Act 1973, even her own eyes will tell her that it is not.

Mrs. Currie

May IȔ

Mr. Maxwell-Hyslop

Yes, she may go and read the Act. If my hon. Friend were familiar with the history of the South-West water authority of the past decade and a half, she would know that delays went into years, not months, for example at Meldon reservoir. Plans for Swincombe reservoir were frustrated, and it did not come into existence. If those reservoirs had functioned when they should have, the picture of drought would have been wholly different. The delay at Roadford reservoir prevented it from functioning during last year's drought. She made no reference to that, although she claimed some expertise.

Mrs. Currie

roseȔ

Mr. Maxwell-Hyslop

I shall give way as often as my hon. Friend did, which is once, and when I come to a suitable point. To import such deplorable ignorance about the South-West water authority into such a debate is not a service to the House. I shall give way when I have finished dealing with such nonsense.

The debate is not about how one costs aeroplanes or visible things with a known maintenance cost and visible attrition. It is about what are technically termed assets, but which can be a liability because the cost of replacing them can be even higher than starting the scheme de novo, which obviously is not the case. We are dealing with a historic network that in many cases bears no relationship to the pattern of the authority which exists today, and which at hideous cost links the disparate parts of the system so that they relate the pattern of population and demand today to the resources.

Mrs. Currie

I am grateful to my hon. Friend for the gracious way in which he has given way. It was no part of my case to suggest to him anything other than my ignorance of his area and his considerable knowledge of it. I did not say that Lundy was part of that water authority area, but merely that the cost of providing a service to such a place would have taken the entire capital programme of the water authority at the time. Does my hon. Friend agree that the kind of capital programme that he advocates, and, indeed, which is needed in the South-West water authority, would cost a great deal of money and result in a substantial increase in charges to his constituents, whatever accounting system is used?

Mr. Maxwell-Hyslop

We could have had three times the capital programme for the same cost if the water authority had been allowed to conduct itself as a business, which is what Ministers often exhort it to do. The previous chairman of the South-West water authority wanted to borrow money at 8ߪ5 per cent., but was forced to go to the Public Works Loan Board and borrow at up to 22 per cent. Exhortations to behave like a business are followed by interdictions on so doing.

An authority is still not allowed to behave like a business or to borrow money as a good business man would. It is forced to adopt accounting practices which attach a wholly artificial value to what are not assets. They are not assets if they require extra reservoir capacity because they leak like sieves, and cause constant complaints about discoloured water because they are made of old flaking pipes that are scaled up, and if they are subject to variations in pressure at times of low flow from some sources, or when demand is highest when it is swollen to three times its normal size in the summer. To treat those as assets, as in the ridiculous computation by Price Waterhouse, and to expect a putative return on them is the sort of nonsense that I do not expect from a Conservative Government, and which I do not intend to support.

A dangerous heresy was nearly expressed—that was, of regarding water authorities as if they were owned by the state. They are not. The component parts of the South-West water authority were owned by the local authorities concerned, and have never been owned by central Government. There is no parallel between the financial disciplines, in terms of yielding a net yield to central Government, imposed on gas or electricity, which are owned by central Government, and those of local water authorities, which are not. The Government are endeavouring to generate employment, especially in the peripheral areas, by holding down avoidable costs in local authorities in the form of rates. It is wholly counter to that policy artificially to force up the costs of the charges imposed by water authorities. The costs are not confined only to supplying water and removing foul water and sewage, but include environmental charges, which are pure taxation. The decisions that lead to environmental charges are political, not business decisions. Yet they take place in secret and with the press excluded from the deliberations leading to them. That is an undeniable fact.

We are dealing with a matter that runs counter to much of the Government's policy — which I support — to minimise costs, generate new enterprises, and reduce as far as possible the capital requirements on new entrepreneurs. That is cut away if, with the other hand, one imposes on them wholly avoidable costs.

It is not good practice to say that capital equipment with a long service life should be financed from revenue rather than borrowing. That is exactly what borrowing is for. The borrowing of which we disapprove is the borrowing from a failure to balance current accounts: it is borrowing in substitution for income on current account, not capital account. We must let the authorities behave like businesses and exercise business acumen about where to borrow. We must not force them into the public borrowing sector. There is no earthly reason why they should not have borrowed on the continent instead of from the Public Works Loan Board. That is the crux of the matter. We do not get out of nonsense of that kind—the Government have it in their power to rectify it by a stroke of legislation —by supplementing it with nonsense of this kind.

As statutory instruments cannot be amended, the best thing to do is to invite the Minister to withdraw them. That is always open to him, and it is the sensible thing to do. Other Ministers have done it in the past. The sensible thing is to treat the statutory instruments as though they were presented in draft form to the House, to collect the views of the House, and to withdraw them. The orders should not be passed into law. If the Government seek to do that, they will do so with the opposition of many hon. Members, not with their consent.

7.19 pm

Mr. Dafydd Wigley (Caernarfon)

As hon. Members will recall from previous debates, water in Wales is a burning issue. Indeed, it is hot water that has become even hotter today. Wales is in the unenviable position of suffering from excess rainfall, which leads to floods, and of having inadequate reservoir and water networks, which leads to drought in summer. It exports water to regions such as the Severn-Trent water authority and the North-West water authority, but Welsh consumers pay twice as much rate poundage as the consumers in those areas. Wales seems to get the worst of all worlds.

Perhaps I may describe the background against which we are considering the orders. In Wales, water rates are considerably higher than those in the rest of the country, and have been twice as high as those in nearby areas. It is interesting to consider the report of the Comptroller and Auditor General for 1983–84, which shows that in the average household bill in Wales water charges account for £47.76. That compares with an average in England of £33.87, and it is interesting to note that the figure for Severn-Trent is £30.27 and for the north-west is £31.15. A 10 per cent. increase in Wales, which will also be hard hit by the orders—we are agreed that they are bad for everyone—will mean an increase in real terms of £4.76. In the north-west area, the increase will be £3.03. Therefore, the increase in Wales will be 50 per cent. higher in real terms than the increase in the north-west area, yet in Wales disposable income is lower than in many regions of England. The position is extremely bad.

The position could be improved in two ways. First, the Welsh water authority could obtain adequate payment for the water that it exports to other areas. The recent High Court case against the Welsh water authorty, to which Plaid Cymru was a party, was settled out of court, with the water authority recognising that it had the right to charge more for the water that it sends to other authorities in England. The Welsh water authority may have been a little slow in catching on to that, but the Severn-Trent authority was not. The Western Mail of 21 January, under the headline, "Water bills for city trebled by authority", states: Birmingham is trebling the price of Welsh water … and selling it to Liverpool. Birmingham — which has always insisted that Wales cannot make a profit out of selling water to England, has increased its bill to Liverpool from £360,000 to around £1 million. The other way of getting a fairer deal, if we must have a near uniform rate of return on capital to which the orders refer, would be to have an even scale of charges in England and Wales. We pay the same price for a Mars bar whether we buy it in Birmingham or in Caernarfon; why do we not do that with water? It would be more equitable. But Wales gets neither a fair price for the water taken out nor equal charges. As I said, Wales gets the worst of both worlds.

The increases have been introduced against that background. For the first time, there is a statutory requirement on water authorities to make specified profits that are higher than many of the water authorities would have wished. Many hon. Members have referred to the rebellion of the Thames water authority. That rebellion is partly because the increase is a tax. It is a tax without representation, because the water authorities that impose such charges are not elected bodies. That is a bad principle.

The chairman of the Welsh water authority led us to expect a decrease in real terms in water rates this year. In a letter that he sent on 30 November to the local advisory councils in Wales, he said that, although the authority had hoped for a 2.5 per cent. decrease in real terms, the Government's policies announced in November had made that impossible. The letter stated that the proposals of the Government are to do this by a combination of higher target financial returns and much lower borrowing limits. As a result of this Governmental policy decision, the Authority can no longer restrain the increases in charges below the increase in the RPI. The new financial constraints are such that we will have to raise charges by considerably more than this in each of the next three years. That is, indeed, bad news.

Mr. Donald Coleman (Neath)

Will the hon. Gentleman care to comment on the other position adopted by the Government? If this were a local authority that wished to increase its charges, it would be rate capped.

Mr. Wigley

That is the great irony. Only last night the House was debating rate-capping legislation which stops authorities increasing their charges, yet here is a specific provision to increase charges. Not surprisingly, there has been a massive reaction in Wales and elsewhere. One is reminded of the water rate rebellion in Wales three years ago, when 20,000 people withheld their water rates. The Government are heading towards stirring up a similar reaction.

In a letter of 22 January to the Secretary of State for Wales, the consumer advisory committee of Gwynedd says: At a special meeting of my Committee held yesterday members expressed their great personal concern, and the concern of the consumers they represent, at the Welsh Water Authority's proposal to increase their charges by 30 per cent. over the next three years. They were further incensed when they recalled statements made last year by the Chairman of the Water Authority that it was the firm intention that annual increases be kept within the level of the retail price index. Members were given to understand that this undertaking could have been fulfilled but for the intervention of the Government in November 1984 … It is the stated hope of my committee that there will be less Government intervention in future in the operations of the Water Authority. That letter is signed by Mr. Vernon Hughes.

The National Farmers Union also wrote to me, and perhaps I may quote from the original: Mae ein aelodau yn methu a deall sut mae yr Awdurdod yn medru cysdiro codi y pris cymaint dros ben lefel chwyddiant yn y wiad. —[Laughter.] Hon. Members may laugh. I am used to that reaction from certain hon. Members but for the benefit of hon. Members I shall translate the letter. It states: Our members fail to understand how the Authority is able to consider increasing the price so much above the level of inflation in the country. That is especially pertinent in Wales, because many farmers are milk producers, who have been clobbered from another direction because of the ineptitude of the Government.

The Parliamentary Under-Secretary of State for Wales (Mr. Wyn Roberts)

The hon. Gentleman will realise that we do not yet know precisely by how much the Welsh water authority will increase its charges next year, because it has yet to meet to decide that. However, there will be at least three elements in the decision. The authority must allow for inflation when it decides the increase in charges. Another factor in domestic charges relates to the transfer of costs from the non-domestic sector, and there is also the factor caused by the change in Government targets. The change in targets amounts to only about 2.75 per cent. of the proposed overall increase in charges.

Mr. Wigley

Once again, the Minister's figures do not add up. Of course, there are swings and roundabouts, and some people will have higher increases than others because of the move towards an equalising of charges within the Welsh water authority area. Everyone recognises that, but the chairman of the authority was talking about an average increase of 30 per cent. over three years, not about a maximum increase. The Minister says that there is inflation. Of course, there is, but the Welsh water authority has been especially effective in keeping down costs, and, without the Government's interference, it would have increased its charges by about half the retail price index for the coming year. That argument is disposed of.

