Water Authorities (Return on Assets)

HC Deb 17 December 1986 vol 107 cc1307-23 10.26 pm

Mr. Roland Boyes (Houghton and Washington)

I beg to move,

That an humble Address be presented to Her Majesty, praying that the Water Authorities (Return on Assets) Order 1986 (S.I., 1986, No. 1952), dated 18th November 1986, a copy of which was laid before this House on 24th November, be annulled. The purpose of the order is to increase the price of water to its users. We in the Labour party do not accept that it is appropriate to calculate the rate of return on a false valuation of the industry's assets. My hon. Friends the Members for Birmingham, Perry Barr (Mr. Rooker) on 2 February 1985 and for South Shields (Dr. Clark) on 17 December 1985 discussed the technicality of using the current cost accounting procedure in their speeches on the orders S.I., 1984, No. 1995 and S.I., 1985, No. 1805. My hon. Friend the Member for South Shields said: To adopt the current cost accounting procedure as the valuation is a false and incorrect way to handle the issue." —[Official Report,17 December 1985; Vol. 89, c. 257.] My hon. Friend the Member for Perry Barr discussed the issued at some length and I do not wish to take time rehearsing the arguments again. However, I wish to consider the implications of the order, which are serious for the people whom my hon. Friends and I represent. There is a clear connection between the return on assets and the level of charges to customers.

An analysis of the figures reveals a number of facts, two of which I wish to highlight. First, since 1984–85 the target rate of return has increased for all water authorities and, secondly, a comparison of the range of rates of return with the previous two years reveals a widening gap. Last year, for example, the range was 1.5 per cent to 1.73 per cent., whereas this year it is 1.7 per cent to 2.1 per cent. Why is that happening, when the Government's initial intention was to move to a common rate of return for all authorities?

I am sure that the Minister will have had sight of a document from the Confederation of British Industry about the order, entitled "CBI: the Industrial View", which states:

it is reasonable to assume that next year's targets are being set to even out price increases rather than encourage effective management with the authorities. The price to the average householder is increasing dramatically, as a few figures will illustrate. Between 1978–79 and 1986–87, the increase in prices to all water authorities averaged a staggering 143 per cent., ranging from 123 per cent for South-West Water to 163 per cent for Northumbrian Water. The average price increase for the past two years was 11.7 per cent in 1985–86, when all water authorities except one increased prices by double figures. For 1986–87, the average is 8 per cent—still more than double the inflation rate.

Those increases resulted in extraordinary profits. Northumbrian Water increased its profits seven times and Thames by £45 million from £105 million to £150 million. Clearly, this is completely unacceptable. However, the same customers must accept further increases in 1987–88, which could be as high as 10 per cent. It is certain that they will be well above inflation, which suggests another question to the Minister. In the White Paper on privatisation, price controls of retail price index minus X were proposed. Why are today's customers facing an increase of RPI times X? Not only householders are affected by price increases. Business customers are, too, and the CBI is rightly worried that, after a series of increases exceeding inflation, businesses will have difficulty in keeping down operational costs and remaining competitive. That will have serious implications for jobs, which concerns my hon. Friends.

The water authorities have no option but to increase prices. The Government are slashing their borrowing powers by £100 million; that means that the only alternative is to cut capital spending which, with the current state of the industry, is not a serious option. Mr. Roy Watts, chairman of the Thames water authority, is so worried that he has written to all London Members. In his letter, he says: It seems as if we shall once again be asked to substantially increase our repayment of long term debt in the coming year … We shall be entirely debt-free within three years, which amounts to a very poor deal for today's customers. Mr. Malcolm Anson, chairman of Wessex water authority, wrote in a letter to my right hon. Friend the Member for Bristol, South (Mr. Cocks) on 10 December that the effect of the Government's policies could only be to the

detriment of our present standards of service. As a result of price increases and of reductions in the external financing limit—the borrowing powers of the water authorities—Richard Evans wrote in an article in the Financial Times on 17 July 1986:

The authorities have become much more financially attractive since the prospect of privatisation was first raised 18 months ago. It appears that the Government are still committed to privatising the water authorities. Or are they? From previous announcements, one cannot be sure of the Government's thinking on the industry. On 19 December 1984, the former Under-Secretary of State for the Environment, the hon. Member for Sutton and Cheam (Mr. Macfarlane), said:

We have absolutely no intention of privatising the water industry. The Government have no plans to urge that upon the water authorities. There has been some press speculation about it in the past, but there is no intention to do so." —[Official Report, 19 December 1984; Vol. 70, c. 457.] Just over a month later, on 31 January 1985, in a written answer, the Prime Minister said: The Government would welcome new ideas on privatisation. However, the water authorities are natural monopolies for many of their functions and we need to be particularly careful when considering replacing a public monopoly by a private one."—[Official Report, 31 January 1985; Vol. 72, c. 292.] On 5 February 1986, all had become clear. The Secretary of State for the Environment, now the Secretary of State for Education and Science, said: The Government have now decided to transfer the 10 water authorities in England and Wales to private ownership." —[Official Report, 5 February 1986; Vol. 91, c. 287.] The position was confirmed by the Minister for Housing, Urban Affairs and Construction when he moved an amendment to a motion of the hon. Member for Southwark and Bermondsey (Mr. Hughes) on 23 June 1986 which

welcomes the Government's proposals for the privatisation of the water authorities."—[Official Report, 23 June 1986; Vol. 100, c. 36.] But that is not the end of the story. On 3 July—just over a week after the Minister had spoken—the Secretary of State for the Environment was forced by my hon. Friend the Member for Copeland (Dr. Cunningham) to come before the House at 10 pm to make what my hon. Friend described as a pathetic and inadequate statement. In that statement, the Secretary of State withdrew the Government's privatisation proposals. However, he said:

I reaffirm the Government's intention to proceed with water privatisation as soon as practicable."—[Official Report, 3 July 1986: Vol. 100, c. 1261.] I will not ask the Minister to make a statement today. He must realise that this is a bit of a minefield. However, I have a serious comment to make about his Department's water legislation division. In 1985–86, costs other than staff were £103,000. In the first half of 1986–87, the costs had reached a colossal £1.3 million. On what is that money being spent? Should the Government bring back their proposals to privatise the water authorities, I assure the House that they will be opposed as vigorously as they were before.

My hon. Friends and I condemn any proposal to privatise a basic necessity of life. We believe that the water industry should be kept in the public sector, the integrated river basin management retained, and until a regional tier of government is introduced, regional water authorities should continue. However, there will be changes to democratise the boards, as we cannot allow a small group of people meeting in secret to determine policy. We shall invest in the industry to clean up beaches and improve the quality of drinking water. We shall not ask water authorities to become what Roy Watts described as "covert tax collectors" for the Government. Under a Labour Government, water authorities will be able to use profit to improve both quality of service and water to the consumer.

This week, a report by the Nitrate Co-ordination Group, "Nitrates in Water", describes how nitrate levels in some areas are above EEC limits and there is a danger that heavy nitrate concentrations could cause serious health hazards. The Government are also concerned about the state of beaches in the United Kingdom. It is incredible that only 27 beaches in the United Kingdom are designated as possessing bathing water meeting EEC quality standards.

To satisfy the requirements of both the nitrate and bathing beach problems would cost about £600 million. Some £200 million is estimated as being needed to solve the nitrate problem, and £400 million for the bathing beach problem. Ian Hill, the chairman of South-West Water, in The Independent on 13 December is reported as saying that the Minister's announcement on bathing beaches is incompatible with financial restrictions currently being imposed by the DOE … It is just not good enough to order these costly monitoring and improvement works while ignoring the financial implications. Will the Minister be producing hard cash for the water authorities to carry out these tasks, particularly the £400 million for the short term and urgent need to clean up the beaches?

The CBI, in the note already cited, states: The increases in charges expected next year will add between £80 million to £100 million to business and industry's costs … The signs are that where large water users discharge effluent to public sewage works it is becoming increasingly attractive for them to instal their own treatment plants. The writer of the note correctly points out that this will lead to unused and unusable plant in the hands of the water authorities, and consequently, the opportunity for investment in the productive areas that could create employment.

I should be glad to have the Minister's comments on this matter, along with answers to the other questions that I have raised. This is a shabby, unacceptable order. I urge the Minister not to press ahead with it but to take it away and come back with a more acceptable proposal. Unlike Conservative Members, my hon. Friends and I care about the water industry.

10.38 pm

The Minister for Housing, Urban Affairs and Construction (Mr. John Patten)

I am afraid that I must disappoint the hon. Member for Houghton and Washington (Mr. Boyes) after his excellent speech, which contained some penetrating questions. We shall be pressing ahead with the order, and we have every reason to be proud of our record of investment in the water industry since 1979, as I shall be able to demonstrate.