Sir Anthony Meyer (Clwyd, North-West)

roseȔ

Mr. Wigley

I have not quite finished with the Minister yet. His third argument was the effect of the Government's proposals, and I shall come to that in a moment.

Sir Anthony Meyer

One reason why the Welsh water authority has been so effective in keeping down costs is that it was reorganised by my right hon. Friend the Secretary of State for Wales, in the face of intense opposition.

Mr. Wigley

There have been reorganisations and some have been beneficial. Some have led to problems for the consumers, but they have led to lower operating costs and we should be seeing the benefit of that in our water bills. We are not, because of Government policies.

What we are seeing is an increase in the water capital investment programme in England and Wales for the next year from £686 million to £769 million. That is an increase of £83 million in the investment that the Government recognise is needed in the water industry.

The hon. Member for Derbyshire, South (Mrs. Currie) referred to projects that need to be undertaken. We in Wales know from last summer's drought and from the floods of a few years ago of the expenditure needed, and I recognise that other areas have needs as well. There is recognition by the Government of a need for £83 million more in capital expenditure, but at the same time the Government, because of their monetarist and cash limits policies, have decreased the external financial limit from £264 million to £183 million, which is a drop of £81 million. Taking those two together, this is a difference of £164 million that has to be met; a shortfall of £164 million.

So the Government say that they are going to increase the rate of return from 1 per cent. to 1.4 per cent. That is an increase of 40 per cent. The return last year was some £400 million over England and Wales, and 40 per cent. of £400 million is £160 million. That more or less balances the books. But the Government cannot escape the criticism being made from this side of the House particularly that it is their policy of cash limits and reducing the available capital that is leading to the need for the excuse of getting a higher return on capital. It is not a matter of following a theoretical conception—or perhaps it is. I will come back to that. It would appear that there is a need to find £160 million and therefore there has to be this theoretical justification of a required return on capital.

Responding to the Minister's point that it was not the Government that caused the problem with increased charges in Wales, they most certainly made things worse. In Wales, the return last year was already 1.47 per cent. Therefore, one can expect little additional revenue to come from the return on capital of 1.45 per cent. stipulated in this order. But there is a need next year for £14 million more in terms of the capital expenditure that the Government have sanctioned for Wales, and by 1987–88 there is a need for £35 million more. If that £35 million is to be funded by increasing the profits generated by the authority and retained for capital expenditure, that needs a return of over 2.5 per cent. on the assets of the authority by 1987–88. That is the logic of what the Government have sanctioned on the one hand by the capital investment programme that they have boasted of in Committees and elsewhere and which is needed, and on the other hand by the restrictions that they announced last November in the external financial limit. Therefore, there is a need for an increase of £35 million, which is equivalent to some 30 per cent. over the three years. That has come directly from the Government's own policies, and the Minister cannot escape from it.

Turning to the background of this whole issue, it is a move towards privatisation. As the hon. Member for Birmingham, Perry Barr (Mr. Rooker), who opened the debate for the Opposition, said, we have to consider it in the context of the "Nationalised Industries Legislation Consultation Proposals", which were lodged in the House only five days before Christmas. This is directly relevant to what we are discussing, because it refers to the private sector companies being regulated by a common set of statutory provisions and says that the Government considers that it would be advantageous if a single Act set out the core framework to be applied to nationalised industries. It goes on—and this is very important—to say that one of the six elements that it refers to in such legislation would be the formation of companies and privatisation. If we look at the list of the industries that would be privatised we see, in annex A, the Welsh water authority.

In other words, what we are seeing tonight is the first step along the road towards privatisation. What we have in the document lodged five days before Christmas, when some people were in an alcoholic haze, apparently, according to comments heard earlier tonight, is a framework to get the accounts of water authorities in a format that will be transparent to those who may want to make a take-over bid, that is, these proposals are meant to make the road to privatisation easier.

There we have it. These orders are not just a pragmatic response to a shortage of cash in the water industry; they are a step towards the privatisation of the industry, not only in Wales but elsewhere, as part of an overall privatisation package which, side by side with cash limits, is giving the problems which Wales and other areas will have to pay for by a 30 per cent. increase in water charges.

7.35 pm

Mr. Michael Stern (Bristol, North-West)

I think it might be helpful if I were to review briefly some of the principles on which these orders are based. The Government, in putting them forward, wish to achieve, among other things, three things in the water industry. First, they wish to see increased investment; secondly, they wish to reduce public borrowing; and, thirdly, they wish to encourage water authorities to achieve on publicly owned assets what the Government consider to be a reasonable rate of return. It occurs to me, particularly listening to the debate tonight, that, far from being criticised for these aims, the Government could almost be criticised for not going hard enough for them. Let me just elucidate that point.

We are all in favour of increased investment in the water industry. I have heard that cry many times from both sides of the House. What it would seem the Opposition parties are against—indeed, they seem to have struck a chord of sympathy in one or two of my hon. Friends—is not so much the investment as paying for it. I have often wondered, particularly in the years before I entered the House, why it was that it was always future generations that seemed to be being caned for the fact that past generations had put in investment and not paid for it. I am beginning to understand why, because there is this reluctance to link the two necessary facts, that investment is not going to drop into our laps from on high, and that it has to be paid for. So, when we talk tonight about increased investment, should we be surprised that there are going to be increased charges to pay for it?

One of the objectives of these orders is to reduce public borrowing. I am not surprised that the Opposition parties are against the orders, because they are not very keen on reducing public borrowing. All the Opposition parties fought the last general election on the basis of increasing public borrowing. They were soundly defeated. I hope, for the sake of the political careers of myself and my hon. Friends, that they will be so again. Nevertheless, the aim of the orders is to reduce public borrowing. That inevitably brings with it the possibility that charges will go up.

The third objective which is a basis for these orders is to produce what the Government consider a reasonable rate of return on net assets. The Government have set as a reasonable rate of return 5 per cent. on new investment, and 1.4 per cent. rising to 1.9 per cent. in 1987–88 on existing assets valued on current costs. We have heard many protests at this rate of investment tonight. I assure my hon. Friends — the Opposition parties will not be interested, because they do not believe in a rate of return on public assets—that if we are looking at privatisation of parts of the water industry, with the exception of the Thames water authority, we have a long way to go before we will produce a rate of return which the market will find attractive to enable us to privatise these public assets at the proper price. The rates of return quoted by the Government are by no means exceptional in large companies which are trying to utilise their assets. If anything, in my view, as a practising accountant, the Government have been overgenerous to the water authorities in the past and are sensibly taking the view that it will take time to catch up.

Those are the principles on which these orders seem to be based. We have heard a lot about those authorities which object to the orders, but there was one authority which was referred to by the hon. Member for Birmingham, Perry Barr (Mr. Rooker) as not having sent in any information. That is not surprising, because it is an authority which totally disproves his case. It is the authority which covers my constituency — the Wessex water authority.

I wish to comment briefly on the effect of the orders on the Wessex water authority to show that, far from being the gross attack on water authorities that they have been painted, the orders highlight the effect on an authority which for a number of years has run on a sound financial basis. It has invested sensibly over those years and has conducted all possible economies, and after these orders the Wessex authority will be able to go into the world perfectly able to offer a reasonable service to its customers.

The chairman of the Wessex water authority, Mr. Malcolm Anson, points out: we have a compelling need to increase the level of investment above that which has been permitted in recent years and, particularly, above the level permitted in the current year, if we are to arrest the decay of old assets, maintain, let alone improve, our levels of service, provide for growth in the region and meet our statutory duties under the Control of Pollution Act and other regulations. This has been recognised by the Government"Ȕ in the external financial limit which has been set. the setting of the financial target for Wessex at 1.4 per cent. simply provides another reason for doing something which we would have needed to do in any case … I hope … you will feel that the Return on Assets Order 1985 is beneficial in its implications for your Wessex constituents and that you will feel able to support it. I reassure the chairman that I have every intention of supporting this order.

The amazing difference between a well-run authority such as Wessex and some of the complaints that we have heard today is also revealed in a reply which the chairman of the Wessex authority has given to the CBI, whose views were quoted with approval by several hon. Members. He said: I do not believe that it is generally true that the setting of financial targets in the form of return on assets is unnecessarily adding to charges. It is not so in Wessex … It is past capital expenditure on storage, mains, telemetry and automation that has enabled us in Wessex, in the last ten years, to get through two droughts, a strike and exceptionally severe winter storms without any real inconvenience to industry or our other customers, and at the same time to reduce operating costs by 2 per cent. per annum for the past four years—a trend which is continuing. For the future, I believe that the levels of investment now proposed are what industry should be asking for and supporting. It is clear that there is a dichotomy of views between the water authorities about the effect of these orders. Following the comments of my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop), I hesitate to dare to comment on other authorities, but although some may have particular problems because of the way they have been managed in the past and the effects of financial targets, with the exception of Thames, the position by and large cannot be nearly as bad as some hon. Members have tried to make out. It is only fair to remind the House that I speak as a practising accountant and a member of the firm of Harpern and Woolf, which has been involved in the debate on current cost accounting. I also speak as an opponent of current cost accounting, and have consistently opposed SAP 16. I was delighted when it was withdrawn. Although there is no black and white in accountancy, I believe that one or two industries are perhaps less inappropriate for current cost accounting than others. Those industries can be distinguished by the fact that, whether we use the term "fixed assets" or "fixed negative assets", their assets have extremely long lives. As a result, the depreciation charges included in their accounts which are based on those assets are totally meaningless if based on historical costs.

As an opponent of current cost accounting, I accept that CCA has at best been an imperfect substitute. However, in the case of industries such as water authorities, CCA is probably a better substitute than historical costs. I was delighted to see that, in his financial report in October, the chairman of the Thames water authority agreed.

Any chairman of a body such as a water authority has an opportunity either to use current cost accounting or to say in his report that he believes it to be inappropriate for his industry. That opportunity was not taken by the chairman of the Thames water authority, who signed the accounts without such a rider. Indeed, his auditors, Arthur Andersen — not consulting engineers, -but nevertheless auditors used to looking at accounting principles — approved those accounts despite the fact that the chairman and his director of finance did not add a rider about current cost accounting.

That report states: the current cost convention is not a system of accounting for general inflation, but allows for price changes specific to the Authority's operations". In other words, the chairman is agreeing with me and is saying that, although CCA is imperfect, it is appropriate to the operation of a water authority. The chairman adds: In the current cost accounts, all fixed assets are depreciated over their estimated useful lives". Those lives are set out in the report.

Therefore, I was somewhat surprised to read in a letter from the Thames water authority that there has been a conversion on the road to Damascus and that the chairman now totally disagrees with the report that he signed four months ago. He now believes that the asset lives included in his authority's report are inappropriate for the purpose of fixing rates of return. I am not sure, however, to what other purpose accounts should be put in an authority of that size. Despite the chairman's absence of adverse comment four months previously, he also believes that CCA is wholly inappropriate to the operations of Thames Water and the relationship between accounts and the rate of return which is inevitably based on those accounts.

My right hon. Friend the Member for Guildford (Mr. Howell) said that CCA was an imperfect tool and that it should not be used as a method of fixing a rate of return. His point was echoed with greater force by the hon. Member for Southwark and Bermondsey (Mr. Hughes). However imperfect CCA may be as a means of fixing rate of return, it is the best guide we have. It is certainly far better in the case of a water authority than the historical cost convention, which on asset lives of about 200 years is wholly inappropriate. I accept that current cost accounting must be treated with caution, but nevertheless it is far better than anything else available.

Mr. Jackson

What is my hon. Friend's estimate of the effect on charges in his area of the application of a 5 per cent. rate of return on a current cost accounting assessment of the assets?

Mr. Stern

In the Wessex water authority, the charges next year are expected to rise by 11 to 12 per cent. after the application of the required rate of return to assets valued under the current cost accounting practice.

Mr. Maxwell-Hyslop

I have the impression that the form of argument of my hon. Friend is that an aeroplane with one wing is better than an aeroplane with no wings, whereas I would say that neither was any use for flying.

Mr. Stern

My hon. Friend, with his customary humour, has slightly twisted my point. I was saying that the only way of fixing a rate of return and of measuring the public's use of the public's assets is by valuing the assets that are being used. I do not agree with my hon. Friend about aeroplanes because they have far too short a life for current cost accounting to be wholly appropriate. We are discussing assets with a life of between 100 and 200 years. In that case, current cost accounting can be appropriate. In adopting a financial target and in conducting a financial exercise we must use a financial tool, and current cost accounting is the best tool available.

Mr. Simon Hughes

Will the hon. Gentleman accept that one of the reasons that the chairman and the board of Thames water are unable to accept the Government's present policy is because, the higher the rate of return, the greater the inadequacies of the accounting mechanism that are revealed, particularly with this mechanism, although it may be better than others. However, I take the point of my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) that if one demands—and there is demand this year—a greater rate of return, the result of working on an inadequate premise is multiplied many times in the inadequacy of the criterion that the Government are now applying. We ought to allow Thames water to make that judgment, as the hon. Gentleman said, rather than suggest that the Government make it for the authority.

Mr. Stern

I would not agree in any way with the hon. Gentleman. The rate of return is merely a factor applied to a value. The closer one can arrive at the true value to the authority of an asset or group of assets, the more accurate the rate of return will be. The suggestion that we should move away from current cost accounting because it gives an inconvenient result to Thames water is wholly opposed to the principle of trying to find the most accurate possible method of measurement of the way in which public assets are being used.

I hope that I have demonstrated that the opinion of one authority has changed in the course of four months from the time that it produced and signed a public document to the time that it realised the effects of using the figures in that public document.

We are debating, I suggest, not the basic argument about accounting principles or assets' lives but rather the contrasts between different water authorities. I have quoted the case of Wessex, which is prepared to accept that present and future investment has to be paid for and that it must consider the interests of not only present but also future ratepayers. Rather than load an unacceptable burden on the future, Wessex accepts that part of that burden must be borne today. It is part of the burden only because, as the House knows, investment in the water industry is a continuous process. It is like painting the Forth bridge.

The authority in which my constituency lies is prepared to accept the financial consequences of the present situation, and other authorities in my view are crying out to court cheap publicity at the expense of present and future ratepayers. [HON. MEMBERS: "No."] That is my honest view, based on the contrast between the statements of the chairman of Thames water four months ago and the exactly opposite statements that he now makes. I believe that that is fair comment.

I call upon the Minister to protect my constituents, the ratepayers in the area that I represent. I ask him to ensure that the prospects of what appears to be a very well-run authority, as in the case of Wessex, will be protected by the orders.

7.54 pm

Mr. Gareth Wardell (Gower)

I shall confine my comments to the implications of the orders for the people of Wales. In doing so I pay tribute to the Welsh water authority for its openness in granting access to its meetings to the media and to the public, and because it will soon be the only water authority in the United Kingdom to retain a virology laboratory. That is significant, because the quality of water is vital for the health of the population. I hope that the Minister will consider having similar virology facilities in other water authorities, and also the benefits of public access to water authorities.

In 1985–86 the financial target of the water authority in Wales will be 1.45 per cent. of the value of net assets, while the external financing limit will be set at £20 million. Under the orders, by 1987–88 the rate of return will be raised to 1.9 per cent. and the external financing limit will be lowered to £13 million. The Government have chosen to impose upon water authorities the combination of a higher rate of return and a lower external financing limit. The Government faced a number of options, one of which was to increase the rate of return in line with the retail prices index, combined with an increase in the external financing limit.

The Parliamentary Under-Secretary for Wales, in his winding-up speech, owes it to the people of Wales to say why he has chosen to force the Welsh water authority to increase its charges when areas of England which receive Welsh water, as the hon. Member for Caernarfon (Mr. Wigley) made clear, pay lower charges than the area from which the water comes. This is the situation at a time when the people of Wales, according to the latest statistics of the European Commission, live in one of the six poorest regions in the European Economic Community. It is another hidden tax on one of the poorest regions in the EEC. In my view, this is an unacceptable measure, and I hope that the Minister will ponder the words of the hon. Member for Tiverton (Mr. Maxwell-Hyslop) and consider withdrawing the orders.

The matter goes deeper than that. The Minister must explain why the Government have chosen not to raise the external financing limit of the Welsh water authority so that even greater effort can be made to increase investment in the Welsh water industry. To take the example of current availability of capital, the Welsh water authority will require at least 30 years in which to construct sewage outfalls to the sea which comply with Department of the Environment criteria. It is vital for the tourist industry in Wales, at a time when the Government have cut regional financial assistance by £60 million this year, that such a programme of investment is radically speeded up.

It is little wonder that the Secretary of State for the Environment, in a reply that he gave me in the first week of December last year, was not prepared to accept the recommendations in paragraph 4.68 of the tenth report of the Royal Commission on Environmental Pollution. That paragraph recommended the setting of a date by which the recommendations of the Jeger working party on sewage disposal relating to discharges of crude sewage were to be implemented in full. It is bitterly disappointing for the people of Wales that the Government are not prepared, after talks with the water authority, to set a date for the implementation of that programme. The Government are once again ducking their responsibility by giving the Welsh water authority the task of forcing the Welsh people to pay for capital investment out of current revenues, while at the same time projecting their own sterile philosophy on to the shoulders of others.

I wish to give the Government their proper due. Their proposal has one major advantage—it is consistent. The consistency is borne out of the overwhelming confidence which the Government are generating daily in the hearts and minds of the people of Wales. That confidence relies heavily on the tenet that the Government must, at all costs, continue to pursue policies which accelerate the slide of Britain down the world economic order. Britain's economic standing in the world is going down, and the people of Wales are at least confident that the Government are pursuing the correct economic policies to continue that course.

An example of this consistent economic idiocy is that water, a free public good according to the economic textbooks, is about to become very expensive for the people of Wales. Therefore, I once again urge the Minister to consider carefully what the hon. Member for Tiverton and other Conservative and Labour Members have said, and withdraw these orders.

8.2 pm

Mr. John Wheeler (Westminster, North)

At the outset, I wish to say that when the House divides, I shall vote against the Government. No hon. Member does that lightly or without careful consideration. In the discussions that I and other colleagues have had with my hon. Friend the Member for Eastbourne (Mr. Gow) he has been the most courteous, considerate and careful of colleagues in spending both his time and energy endeavouring to explain the issue and the Government's position.

My vote tonight against the Government in no way reflects my hon. Friend's inadequacy in getting the case across. The issue is quite straightforward and has little to do with accounting practices or the return on assets. It is about straightforward politics. It is about the Government's central and major objective of containing inflation and ensuring that ratepayers receive good value for services provided as cheaply and efficiently as possible. Therefore, it is with great regret that I shall cast my vote against the Government.

My hon. Friend the Member for Eastbourne said that the Government's objective is the containing of inflation, and I agree with that. Throughout my time in the House since 1979, I have voted consistently with the Government on their central economic policies on reducing inflation. I see that that is absolutely essential and in the best interests of the people of the United Kingdom. The Government's objective of seeking to secure wage increases of around 3 per cent., particularly in the public service, is also the right objective.

However, if the Government have the right objectives, how can we say that the water authorities should increase their charges by about 10 per cent.? How can we then say to the work force of Great Britain and to British commerce that their charges should be held? This is why the Government are so wrong in what they are proposing.

There are other aspects to the matter. Last night, the House had to decide about rate limitation. Throughout my time here, I have been critical of the minority of local authorities who have wilfully disregarded the interests of the poor, commerce, industry and the institutional ratepayers such as the Health Service, and have put up rates faster and higher, to the great damage to the community as a whole. The House, in its wisdom, has agreed rate limitations. If we support that principle, it is inconsistent then to vote to increase water charges. That is impossible, and as a matter of conscience, apart from any duty to my constituents in Westminster, North, I simply could not follow that contradiction. I think that I speak for many hon. Friends who will not be supporting the Government tonight, but who may not be as fortunate as I have been, Mr. Deputy Speaker, in catching your eye.

Alas, the Government are almost friendless on this issue. In the debate, one or two speeches have been in support of them, but even one of those had some limit in its support. The Government's friendlessness arises from not only the lack of support within the House and on the Conservative Benches, but from those voices outside the House whose opinion is so significant and who generally support the Government's policy and objectives. The CBI, the chambers of commerce and industry and the consultative councils for the water authorities are all against the Government. We know the opinion of the chairman of Thames water, and my comments about water authorities naturally relate to that authority as my constituency is in the Thames water authority area.

The Government's proposals remove from the management of Thames water, and perhaps the other authorities, the one plank that management has to encourage efficiency within its business. If there is to be no tangible gain of lower charges to the consumer of the water services, why should management and the employees of the water authorities work to achieve a higher standard of efficiency? The Government's proposals would seriously damage the ability of management in the water industry to manage.

Alas, the only comment that my hon. Friend the Member for Eastbourne made in his interesting speech with which I could find much favour was his suggestion that at some point denationalisation might be a possibility. I applaud that suggestion. Surely the answer is to remove the water industry with its extremely interesting, developing businesses with many opportunities both at home and overseas from the quagmire of the Treasury's public sector borrowing requirement and from all the other areas that constantly drag us into the whirlpool of dissent and confusion. I very much hope that my hon. Friend will be persuaded to heed the message that we cannot go on increasing charges without looking at fundamental principles.

I do not intend to discuss the return on assets. I am not an accountant. I cannot judge between the claims and statements of my hon. Friend and his excellent civil servants and the claims and statements of the chairman of the Thames water authority and his excellent employees. I do not know who is getting the best return on assets. I do not believe that to be a particularly relevant argument. The case is quite simple. We are saying to the public that we should keep inflation down. We are also saying that we should keep rates down. The public want that to be achieved. Therefore, the public cannot understand, nor will it understand, why the rates should go up.