I remind the House of our policy, which I outlined a year ago when the previous order was debated. This is exactly the same policy as that announced in 1984 by my distinguished predecessor, my hon. Friend the Member for Eastbourne (Mr. Gow), who I see here tonight. Two years ago we were seeking convergence as much as possible, in answer to the hon. Gentleman's first question. [Interruption.] I do not know what the hon. Member for Copeland (Dr. Cunningham) finds so funny about this. I am trying to answer the questions put to me by the hon. Member for Houghton and Washington.

Dr. John Cunningham (Copeland)

It was a compliment.

Mr. Patten

If that is a compliment, I shall give way gladly.

Dr. Cunningham

Not to the hon. Gentleman.

Mr. Patten

In that case, I shall not. I thought that, as it is Christmas time, I might get a compliment from the hon. Gentleman, but, alas, I shall not.

I agree with the hon. Member for Houghton and Washington that there has been some divergence, but this divergence reflects the financing needs of the authorities. Anglian has the highest target, reflecting its heavy investment requirements and its need to reduce the heavy burden of interest.

We have asked water authorities steadily to improve the rate of return that they earn on their capital assets. The previous figure of approximately 1 per cent was an inadequate return on the considerable investment in the water industry. In 1984 the target announced for 1987–88 by my hon. Friend the Member for Eastbourne was an average of 1.9 per cent. The average figure in the order that was laid on 24 November is close to that figure, but at 1.875 per cent it is not quite so tough.

The hon. Member for Houghton and Washington was a little unfair about the Government's record since 1979. In 1986–87, water authorities' capital expenditure, excluding expenditure on the tricky subject of land drainage, is £925 million, about 40 per cent of revenue. That is not bad. It represents an increase of 35 per cent., in volume terms, since 1980–81. In some areas the increases, in volume terms, are even higher—70 per cent in the South-West, 74 per cent in the North-West and 110 per cent in Wessex. I do not see any Members from Wessex constituencies here; clearly they are very satisfied with the volume of investment in their area. It is more than the 70 per cent increase in the South-West, where the volume of investment is considerably above the national average.

Mr. Robin Maxwell-Hyslop (Tiverton)

Of course the Wessex Members of Parliament are satisfied. They obtain a great deal of their water from a new reservoir, paid for out of capital, in the South-West water authority's area.

Mr. Patten

The South-West will have its own splendid reservoir when Roadford reservoir is constructed.

In 1974, virtually all the investment by the water authorities was funded by borrowing. Inevitably, that placed a burden on public expenditure. By 1980–81, 40 per cent of the investment was funded by borrowing. In 1987–88 the industry will pay for virtually all its investment. That has been achieved while the burden on public expenditure has been reduced.

The water authorities deserve praise for their efficiency. They have reduced their total operating costs by 6 per cent., in real terms, since 1980. Efficiency in most water authorities has improved year by year. Unfortunately, it has slipped back in recent years in a few authorities. Operating and management expenditure per head has been reduced for all major services. Standards of service have been maintained or improved, although a few water authorities could do better. On the whole, though water authorities are doing more work for less expenditure. That is an impressive record.

Mr. Simon Hughes (Southwark and Bermondsey)

Does the Minister know of any public sector body from which the Government have required such a large pay back of borrowed money in the last three years?

Mr. Patten

There is nothing wrong with a businesslike rate of return of 1 to 2 per cent on water industry assets. Any business would expect to earn considerably more. I can tell the official spokesman for the alliance, its representative here today, that water authority debt stands at about £5 billion and interest charges take no less than one quarter of the whole of the revenue from water authority customers. That is too much, hence the policy laid down by my predecessor, my hon. Friend the Member for Eastbourne.

Amidst all the understandable concern about bathing beaches and the quality of river water, which the hon. Member for Houghton and Washington did not mention, let us remember that 99 per cent of Britain's households are connected to mains water and 95 per cent are connected to sewerage. Those are the highest percentages in Europe.

Mr. Nigel Spearing (Newham, South)

Thanks to public enterprise.

Mr. Patten

Thanks to public and private enterprise over the best part of 200 years. Every year, service standards to maintain these improvements are monitored through the process of the corporate plans produced by water authorities.