Moreover, commerce and industry, which are seeking to hold their prices and make themselves competitive overseas, cannot understand this policy. The knock-on effects of putting up water charges to commerce and industry involve hundreds of millions of pounds. We should remember who are the big ratepayers. They are the London electricity board, the gas boards and the retail food industries. All of them pass on these charges to the consumer. One cannot even protect those who are on supplementary benefit. The poor always pay, even if it is only via the back pocket. Therefore, I join other hon. Members in suggesting to my hon. Friend that even at this late hour he should consider whether or not the Government ought to proceed with these orders. It will not do if significant groups of people are constantly ignored by the Government. The Government have many strengths. Their one weakness is that they do not listen well enough and hard enough to many of their own supporters and, perhaps more importantly, to the people of this country.

8.12 pm

Mr. Gerald Bermingham (St. Helens, South)

I wish to pay one compliment to the Minister. I have found a cliché for him. One of his ministerial colleagues said recently that the water authorities would not be privatised. It appears that because of his open statement this afternoon the Minister has become a courteous assassin of that ministerial declaration by his colleague. The Minister will recognise that some months ago I suspected that privatisation was lurking in the background or in the wings. Nevertheless, that declaration was not made last Friday; it was made this afternoon.

The Government are prepared to sell almost anything. I have been racking my brains to discover what else they could find to sell. If the Government get rid of the water industry and of all the other nationalised industries, the best thing that we could then do would be to turn Great Britain into a limited company, stick it on to the Tokyo and New York stock exchanges and sell it off. The Government would then have completed the job. Everything would have gone.

It is nonsense to talk about the water industry in terms of its being a publicly owned asset that is up for sale to a certain group of city bankers or speculators on foreign stock exchanges. It just is not so. How are the Government going to do it? Are the water authority areas to be rearranged? They are quite arbitrary, in any event. We have heard that Wales sells its water to Birmingham, which in turn sells its water to the north-west. It is quite ludicrous. There ought in this land of ours to be some assets which belong to us all—air, water and, with a bit of luck, light and heat, but even those might be up for sale soon, so I must be careful about what I say.

We ought to consider the water industry in a realistic way. What are the Government seeking to do? By means of these orders they are seeking to reduce borrowing, for if they reduce borrowing there will be less pressure on the public sector borrowing requirement. One or two hon. Members who are accountants have spoken in this debate. Having heard what those hon. Members had to say, I am jolly glad that I am a lawyer and not an accountant. If a sewer has been lying under a road for 50 or 70 years, how can one put a notional figure on it and expect a financial return at the end of the year? To try to do so would be the height of absurdity.

Based upon SAP16—what a pity it is that we have to use initials instead of words; would it not be better to say standard accounting practice No. 16?—the Government are valuing the Thames water authority at about £4,425 million worth of assets. The Government are looking for a 1 per cent. return and therefore wish to raise an extra amount of money. Consequently, the rates are to go up this year by 12.4 per cent. In the north-west the rates are to go up by 12 per cent. Over the next three years the Thames water authority rate will go up by 29 per cent., while that in the north-west will go up by about 40 per cent. For what purpose? Who will pay? The ratepayers will pay.

We cannot get away from the fact that we are all taxed either as ratepayers or as householders. To use a rating term, the levy is based upon a notional rental value. Upon that basis a sum of money is levied upon one's property. Regardless of whether one uses a bucket or a tubful of water a day that property attracts the same levy. It does not matter whether one's income is £50 or £5,000 a week. On that property, the same amount of money will be levied.

It is a very unfair form of taxation. Rating always has been unfair. We are to allow the nine English authorities and the one Welsh authority to impose a levy at that kind of rate. We, the mere ratepayers, have no say. Those authorities are not accountable to us. They are run by people who have been appointed by Ministers. In the old days they were at least partly accountable to us. Before 1983 there was local authority input into the running of the water authorities. That is no longer so.

I would remind our courteous Minister that the Boston tea party, which was about taxation without representation, did not do King George very much good. I suggest that the Minister ought to take a leaf out of our history books and remember what might happen if he continues down this particular road. With great respect to him, by pursuing this policy he is doing neither us nor himself much good. The people who will have to pay are the ratepayers. The ratepayers include both the rich and the poor. The poor have no way of recouping these charges. We know that under the rules of the Department of Health and Social Security water authority payments have to be paid by these people. They have to reach into their own pockets.

If a notional profit is made, the Government will increase the amount of money in their coffers at the end of three years. That is the object of the exercise. The Minister is aware that at Question Time yesterday I asked him this very question. Hansard will show his reply. He said that he did not consider it to be a tax, but I think that everyone else recognises it to be one.

At the end of the day the public sector borrowing requirement will fall slightly and it will be said that more money is available for tax cuts. The poor, who will pay increased water charges with no relief, do not benefit from tax cuts, because they do not pay tax. Once again, the poor will finance the tax cuts of the not so poor. The poor will pay, and so will industry and commerce. The unit costs of products will increase and Britain will become slightly less competitive in world markets. We shall all become the losers. The Government seem hooked on the policy that even the air that we breathe must make a profit for someone. That policy does not produce a fair society. It does not produce the society which any of us wants.

Many hon. Members on both sides of the House accept that there are certain services that are fundamental to our way of life and are not for sale or profit. They believe that they should be for the use of everyone, at the most economic rate.

8.22 pm

Mr. Peter Fry (Wellingborough)

I hope that the hon. Member for St. Helens, South (Mr. Bermingham) will forgive me if I do not respond to his speech. Instead, I shall take up some of the remarks which were made in the two speeches from the Government Benches which were in favour of the orders.

My hon. Friend the Member for Derbyshire, South (Mrs. Currie) seems to defend the Government's case on the basis of some esoteric games that she played at Oxford university. I played games there in a rather more straightforward and simple manner and perhaps that is why I disagree with my hon. Friend in this instance.

My hon. Friend the Member for Bristol, North-West (Mr. Stern) confirmed my fear that accountants are second only to lawyers in being able to make a mystery of any issue and to use language that the rest of us, alas, cannot often understand. If my hon. Friend were still in the Chamber, I would put it to him that if he is in favour of privatisation he would be in favour of water authorities borrowing their money on the open market and arranging their finances accordingly. If we are trying to move industries from one sector to the other, why should we make one set of rules for the public sector and another and different set for the private sector? We do our credibility no good when we do that.

I listened carefully to my hon. Friend the Minister because it is always worth doing so. I welcomed what he had to say about privatisation. We expected only a skilful rendering from my hon. Friend, but he reminded me of an experienced lawyer who chose to defend his client in a case in which he was not really sure of the merits. The lawyer felt that he had to put up a good show because of the high fees that his undoubted abilities entitled him to receive. I was not sure that the Minister was as convinced of the Government's case as he wished us to believe.

It is about time that other areas were discussed apart from those covered by the Thames water authority, the Wessex water authority and the Welsh water authority. My comments will be directed to the area covered by the Anglian water authority. I have been requested specifically by Wellingborough borough council to make a protest about the charges that will be imposed upon those living in the area. I received a deluge of pieces of paper from the Anglian water authority containing many different comments.

The chairman of the Anglian water authority stated: No one likes to see this level of increase but it is inevitable if we are to maintain investment to safeguard the standards of existing services and at the same time cope with the tremendous demands which are imposed on us by regional growth—the fastest in the country. He continued: The Government has also decided that this should be paid for by increased charges rather than more borrowing. These decisions account for about one half of our charges increase and inflation on our costs for the remainder. The income of the Anglian water authority is about £270 million but its operating costs are only about £115 million. It is having to find £95 million to cover depreciation and £55 million to cover the rate of return on assets fixed by the Government. Figures such as these illustrate why so many of my right hon. and hon. Friends are unhappy about the Government's proposals.

I was worried when I read the statement made by the Anglian water authority about the future. It states: The Government intends to continue to reduce the amount of money that water authorities like Anglia can borrow until they eventually become self-sufficient with customers paying for all capital investment directly through charges. I do not think that there are many families or firms that could adhere to that sort of financial regime, however much they wished to do so. I suggest that my hon. Friend the Minister is asking the impossible and the unnecessary of water authorities. It is no wonder that the National Farmers Union at local and national levels is extremely worried about the proposed increased charges. The local county secretary of the area that I represent wrote to me as follows: The Order, if confirmed, will raise charges to some two to three times the current rate of inflation for the next three years, and perhaps longer, and will bear harshly upon consumers. Livestock producers and horticulturalists will be particularly oppressed by the measures". That includes the especially hard-hit dairy industry, which is already reeling from the effects of the Common Market.

Local authorities, farmers' organisations and the CBI are worried about the order, and so it is not surprising that constituency Members are concerned.

I thought that one of the benefits of increased charges would be the implementation of many much-needed capital projects in the east of England. Yet in the third piece of paper that the Anglian water authority sent me I read the following: A major financial crisis is threatening essential work on sea and river flood defence schemes to protect people and property in the Anglian region according to local land drainage committees. Government cutbacks in the amount of money which is made available for such projects, coupled with strict financial controls on the amount of money which Anglian Water can borrow to help finance capital schemes, means that all five land drainage committees face the prospect of vital schemes being delayed". It seems that the increased charges will not result in the implementation of the capital projects that are needed. Anglia is the fastest growing part of the country and it has many new installations. It is odd that it is being asked to accept a system of depreciation that is based on assets being many years old. My hon. Friend the Member for Bristol, North-West suggested that an accounting system must be devised that reflects the difficulty of estimating the length of life of certain assets because it is so long. It is peculiar that the system that has been adopted shortens the period of depreciation rather than lengthening it. I hope that that will be explained when my hon. Friend the Under-Secretary of State for Wales replies.

Against this background it is not so surprising that many of us have become somewhat bemused by the Government's actions. It seems that the Government are saying that water authorities can no longer run their own affairs commercially, as we said at one time that we wanted them to do.

The backlog of capital projects is still too big. Charges are to go up at least by two-and-a-half times the rate of inflation. The enforced rate of return means an extra taxation on water.

I thought, perhaps naively, that the Government believed that we should ensure that nationalised industries are run and managed commercially and responsible for their own decisions. I believed that our first aim was to fight inflation. I also thought that we had a special concern for the lower paid who are in danger of being caught in the poverty trap.

Before Christmas I tabled a question to the Department of Health and Social Security to discover how many people were in receipt of rate rebate and therefore, by definition, not in receipt of supplementary benefit and without help with their water rates.

The Minister said today that 3 million people are assisted by supplementary benefit. The answer that I received was that 3,600,000 people receive rate benefit. That means that 5 million people, or one-tenth of our population, will have to meet the increase in water charges in full without any help.

Mr. Gow

I said that 3 millon households were involved.

Mr. Fry

The point is that more people will not be helped than will be helped.

I also asked the Department how much it would cost to operate a water rate rebate scheme. I regret that after many weeks I still await that information.

So despite my hon. Friend's eloquent explanation the position is unsatisfactory and not understood. It is not understood by local councils, by the farming community or by industry and commerce. Their attitude and mine is based not on an abstruse argument about accounting but on common sense. If one increases the price of anything above the inflation rate that increase causes inflation. The Government are shooting themselves in the foot. They are attacking their own policies.

Those of us who have supported the Government over local government reform are entitled tonight to say "If you want that continued support at least be consistent". Despite the great admiration that I have for my hon. Friend the Minister for Housing and Construction, I cannot, on behalf of my constituents, support the orders. Indeed, it is my duty to oppose them. I trust that my hon. Friends will join me in the Opposition Lobby tonight.

8.34 pm

Mr. Harry Cohen (Leyton)

I have enjoyed many of the speeches from both sides of the House tonight. I particularly enjoyed that of my hon. Friend the Member for St. Helens, South (Mr. Bermingham). I agree with his exposition of the lunacy of the Government's privatisation and profit motivation, particularly as applied to water services, which are so important to the healthy lives of our people.

The Government are in hot water, not least with their own Back Benchers. The orders will result in an increase in water rates for everyone. If all Government Members realised that, they too would rebel against the Government.

The Treasury has brought the matter to the boil. The Thames water authority is primarily affected by the orders. I shall outline the objectives and achievements of that authority since it was created in October 1983.

I recently received a letter from the chairman of Thames water, Mr. Roy Watts, to whom I paid tribute last week. He said: Thames' objective including 'running the Authority as a major well-run business'. We were also exhorted to ensure that charges to customers were below inflation. My Board and executive have done that. We have substantially reduced costs, including a reduction of one-quarter in the number of managers and an equal amount of office property. We have restructured the Authority, adding the disciplines of profit loss and of the marketplace And much more. So much, in fact, that we have produced a programme for 1985 which repays £18 million of due debt, introduces an enlarged capital programme which will accelerate projects and introduce cost-saving techniques, but which also holds down price rises to customers to 3 per cent., some two points below inflation. Equally important we have tested our programme against the best practices in the private sector. And our plans ensure continuing improvement in future years. The Government are turning those policies on their head. They are sabotaging those beneficial policies.

The underhand tax rise in the Chancellor's autumn statement is to blame. The Minister is defending that underhand tax rise. He is imposing the Treasury's policy upon the water authorities by forcing the orders through. He could be described as the water industry's "Gow-leiter".

The Minister said that there was a difference between water charges and water rates. The customers do not recognise such a difference because there is no practical difference. The Minister claimed that this was not a tax. If the Government compel water authorities to generate funds beyond those that are necessary and require them to pay them to the Treasury, that is a tax. It is like VAT on take-away fish and chips.

The Minister stressed current cost accounting. Roy Watts in his letter said: The Thames Board — a Board full of professional and business experience—is clear that such a basis for targeting is wrong in principle, wrong in application, generates excessive cash surpluses, and is inflationary. The CBI — not an organisation which I would normally cite — believes that there are serious doubts about applying CCA to the water industry where long-life assets are concerned, and where the useful life is a subjective judgement; where the assets comprise basic infrastructure, and could not be sold; where the assets are never likely to be replaced but will be maintained at current cost, such as reservoirs … any comparison between water authority rates of return and those in the private sector is bound to be misleading … there is every reason to believe that the water authorities are already highly profitable enterprises compared with the private sector if a common method of appraisal is used. The fallacy of using current cost accounting was exposed by Roy Watts in an interview that he gave to The Sunday Times, published on 20 January, in which he said: We believe that the current cost convention and other arguments used by the Government are a smokescreen for the real intention, which is to raise money for non-water purposes from my water customers. In other words, it is a tax.

Mr. Freeman

Will the hon. Gentleman explain, for the benefit of hon. Members on this side of the House, what particular technical aspects of current cost accounting concern him most?

Mr. Cohen

I should have thought that the CBI's objections to it would have the hon. Gentleman's support. I would be happy to discuss the details of CCA with him, but hon. Members may think that a 15-minute speech is not the occasion for that.

The Minister said that the argument was about four categories of effort. One category to which he did not refer was that of efficiency, which surprised me coming from a Minister whose Government are always extolling the virtues of efficiency. The record of the Thames water authoriy is excellent — I doubt whether even Conservative Members would deny that—yet it is being penalised for its efficiency. The Government pay lip-service to the need for efficiency and value for money, but when the crunch comes they penalise those who give value.

The Thames water authority's plans show that the authority is acting in a prudent manner and would in 1985 repay £18 million of its debts. It would be debt-free by 1989 if it had its way. It is clear, however, that the Government want unjustified increases even on that rate of efficiency. Any surpluses that water authorities receive from high charges will go not to the consumer but straight into the Treasury. That is a tax all right.

There is opposition right across the political spectrum to what the Government are doing. Not just the Thames water authority but the water industry generally opposes the order. From the business point of view, the CBI said: The increases proposed for next year will add £100 million to business and industry's costs. They will hit certain industries such as food, chemicals, pharmaceuticals, textiles, brewing and paper, particularly hard…Such increases could threaten still more jobs at a time when industry is compelled to match the efforts of its international competitors.

Mr. Eddie Loyden (Liverpool, Garston)

My hon. Friend is dealing with an important aspect which, to be fair to Conservative Members, has also been raised by them. The North-West water authority has made it clear that, because it will not be permitted to use capital resources, the increases proposed will not only affect jobs in the area but will create hardship for many people, in particular the low-paid. That is a critical issue in this debate.

Mr. Cohen

I agree with my hon. Friend that the possible loss of jobs and the hardship that will be created are issues of paramount importance. I was citing the CBI's view of this legislation because that body is supposed to be a friend of the Government and to support their policies and strategies.

Many people will be adversely affected by the order, and I have received many letters to that effect from constituents, particularly those living on small incomes. The Minister has refused to allow rebates to people in that situation. There will be unnecessarily high water rates bills. In the Thames water authority area, for example, there will be an increase of 12 per cent. rather than of only 3 per cent. in 1985–86.

There will be great anger in March and April of this year when bills arrive through people's letter boxes. It should be made clear to the public on those bills that the Government's surcharge is to blame. The Government seem determined to press ahead with their unpopular strategy, come hell or high water. The House should ensure that it sinks without trace.

8.46 pm

Mr. Martin Stevens (Fulham)

I apologise to the House for not having attended the earlier part of the debate. I have been upstairs in a Standing Committee.

Had I been in the Minister's shoes, I would have made exactly the same decision in this matter as he made. I chide him, however, by adding that I would have handled the announcement and implementation of the decision differently, for I feel that his handling of it contributed to the response of the Thames water authority.

In speaking about that authority, I am sorry to be on the opposite side to my hon. Friend the Member for Westminster, North (Mr. Wheeler). The Thames water authority claims that it has been running the organisation as a private company, and it is generally agreed that its management has been extremely efficient. I have known Roy Watts for many years, since in my capacity as chairman of Annual Reports Limited I produced British Airways' annual report, and I know him to be a man of exceptional ability. However, it is fair to probe a little his claim that the accounts of the Thames water authority match those of a private company.

I hope that the Minister will ask him bluntly whether, in his opinion, the rate of depreciation proposed in the authority's figures is adequate. I do not think that it is. One can argue that because of the higher quality of the infrastructure, and because Thames has been experimenting with methods of rebuilding sewers which do not require the digging of holes, there may be detailed questions to ask about the way in which the current cost accounting system has been applied. Even if we take that into account, Roy Watts would be bound to confess that his level of depreciation is inadequate.

The second point that I should like to consider in Thames water's accounts is its borrowing. I never like to contradict the hon. Member for Leyton (Mr. Cohen). He said that under present plans Thames water would have repaid its debt by 1989. The true timetable under its present plan is 15 years. I do not believe that many accountants employed by a private company would welcome such a long loan. If my hon. Friend were to press Roy Watts on that point he would accept that there is merit in the proposition, in a nation that is still overborrowed despite all our efforts, that that rate of borrowing should be paid off more rapidly than the authority was planning.

Thames water is annoyed by the fact that it will have to go on paying £60 million a year even after the debt has been paid in three years' time. It does not pay corporation tax. Water is zero-rated. I hope that my hon. Friend will consider the matter in the coming month to see whether it will be possible to arrive at a slightly more gentle arrangement. To be asked to continue repaying debts after they have been settled might have the same result—I believe that it is called negative debt repayment or some such term.

Mr. Gow

Negative EFL.

Mr. Stevens

I am grateful to my hon. Friend. That is rather like negative recruitment, as it used to be called when I was a business man. It always gives rise to understandable resentment.

There is the issue of the corporation's asset value.

Mr. Simon Hughes

Does the hon. Member agree that what is unique about Thames water is that none of its capital expenditure is being financed from borrowing, unlike other water authorities? It will therefore inevitably be reducing its borrowing requirement and borrowed money. It already has less than any other water authority in England.

Mr. Stevens

The hon. Gentleman is right. Every Conservative Member has commended Thames water for the admirable way that it has carried out its business. I do not belittle that achievement. It is the only one of 10 regional water authorities in England and Wales conducting its business without borrowing.

When we talk about asset value, we return to our old friend—current cost accounting. It is right that my hon. Friend the Minister should remind Roy Watts that it was his former finance director who originally proposed that that system of accounting should be used by the 10 regional water authorities. Price Waterhouse, which is not wholly unknown, although not as distinguished as the partnership to which my hon. Friend the Member for Bristol, North-West (Mr. Stern) belongs, but which is nevertheless a highly regarded firm of accountants, agreed that that system was the best in the circumstances. At this moment, a working party is reviewing the method of accounting used throughout the 10 water authorities. The present finance director of Thames water is the chairman of that review body.

If Thames water is denationalised, which is what I believe its directors desire, how much will it be worth? The value of such an undertaking will depend upon its profitability. We may argue that my hon. Friend the Minister's profitability requirement is insufficient to produce a £4 billion asset value which the current cost accounting system has generated, but if I were doing his job I should want to ensure that if that asset were sold it would attract as much money as possible. I am sure that that point has been made already today.

If I were to tell my constituents that we are protecting them against a water price increase of something under 2p a day but that the price that they will have to pay for that will be the loss of £1 billion or more, I think that they would agree that the national interest is best protected by the profit requirements that my hon. Friend has imposed.

Mr. Loyden

The hon. Gentleman will be aware that some industries are intensive water users. The car industry is one example, and there are many others. Has he taken into account the fact that if these increases are imposed they will have consequences for jobs and the economy. A broader view must be taken, we must get away from current cost accounting. Like it or not, water is something that the state must provide for domestic and industrial consumers.