Mr. Spearing

Will the hon. Gentleman give way?

Mr. Patten

Perhaps the hon. Gentleman will forgive me if I do not. This is a short debate and I must make progress. The number of customers experiencing inadequate water pressure has fallen considerably. In every area the quality of drinking water has improved, and I am happy to report to the House that the number of properties affected by sewage flooding is low and has fallen in most authority areas. The reductions in operating costs achieved by most authorities have not been at the cost of a reduction in service standards. That is a tribute to the publicly owned water authorities and, where appropriate, to the excellent record of the privately owned water companies. I am pleased to see my hon. Friend the Member for Harrow, West (Sir J. Page) in his place.

Mr. Maxwell-Hyslop

They do not dispose of sewage.

Mr. Patten

They do not; I am well aware of that. However, they supply water and have a good record for supplying potable water at a good cost. The underlying gains in efficiency are better than steady and, even after all these service improvements, there has been a 6 per cent reduction in operating costs.

Despite the evidence of improving levels of service, we still hear frequent complaints about the state of the water industry's assets. That is a bit of a myth, because asset condition is now reported annually in the corporate plans of water authorities, and we discuss those with the authorities, as I have done this year with every water authority in England and as my hon. Friend the Member for Newport, West (Mr. Robinson) the Parliamentary Under-Secretary of State for Wales, has done with the chairman of the Welsh water authority.

Thanks to the independent-minded work of the Water Research Centre, the water industry now has manuals describing the best way of conducting and interpreting surveys on the condition of assets. All authorities are making considerable progress with these surveys.

The record shows increased investment and lower operating costs. There have been improvements in service standards, certainly an improved knowledge of asset condition, and a reduction in the burden of public expenditure, which I applaud. The present order continues that policy. It is a great contrast to the policy which led to declining investment for which some right hon. Gentlemen on the Opposition Front Bench were responsible in the Labour Government before 1979.

In 1979 we saw declining investment and seemingly bottomless deficit financing of the water industry. That was the picture that faced the Government when we took power in 1979. It was not a happy picture, and the progress that has been made since 1979 is a remarkable tribute to the efficiency of the water authorities and to the Government for the substantial sums of money invested in the industry.

Mr. Jeremy Corbyn (Islington, North)

How many jobs have been lost?

Mr. Patten

About 20 per cent. Of course, aspirations must go on rising and I share those aspirations, as does my right hon. Friend the Secretary of State for the Environment. As scientific understanding and environmental awareness develop, and as general living standards continue to rise for most of—though not all—our citizens we will have to apply ever-higher standards. We are not trying to measure our achievements in the water industry against one benchmark. The water authorities have been brought to a much stronger financial position from which they can face the problems. Their corporate plans show that they recognise the problems and have the will to tackle them.

The order continues the Government's progress before privatisation, to which the Government remain committed, in discharging their responsibility to ensure that the water authorities operate in an effective and businesslike way.

It is a long time now since the water industry was the poor relation of local government, which it was for too long. The Government can rightly claim that we have created the conditions of sound finance and commercial flair which now, more than ever before, permeate most water authorities and reflect what their customers expect. That is why we intend to press the order home tonight.

Several Hon. Members

rose—

Mr. Deputy Speaker (Mr. Ernest Armstrong)

Order. I remind the House that the debate must finish at 11.30 pm and the Front bench spokesmen are hoping to catch my eye at 11.20 pm.

10.51 pm

Mr. William O'Brien (Normanton)

The debate has been initiated because of the impact of the Government's financial policy on water authorities' charges next year. Current signs are that the charges for most water authorities will increase by between 8 and 10 per cent., with the majority being at the 10 per cent mark. That follows an increase in excess of 10 per cent for the current year. Therefore, there is little comfort in what the Minister has offered tonight to water consumers throughout the length and breadth of Britain.

If there is one Minister in the Government who has his head in the sand, it is the Minister who is responsible for water charges. The Government's policies have meant high prices, well above the rate of inflation, and, in most cases, a reduction in services. If consumers had the choice, would they go for a rise in water charges in order to receive a higher level of services? We often hear that question posed in the water industry.

Mr. John Patten

Will the hon. Gentleman give way?

Mr. O'Brien

The Minister was the first to say that this was a short debate, yet after two minutes he asks me to give way. I am afraid that I must refuse the Minister on this occasion. The Minister refused to give way to me once in Committee because he wanted an apology. I shall not give way to the Minister.