Mr. Stevens

I think that the figure for trade and industry is £100 million. That is 100th part of 1 per cent. on inflation.

We must accept, as my hon. Friend the Member for Westminster, North so cogently put it, that the proposals are an extremely difficult package to sell. We cannot enter the House, as all Conservative Members did after the general election, on the ticket that we shall cut public spending and borrowing and ensure that our national assets pay their way, and then start moaning when we have the difficult job of implementing that proposition. My hon. Friend the Minister is carrying out his job manfully. I shall be happy to be a humble member of his following.

8.57 pm

Mr. David Harris (St. Ives)

I am pleased to follow my hon. Friend the Member for Fulham (Mr. Stevens). Apart from his final remarks, his contribution showed that those who have taken part in the debate, at least on the Conservative side, are divided into two categories —those who have taken the academic accounting or "Oxford" approach, and those of us who like to think that our feet are firmly on the ground and who see the matter in simpler terms and certainly in political terms.

Having sat through the whole debate, I still do not really know what current cost accounting is. If I tried to cover up my ignorance, my hon. Friend the Member for Kettering (Mr. Freeman) would no doubt shoot me down by asking questions as effectively as he did to the Opposition. Moreover, I do not begin to understand what negative external financing limits are. I am absolutely sure, however, that my constituents share my ignorance of those technicalities and will see the matter as I see it.

What will hit my constituents in a couple of weeks' time will be the rate demand from the South-West water authority telling them that if they are domestic ratepayers they face an increase of roughly 12 per cent.—way over double the rate of inflation. When they ask me to explain the reasons for that, I might offer to send them a copy of the speech made by my hon. Friend the Member for Fulham and hope that it will persuade them, but I know that they will not be persuaded any more than I am. I regret to say that I was also not persuaded by my hon. Friend the Minister, despite all his charm and courtesy and an excellent glass of muscadet last night—[Interruption.] I apologise if I have breached some awful convention which Back Benchers are expected to observe. However that may be, I remain unconvinced by my hon. Friend's argument.

I take the example that I mentioned to my hon. Friend last night — the little old lady living on the Lizard peninsula in my constituency. The South-West water authority tells me that a person with an average house, if such a house exists, will be paying £104.59 per year in the coming financial year — a much higher figure, incidentally, than the national average of £80 given by my hon. Friend the Minister—so if my little old lady on the Lizard lives in an average house she will face an increase of £11.11. To Members of Parliament, particularly Opposition Members, that may not seem a great deal of money, but to my little old lady, probably living alone on a pension, it is a lot of money and she cannot obtain any rebate.

My next comment would be addressed to my hon. Friend the Member for Derbyshire, South (Mrs. Currie) if she were present. On the basis of a holiday in the southwest—we are, of course, delighted to have her as one of the emmets — she launched into an attack on the South-West water authority. If the South-West water authority needs to be attacked, Members from Devon and Cornwall have no hesitation in doing so. We do not require the assistance of my hon. Friend the Member for Derbyshire, South, especially when her comments are based on ignorance of the situation.

Mr. Robert Hughes (Aberdeen, North)

The hon. Gentleman is making a very spirited riposte to his hon. Friend the Member for Derbyshire, South (Mrs. Currie). Has he observed the usual parliamentary courtesy of advising her of his intention to do so?

Mr. Harris

Yes, of course. My charming hon. Friend came and sat down just across the Gangway and said that she hoped she had not offended me. I assured her that she had not offended me, but told her that I might make a passing reference to her speech in my own contribution. The hon. Gentleman may rest assured about that.

My hon. Friend the Minister and my hon. Friend the Member for Derbyshire, South both referred to increased investment. I would go along with that package if I could put my hand on my heart and tell my constituents that the awful Victorian sewerage system in St. Ives town, which has polluted beaches and damaged tourism, and which attracted international publicity two years ago, would be renewed as a result of the Government's proposals, but I cannot do that—I only wish that I could.

I have made inquiries of the South-West water authority and I understand that there is to be no great advancement of the investment programme of the authority for sewerage and water supply schemes. Much of the extra money will be spent on meeting the proper demands of central Government in connection with implementing the control of pollution legislation. There may be a spin-off for St. Ives and for the tourist industry, but the increase must be seen against a background of drought last year and of antiquated sewerage systems. People in the south-west ask, "When is something going to happen?" I do not think that the increase will result in much acceleration in normal capital programmes.

I have spoken for long enough. With the greatest reluctance, I have to say that I shall not be with my hon. Friend the Minister in the Division Lobby tonight.

9.6 pm

Mr. Roger Freeman (Kettering)

It is a pleasure for me to follow my hon. Friend the Member for St. Ives (Mr.

Harris). I take a different view. I shall support the Government in the Lobby tonight. I should like, first of all, briefly to explain why.

Once we had accepted the medium-term financial strategy and the autumn statement, it was crystal clear some three months ago that water rates would have to rise in the coming financial year. One cannot wish the end and then not will the means.

My hon. Friend the Member for St. Ives conjured up the proverbial old lady who asks each hon. Member, "Why are my water rates going up?" In the Anglian region the rise is to be 12.5 per cent. One must be honest and explain in simple language that the Government are determined to reduce the aggregate external financing limit of the nationalised industries. One must explain that in simple language, and explain the need for increased capital expenditure. The reasons have been made clear. It then becomes clear that charges must inevitably rise—that the self-financing ratio of water authorities must rise. We must be honest in explaining the background to our constituents, and we must be honest with ourselves in deciding whether the water rate increases were inevitable. I believe that they were, and I shall support the Government.

I have two important questions to ask my hon. Friend the Minister. First, how can water authorities judge investment programmes in future? My hon. Friend the Minister for Housing and Construction will remember admitting several months ago that perhaps, in the case of the Kielder project, there was over-provision. He was not the Minister responsible. There are examples of capital investment projects in the water industry that in my humble judgment were not properly thought through, and cannot be adequately justified today.

I look forward to reading the Watts committee report on metering, which is due at the end of March. I suggest that the capital expenditure figures that my hon. Friend the Minister gave are questionable. I do not believe that any industry can justify such a significant capital investment programme. My hon. Friend the Member for St. Ives said that the only justification for capital investment was need. That is not a satisfactory answer. The correct way in which to measure capital investment in the water industry is to examine the price elasticity of demand, as is done in the electricity and gas industries, and any other utility. That can be measured only if the consumer is allowed to make the decision on the basis of price. The correct way in which to measure capital investment is to use a universal metering scheme.

I hope that my hon. Friend the Minister will argue with the Treasury, once again, that the rules which govern the involvement of private sector capital in public sector projects should be revised. The water industry has capital investment of £200 million to £300 million. In some water authorities, a higher level of capital expenditure is justified, but it is not possible for them to carry out their capital investment programme because they are constrained by Treasury limits. If private sector capital could be introduced in the construction of, for example, a pumping station or a reservoir, we might not be faced with these substantial water rate increases.

My hon. Friend should ask the Treasury to think again about the imposition of these rules. One way out of the impasse might be to ask the Treasury to take professional advice on how to take a view about the extent of contingent liability that will fall on the taxpayer if the public sector projects in which private sector capital is introduced fail or do not live up to the original promises and predictions. The Treasury says that it represents the taxpayer, who will have to pick up the bill, thus making it difficult for private sector capital to come in on such projects.

I hope that what I have said has been constructive. I encourage my hon. Friends who doubt their ability to persuade their constituents about the applicability of or the justification for the increases to think back to the autumn statement debate and their commitment to the medium-term financial strategy.

9.12 pm

Sir Nicholas Bonsor (Upminister)

It gives me little pleasure to speak today for two reasons. First, I have an extremely painful toothache and, secondly, I must oppose my hon. Friend the Minister's proposals.

I shall be brief because most of the issues that I intended to cover have already been dealt with. I should like to associate myself wholly with what my right hon. Friend the Member for Guildford (Mr. Howell) and my hon. Friend the Member for Westminster, North (Mr. Wheeler) said. My hon. Friend the Member for Westminster, North dealt with the details of why the Government's proposal is not satisfactory and the political reasons why we cannot accept it.

I cannot see that current cost accounting is the right way in which to approach the valuation of capital in an industry such as the water authorities. Their assets consist largely of sewerage pipes, water pipes and tunnels, some of which have been there for as long as 180 years. The Thames water authority covers most of my constituency, and it says that the valuation put on its pipes is £4.5 billion. It is not reasonable to assess the return that the authority is expected to make on its annual expenditure by referring to asset values which have been plucked by that weird accounting process. I am no expert, and do not propose to go into the details of it for fear of tripping over myself. There is no reason for putting a figure of £4,500 million on the assets of Thames water authority.

A more realistic way to assess whether the authority is operating sensibly and profitably is to examine the cash cost of the operation and the returns that it is receiving over VAT, and to see whether it is making an adequate trading profit on its turnover. The authority's cash operating expenditure for 1985 will be £292 million. The Government's current cost accounting process demands that it should also cover a depreciation figure of £145 million and an additional profit of £68 million. That means that the return that it must generate is more than two thirds as much again as the operating costs which it incurs.

I am not a business expert, but I run a small farm. To expect that sort of return on that sort of annual turnover seems to be a wholly unrealistic way of assessing a proper return from the industry. It is grossly unfair of the Government to attack the water authorities, which, as my hon. Friend the Minister acknowledged, have done a tremendous amount of work and achieved tremendous success in pulling the industry round and making it more efficient and effective during the past few years. To say that the industry is not returning an adequate figure because it is only 1 per cent. of the £4,500 million figure on the current cost accounting is unfair. The asset value and turnover are two reasons why I find it impossible to support my hon. Friend the Minister, and why I must vote against the proposals.

The way in which the accelerated repayment of loans is being demanded from water authorities is serious. Thames water authority was to repay its Government debt over 10 years. That has now been reduced to three years. Its annual repayment this year was to be £20 million, but under the Government order it will have to pay £60 million. My hon. Friend denied that that constitutes taxation, and said that he was clawing back money that the Government had lent. I do not accept that, but even if it were so it is an unreasonable banking practice for a bank suddenly to tell a continuing industry, "I am sorry but the plan that we previously agreed to repay the debt over a substantial number of years will have to be scrapped, and we demand the full repayment down to zero borrowing within three years". That is what the Government are doing in their role as lender in this operation. That is an unreasonable way to approach the business.

That sums up the two points that I wished to make in addition to what has been said. It is politically impossible for the Government to rate cap local authorities, to fight inflation, and to try to keep costs down as a primary objective in our strategy — which all Conservative Members fully endorse—and then to increase by 10 per cent. a basic cost that will hit at the poorest section of our community and cause great anxiety and trouble to those who can only just afford to find such a payment.