In Yorkshire, charges have been increased, yet we are still suffering from discoloured water, soil collapse and flooding. If the Minister comes to Yorkshire he will see how higher charges are reflected in the services provided for the people there. He did not mention Yorkshire.

It is politically impossible for the Government to rate-cap local authorities to fight inflation and then to increase charges to water consumers by an average of 10 per cent. It is also an unnecessary burden to increase charges for industry, particularly the big water users, such as the food processing, chemical, pharmaceuticals, textiles, brewing and paper industries. I believe it is an attack on job opportunities in the large water-consuming industries. The object of the 1983 reorganisation was to ensure that the water authorities were run as highly efficient businesses. The way in which the Minister has described the order tonight suggests that they are just turning water authorities into tax collectors because the order is nothing more than a tax increase on water charges.

I should like to raise the question of the water authorities opening their meetings to the public and the press. We are talking about water charge increases which will affect all water consumers, especially in Yorkshire, yet there is no opportunity for members of the public or consumers to try to find out how decisions are reached.

Earlier this month the Yorkshire water authority at a board meeting, revealed: the increase would have been nearly 2 per cent higher if it had not been for two factors: the welcome relaxation by the Government of financial controls which permit more borrowing". If to "permit more borrowing" is the criterion for reducing charges, why do the Government not allow that to continue? That is the Yorkshire water authority's suggestion to keep charges down.

On behalf of the Yorkshire water authority, I must say that if we are to be reasonable to consumers we should allow more borrowing to take place, as has been described by that authority, in order to keep prices down. I hope that we will reject the order.

10.56 pm

Mr. Robin Maxwell-Hyslop (Tiverton)

There are many defects in the argument that my hon. Friend the Minister put forward. If he had been listening at Question Time, he would have heard his right hon. Friend the Secretary of State say that he regarded borrowings not as debt but in the nature of an overhead. If that is the case, it is nonsense to talk about return on capital. The Minister cannot call it capital for one argument and for another call it overhead. He should make his mind up which it is, instead of trying to ride both horses or they will split him down the middle because they are going in different directions.

The Government are trying, we understand, to control inflation. Therefore, what possible reason can there be to bring in orders the effect of which is to increase the water rates by more than the rate of inflation? Water is the tool of the trade of many industries—for example, the paper industry. It must be remembered that retirement pensions increase only as function of the retail price index and, moreover, they are not subject to abatement, unlike rates. Those are two good reasons for keeping water charges below the rate of inflation and not allowing them to go above it.

The other major point I want to make is that the Department of the Environement is supposed to be a coherent Department of State. There are many reasons for believing that that is a false assumption. It is simply not coherent to have one Minister exhorting water authorities to spend immense sums of money on new sewerage works to process sewage, instead of what is politely known as macerating it and then releasing it into the sea—that may be commendable—and then to have a zero external financing limit imposed on the water authority that has the longest coastline of any per head of population and whose population increased by a tremendous factor in the summer—it has approximately on quarter of the tourist activity in Britain—when water flows are at a minimum.

The use of capital expenditure for the purpose of cleaning up the beaches is not compatible with the order against which the prayer has been laid. I shall be voting for the prayer because the order does not contain a coherent and sensible policy and because it is not compatible with what the autumn statement has to say about inflation.

11 pm

Mr. Dafydd Wigley (Caernarfon)

This issue of water charges in Wales has been a contentious one for a long time and it has become more contentious in recent years because of the substantial increase in the cost of water under the Government's policies. Welsh water rate payers have to pay £4 million more a year in water rates as a result of a deliberate act of policy by the Government when they did away with the Water Equalisation Act 1977. There has been a historic high level of water charges in Wales, which for the most of the time have been at the top of the league table of charges in England and Wales, and in the past couple of years there have been forced increases in water charges arising from the requirement to have a set return on the capital base.

Water rates in Wales will increase next year between twice and three times the rate of inflation as a result of the order against which we are praying. The charge for water will increase by 6 per cent., 7 per cent or 8 per cent compared with the going rate of inflation, which is 3 per cent. That will hit those who can ill afford to pay such charges.