9.18 pm

Mr. Robert Jackson (Wantage)

I join Conservative Members in congratulating my hon. Friend the Minister for Housing and Construction on the patience and courtesy that he has shown before and during this debate. I wish that the substance of his argument was as impeccable as the form of his presentation this afternoon. I am one of those hon. Members who cannot find sufficient justification in what the Government have said for voting in favour of the orders. Having heard the lecture that my hon. Friend the Member for Kettering (Mr. Freeman) recommends that we give to our proverbial old ladies, I believe that they will not be satisfied by what he said either.

I am worried not only about the impact of what the Government propose to do this year, but about the danger in future years. I regret very much the fact that my hon. Friend the Minister could not repudiate the suggestion that the principle of a 5 per cent. rate of return will be applied to the water authorities on all their assets in the future.

I do not wish to repeat arguments that have been made by others. I welcome the Minister's statement, for which he has not been given sufficient credit so far in the debate, that the privatisation of water authorities is under active review. The Conservative party believes that, in general, private enterprise manages better than the public sector. We believe this, not because we think that managers in the public sector are less competent, but because we have concluded from hard experience that the public sector is so constituted, in terms of parliamentary accountability and Treasury financial discipline, as to be a peculiarly difficult environment for commercial enterprise. The case that we are discussing today demonstrates that point fully.

That being so, the House should draw two main conclusions from this debate about water rates. First, there will inevitably continue to be many economic activities in the public sector which cannot be privatised for various reasons, or at any rate cannot be privatised immediately.

Therefore, we must not let up on the effort to make the public sector a more satisfactory environment for commercial enterprise. We must not neglect our continuing responsibility to those who run the nationalised industries, to those who consume their products, and to the workers in those industries. In that context, the proposals that we are considering are unsatisfactory.

The second conclusion that I draw from the debate is that the Government's review of the privatisation of water authorities which the Minister announced today should come to an early and positive conclusion. I need not remind the House that the Chancellor of the Exchequer says that he needs £2 billion-worth of asset sales each year. Although the Thames water authority is certainly not worth £4.5 billion, as the Minister claims, it is probably worth between a quarter and a half of the amount that the Chancellor requires.

Mr. Gow

I did not claim that. It was claimed by the chairman and the director of finance of Thames water authority, who put that figure on the assets. Of course, the figure was confirmed by the authority's auditors.

Mr. Jackson

The question whether current cost accounting should be applied to nationalised industries, especially to the water authorities, in valuing their assets is one issue. A separate issue is the rate of return that should be expected from them. That is what we are concerned with tonight. To return to my point, the Government will not obtain £4.5 billion if they sell the Thames water authority, but the proceeds from such a sale would go some way to meeting the Chancellor's requirement. That is one reason for considering it seriously.

Of course, it has been said, and it is true, that water is a natural monopoly—but there are ways of overcoming the problem. In many countries, water services are not in the public sector. Mayor Chirac of Paris has just privatised the water supplies to that city. We should study all such examples. In the case of British Telecom we have organised sophisticated mechanisms for the regulation of a monopoly, and those mechanisms could easily be applied to the operation of water authorities.

I am afraid that, if such mechanisms were applied, they might have the effect of preventing the future private owners of water authorities from behaving towards their consumers as the present "owners" now propose.

9.23 pm

Mr. Roger Sims (Chislehurst)

Like my hon. Friends the Members for Westminster, North (Mr. Wheeler) and for Upminster (Sir N. Bonsor), it gives me no pleasure to disagree with my hon. Friend the Minister and the Government on this matter. It will give me even less pleasure to vote against my party for the first time in 11 years, but I was sent to Parliament with a duty to represent my constituents' interests and to use my judgment in assessing the issues that come before the House. Doing both those things, I must say that my hon. Friend's proposals are wrong.

I am strengthened in that judgment by the seven consumer consultative committees set up to safeguard the interests of the 11 million customers of the Thames water authority. All those committees are against the proposals and the orders.

Many of the arguments against the orders have been well rehearsed, and I do not intend to detain the House by going over familiar ground. But my hon. Friend speaks of increasing capital expenditure and reducing borrowings. He knows perfectly well that the Thames water authority has been increasing and is planning to increase its capital expenditure, and to do so from revenue. There is a clear and perfectly respectable economic argument for telling a water authority that it should invest more in capital projects, and we all know the reason for that. But to go on to say that it must not borrow money to do it because that will increase the PSBR, that its capital investment must be from revenue and that it must increase its water rates to enable it to do so is another matter.

Of course, the Thames water authority does invest from revenue, and it plans to continue to repay such debts as it has. Therefore, it would be reasonable to assume that the requirement to increase the rate should not apply to it. But, in that case, says my hon. Friend, it must repay its existing debt more quickly, so it will still have to put its water charges up. I do not think that that is equitable or sensible. I share the view of my hon. Friend the Member for Upminster that it is barely ethical, and certainly there is no economic justification for it.

I do not intend to go into the detail of the argument on current cost accounting, except to say that it seems to me impossible to draw a comparison between the assets of something like British Airways and those of the Thames water authority. The sort of figures that have been produced are hypothetical and unrealistic. I understand that current cost accounting is widely considered to be a very unsatisfactory system. It is little used outside the state industries and it certainly is not appropriate for the water industry.

My hon. Friend says that he has dealt with the authorities in an even-handed fashion, but he has admitted on several occasions that Thames water authority is in a different position from the other authorities. It is different by virtue of its financial circumstances and of the state of its assets. So why is it necessary to treat the Thames water authority in exactly the same way as the other authorities and to impose a wholly unnecessary financial burden on the 11 million customers of the authority, including my constituents?

I hope that, even at this stage, my hon. Friend will take the advice of my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) and others and consider again the effect of these orders. I put it to him that he should withdraw the order in its present form and re-table it, without involving the Thames water authority in its requirements. If he does not do so, if he intends to proceed with the order as at present drawn, I cannot vote in favour of it and will have to vote against it.

9.27 pm

Mr. Christopher Murphy (Welwyn Hatfield)

Even at this late stage, recognising that it might be difficult for my hon. Friend to take up arms against this reservoir of troubles and by opposing end them, I appeal to him nevertheless to reconsider. I deeply regret that I must add to the very evident ripples of discontent with an alternative Oxford view, for I cannot support the order as it stands tonight. However, I welcome the Government's commitment on privatisation of the water industry, as I have previously welcomed the inquiry into water metering.

Mid-Hertfordshire has the benefit of a combination of water company—in the main the Lea Valley, but in part the Colne valley—and water authority, that of Thames. Charging to the consumer is therefore also a combination, approximately 50 per cent. being the consequence of company as water supplier and 50 per cent. that of authority as sewage disposer. Without the intervention of Government, the net result would have been an increase in overall charges of probably just under the rate of inflation. Now the signs are that the consumer will be faced with approximately double that figure. I fully appreciate the anxiety about the need for an adequate return on public investment, because the taxpayer must be protected. However, I hope that the anxiety expressed by my constituents will equally be appreciated. They are also water rate payers, and they also expect protection.

The Government have been well advised to seek far greater efficiency from the water industry and a far more commercial approach. The Government have been ill advised to act so that such gains for the consumer are overtaken by what amounts to a tax on water. The order should now be withdrawn and a bridge over these troubled waters be found. The central policy objective of ending, not adding to, inflation must be adhered to. Having dipped a toe, my hon. Friend has surely found the temperature somewhat lukewarm!

9.30 pm

Mr. Roy Hughes (Newport, East)

We have had a rather longer debate than originally anticipated, but the basic fact remains that these two orders are essentially part and parcel of a Government exercise to increase the cost of water quite unnecessarily. Needless to say, domestic consumers throughout England and Wales, let alone business interests, are not very pleased.

The issue has been spotlighted by the courageous stand taken by Mr. Roy Watts, the chairman of the Thames water authority, who has voiced his concern in the columns of The Times and elsewhere. Nevertheless, this is not confined to the area covered by the Thames authority and applies equally to the 10 water authorities throughout England and Wales.

As the National Farmers Union pointed out: It is wrong that what is effectively a tax is to be levied on an indispensable product provided by a monopoly supplier. Likewise, the CBI pointed out that it would constitute an additional cost burden, and added: It could threaten still more jobs". With 3 million to 4 million unemployed, I would have thought that it was time that the Government gave all their attention to what is perhaps the most important question of all.

The Government's policy towards water has been spawned over a number of years. What was once essentially a local government service has been taken over. All board members throughout the country are now appointed by Whitehall. Since the late 1970s there have been successive restrictions on capital spending, and by 1981 water authorities were committed to current cost accounting. It is noticeable that British Telecom switched from this system of accountancy back to historic cost accountancy as soon as it became a private enterprise concern. There must be a moral in that.

The 1985–86 target for the Welsh water authority is 1.45 per cent. Presumably that will go up to 1.7 per cent. next year and 1.9 per cent. the year after. I confess that those figures look modest. With this arcane system of accountancy, they constitute a considerable burden. It means that the present generation is being asked to pay off debt far more quickly than necessary. When a waterworks is built to last 50 to 100 years, how can one justify taking all that money from people who are living today when the waterworks will benefit people who are not yet born? The idea, of course, is to have a regular annual surplus of funds to flow back to the Treasury.

I was interested in the minor altercation that took place earlier between the Minister and his right hon. Friend the Member for Guildford (Mr. Howell) over charging procedures, among other things. The Minister indicated that the right hon. Member for Guildford had served in the Government in 1973 when the Water Bill went through Parliament. My hon. Friend the Member for Newham, South (Mr. Spearing) pointed out to me that in the debate on 2 May 1973 the late Mr. Graham Page, the then Minister for Local Government and Development, gave clear promises that consultation would take place with all manner of interested parties. In practice, we know that there has been little or no consultation with the consumer bodies, and certainly no agreement with them. It has been apparent in the debate that the Government have had little or no consultation, and certainly no agreement, with their Back Benchers.

We know that in other public utilities—for instance, gas and electricity — prices have been increased unnecessarily again. However, the difference is that a change in the consumption of water has little effect because the charges for many consumers are based on rateable value.

Then there is the contradiction which the hon. Member for Westminster, North (Mr. Wheeler) pointed out. On the one hand the Government are pressing local authorities to hold down the rates—and many Conservative Members support the Government in that respect—while on the other they are driving up water charges, which are also based on rateable value. The hon. Member for Wellingborough (Mr. Fry) put it clearly when he said that in his view the Government were shooting themselves in the foot. What is more, there is no system of rebate for the less well off. Many people will suffer considerable hardship as a result of the measures, and no satisfactory answer was given by the Minister in opening the debate.

The Government's policy has an element of farce about it. Somebody has suggested that the next move might be value added tax on sewage disposal, which is perhaps the biggest take-away business of all. What a ridiculous position the Government are getting themselves into. Listening to the remarks of the hon. Member for St. Ives (Mr. Harris), I feel that it will need more muscadet to convince even the Government's own Back Benchers.

I know from correspondence that I have received from individuals in my constituency that the Welsh water authority has cut its labour force to the bone. For the forthcoming year, it had hoped to propose an increase in line with the retail prices index. Now, directly as a result of the Government's measures, water charges in Wales for the next three years will go up by 30 per cent. Other authorities throughout the country will make similar increases.

I should have thought that a Government must be pretty heartless to increase the price of water, which is such a basic commodity. There have been ridiculous forms of taxation throughout history. Pitt introduced the window tax, which was virtually a tax on light and air, to finance the Napoleonic wars. The Prime Minister has often lectured us on Victorian values, but she seems now not to be satisfied with that and wants to go back to Georgian times.

Water in Wales, as the Under-Secretary of State for Wales knows, is an emotional subject. We have abundant supplies and our people can never understand why they have to pay such an exorbitant price for water. My hon. Friend the Member for Gower (Mr. Wardell) pointed out eloquently the increased burden that will continue to be put on the whole of western Europe. How can any Welsh Minister go along with such proposals? The chairman of Thames water has made a principled stand. His lead should be followed and the Government forced to change course.

9.41 pm

The Parliamentary Under-Secretary of State for Wales (Mr. Wyn Roberts)

We have heard speeches from 18 Back-Bench Members, from constituencies that lie in all parts of England and Wales. That alone reflects the fact that the two orders that we are debating apply to all water authorities in England and Wales. That is a significant point. Recent articles in the press have concentrated on the effect on the finances of the Thames water authority of the Government's target for the return on assets. In fact, the Government's policy is consistent for all 10 water authorities. In raising the target from 1 per cent. on average to 1.4 per cent. on average, the Government are generating additional funds for all authorities, enabling each to undertake additional investment and to make some contribution to the reduction in public borrowing.

Over the past few weeks, we have heard sincere cries from Labour Members that there should be more investment in the water industry, as in other forms of infrastructure. I am astonished to hear them playing down that call for investment tonight. Each authority is being enabled to make some contribution to the reduction in public borrowing; that is a cause that is dear to the hearts of many Conservative Members.

As the policy applies to all 10 water authorities, so it affects all their consumers. In one way or another, nearly every man, woman and child in England and Wales is a customer of a water authority and so is financially affected by these orders. But these orders affect the whole population in another way. Everyone is affected by the management of the national economy. We are all taxpayers and have a responsibility for what public bodies and the Government borrow. The debate on these orders reflects that interest, too — our interest in sound economic management and the proper control of public expenditure. The debate has been about the Government's resolution of the competing claims of taxpayers and consumers. However, let me make it quite clear that water authorities are not consumer co-operatives and never have been.

Mr. Simon Hughes

Will the hon. Gentleman give way?

Mr. Roberts

I have many points to answer and I would ask the hon. Gentleman to forgive me.

Some hon. Members, including the hon. Member for Bermondsey (Mr. Hughes), who has just tried to intervene, the right hon. Member for Halton (Mr. Oakes), the hon. Member for Birmingham, Perry Barr (Mr. Rooker), my hon. Friend the Member for Wellingborough (Mr. Fry) and the hon. Member for Leyton (Mr. Cohen), have argued that water authorities will be required under the orders to raise more money than they need, that this is taxation by the back door and, by implication, that this is an abuse of monopoly. The Government reject that view. We are of course sensitive to the consideration that water supplies and the other services provided by the water authorities are vital to public health and that they are provided on a monopoly basis.

Of course we cannot permit the customer to be overcharged for these services, but I must remind the House of what my hon. Friend the Minister said in his speech: Our policy for the nationalised industries and the policy of the Water Act 1973 is that water authorities should make a reasonable return on their net assets. The rates of return which are specified in the orders we are debating are in all cases less than 2 per cent. By any reckoning that is not an unreasonable rate of return. Therefore, I argue that the question of taxation does not arise. There would only be an abuse of monopoly power at the point where an unreasonable return was to be exacted.

We are debating the fifth order of this kind and have never previously been accused of using orders for taxation purposes. It is quite a novel approach to this kind of order. Other hon. Members, including my hon. Friend the Member for Upminster (Sir N. Bonsor), asked why a Government who are prepared to cap local government rates are at the same time setting targets for water authorities that will require them to increase their charges.

As we all know, the water authorities are quite separate from local government. They have been separate since 1974, when the local authorities were reorganised under the Local Government Act 1972 and when the water services were reorganised under the Water Act 1973. Water authorities have kept their spending under control, consistent with the Government's public expenditure requirements. As my hon. Friend the Minister said in his opening speech, since 1981 water authorities have controlled their operating costs and, indeed, have reduced their operating and manpower costs year by year in response to the Government's objectives for the management of the public sector and the control of public expenditure.

With controls over capital and current expenditure established, it is possible, as it is also necessary, both to increase water authorities' targets and to reduce water authorities' borrowing. The result is to increase self-financing and the proportion of their expenditure met from charges.

Local government presents an entirely different picture. Many local authorities have been sedulous over the years in controlling their expenditure and in seeking to make it efficient, economical and effective, but others seem to regard spending as a sign of virtue. As a result, the Government have had to introduce this series of measures to contain local government expenditure. That has been done by means of the Local Government, Planning and Land Act 1980, the Local Government Finance Act 1982 and most recently the Rates Act 1984. It was essential for the Government to keep their economic strategy on course — to control public spending and reduce inflation, particularly as it affects industry and commerce.

Where local authorities had not been responding by reining back expenditure to the constraints of the block grant, target and penalty system, we had no alternative but to seek Parliament's approval to placing a limit on the amount that they could raise from their ratepayers.

I see no inconsistency with what we are doing in the water industry and in local government with its special problems. Within the framework of the Water Act 1973, the water authorities have provided and developed their services consistent with the public expenditure policies of the Government of the day.

Mr. Simon Hughes

If it is part of the Government's policy to reduce costs for commerce and business by reducing rates and thereby holding down inflation, surely that is not consistent with their policy of increasing the costs of commerce and business by increasing water rates and thereby increasing inflation.

Mr. Roberts

My hon. Friend the Minister for Housing and Construction has dealt with the target achievement and its effect on inflation. The hon. Gentleman's argument about costs for commerce and industry has been advanced by the CBI. I remind him and others that the CBI was among those who called for higher investment in the water industry, especially in the document entitled "Fabric of the Nation".

The hon. Member for Perry Barr appeared in an article on the front page of The Times this morning and appeared in "The World At One" as a result of his "discovery" in the Library, of all places, of a document entitled "Nationalised Industries Legislation: Consultation Proposals". Reference has been made, either directly or indirectly, to this by a number of hon. Members, including the hon. Members for Normanton (Mr. O'Brien) and for Caernarfon (Mr. Wigley) and by my hon. Friend the Member for Wantage (Mr. Jackson). Better informed Members than the hon. Member for Perry Barr will know that the document has been available and widely circulated since 20 December, when my right hon. and learned Friend the Chief Secretary to the Treasury announced in a written answer that he was placing a copy in the Library. He tells me that there was consultation for months before 20 December.

The proposals apply to water authorities along with 17 other industries. Among the proposals is one that the Government should introduce legislation to empower industries to set up subsidiaries under the Companies Act and to transfer to them property rights and liabilities. This would enable industries to carry out their activities through Companies Act companies. We say that this may or may not be a prelude to privatisation.

As far as that discovered document is concerned, general enabling legislation is being considered and we are still at the consultative stage. It is consistent with the Government's view that activities of state-owned businesses should be transferred to the private sector where this makes commercial and practical sense.

Mr. Maxwell-Hyslop

rose—

Mr. Roberts

I shall come to the issue raised by my hon. Friend in his speech.

Mr. Maxwell-Hyslop

But will my hon. Friend give way?

Mr. Roberts

I shall take up my hon. Friend's remarks when I come to the relevant part of my speech.

The setting up of Companies Act company subsidiaries to water authorities is one of a number of possible ways of bringing a measure of private sector participation into the operations of water authorities. There is no question of setting up a private company to control water pollution. As my hon. Friend the Minister for Housing and Construction said, we must have a regulatory mechanism to prevent the abuse of monopoly.

The Companies Act subsidiary company is not necessarily the best option. It is too early to discuss what the options might be. I go no further than to say that we shall examine the possibilities.

My hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) suggested that the water authorities' assets are really liabilities. In that remark he recognised the investment needs to which other hon. Members referred. However, my hon. Friend is wrong to conclude that it is therefore wrong to value and account for assets. Water mains and sewers deteriorate and provision must be made for their replacement. They will be replaced at today's or tomorrow's prices, not at yesterday's prices. That is why current cost accounting is needed. Values are based on the analysis of recent contract prices.

My right hon. Friend the Member for Guildford (Mr. Howell) rightly reminded us that the possibility of over-provision — because we have improved methods of renovation and some items may not need to be replaced—has been recognized—

Mr. Maxwell-Hyslop

On a point of order, Mr. Speaker. Can you confirm that under Standing Orders the debate does not have to finish until 11.30? The Minister does not have to gabble as if the debate must end at 10 pm. Is that correct?

Mr. Speaker

That is entirely correct.

Mr. Roberts

As I was saying—

Mr. Maxwell-Hyslop

My hon. Friend referred to what is common in state-owned industries. Is he aware that we are not talking about state-owned industries? The water authorities are not state-owned.

Mr. Roberts

I never said that they were state-owned, but they are quasi-state-owned. They are publicly owned.

The 40 per cent. abatement factor was reviewed by Price Waterhouse and it gave its opinion, to which reference has been made. A later opinion can also be quoted—that of Professor Carsberg, now the director general of Oftel, who reported on CCA in the water industry in 1983. His report supports water authorities in their use of current cost accounting and commends their skill in using it… Strictly defined historical cost numbers are not available: to obtain them would involve the use of procedures even less reliable than those required for the measurement of current cost". This has been a far-reaching debate, covering even more than the four issues that my hon. Friend referred to in his opening speech, but at this very end of the debate the issue is whether the public are best served by the implementation of the orders that we have before us, or by abandoning them in response to the Opposition's prayer.

The Opposition's argument falls because, on the one hand, they cry out for more investment in the water industry, and, on the other, they are not prepared to will the means, except by their usual, thoughtless profligate universal remedy—increased public borrowing. It is the remedy to which they always resort, like addicts to their fix, and it is a fix that does no good for them or, in the end, for the people of Britain.

The Government's position and that of their supporters on the Benches behind me has been clear and constant — [Interruption.]—ever since we approved the public expenditure White Paper. I agree with my hon. Friend the Member for Kettering (Mr. Freeman) in that I cannot see how any of my hon. Friends who approved that White Paper can oppose these orders, which are associated with it. There can be no turning back on this issue. [Interruption.] There can be no turning back tonight, and I commend the orders to the House.

Question put and negatived.

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1. WATER AUTHORITIES (RETURN ON ASSETS) 2,002 words, 1 division