Why are we being forced to increase water charges in Wales in this way? Increased charges are being imposed to finance the capital expenditure programme, which I agree is necessary in Wales. I understand that the capital expenditure programme next year will include about £68 million for the Welsh water authority. A substantial part of the programme will be directed to improving beaches in Wales, and no one would dispute the need to improve their standard. We contend, however, that the cost of undertaking the necessary work should be borne by the taxpayer in general and not only by the ratepayer in Wales. The beaches of Wales are for the benefit of people from all parts of these islands and the cost of improving them should not be incurred only by water rate payers in Wales. The cost of cleaning the beaches of Wales should be met by Treasury grant instead of increasing the return on capital. The order will require a 1.95 per cent. return on capital base, which is higher than the average. I believe that the Minister said that the average is 1.875 per cent. As I have said, charges in Wales are already high.

The proposed increase will realise an additional £7.5 million a year. That is the increased profit that is required to be funded by Welsh water rate payers to finance the Government's back-door taxation. The logic of the Government's position suggests that there is a move towards privatisation. The Welsh water authority has a capital base of £1,600 million and if there were to be a reasonable return in financial terms on that base we would be looking for 10 per cent., which would be £160 million a year. The profit of the authority has been about £24 million a year, and that will increase to about £30 million as a result of the change that the Government propose. That is nothing like the return that will be required if the authority is to be privatised.

If there is to be privatisation, there will have to be a massive increase in the cost of water or the assets of the authority will have to be given away at about a fifth or a quarter of the cost of their construction. That would be a nonsensical public policy. The dogmatic privatisation which the Government insist on pursuing is the reason why Welsh water rate payers are being required to pay 6 per cent., 7 per cent or 8 per cent more for their water next year.

As I have said, the extra charge will hit home extremely hard. If the authority is privatised, the increased capital expenditure which is being justified by the Government will not be directed to capital expenditure. It will be given in the form of a dividend to those who have put money in. In other words, it is an excuse to say that we need to fund capital expenditure by increasing the return. The Government want the return to be high enough to be attractive to those who may put money in. There is no way in which privatisation of this basic public service can be justified, as the Government insist, and the poor water rate payer will have to bear the cost.

11.5 pm

Mr. Ian Gow (Eastbourne)

I rise to congratulate my hon. Friend the Minister on the way in which he has presented the Government's case, and to say that I hope that my hon. Friends will vote against the Opposition's prayer.

I very much welcome my hon. Friend's reaffirmation of the Government's commitment to the privatisation of the water industry. That privatisation is long overdue, and I hope that it will be included in one of the first Bills in the next Parliament. When that privatisation has been accomplished, it will no longer be necessary for us to debate such orders late at night although reference has been made to the remarks of my right hon. Friend the Prime Minister, it is emphatically the case that the water industry is capable of responding to a new impetus and to the fresh ideas which will come from private ownership.

My hon. Friend the Minister is continuing with the Government's sensible economic policy in seeking a proper return on the water authorities' assets. There has been a slight modification of the policy. The return on assets sought in the order is slightly less than was envisaged two years ago. Nevertheless, requiring a higher and more appropriate return on assets moves the water authorities in the right direction.

There is one specific point that I wish to put to my hon. Friend the Minister, and I hope that he has had more success than I had when I held his responsibilities. It was my experience that the nine water authorities in England were extremely reluctant to dispose of land that was not required for operational purposes. There was a misunderstanding, or myth, that it was necessary for the water authority requiring a catchment area to own the freehold.

I hope that my hon. Friend will persevere strenuously and urgently with the policy of requiring the water authorities to dispose of land that is not required for operational purposes. Such a disposal of assets would diminish the cost to the customer and would affect the way in which my hon. Friend presents any further orders, if there are any. I urge on my hon. friend the truth of the proposition that it is possible to safeguard the purity of supply from a catchment area without the water authority owning the land involved.

I congratulate my hon. Friend, and I hope that the Opposition's prayer will be soundly defeated.

11.8 pm

Mr. Simon Hughes (Southwark and Bermondsey)

We will wholeheartedly support the prayer, because the Government have persisted in the same illogical economic policy and ignored the consumer.

It is illogical to say that over a very short period of time the borrowing necessary for the water industry must be paid off by the consumers of last year, this year and next year. That is not the way that public finance should work, and it is not the way that it wórks anywhere else. One should add to that, as the hon. Member for Tiverton (Mr. Maxwell-Hyslop) said, the completely contradictory statement of Government policy that was adumbrated only hours ago by the Chancellor of the Exchequer when asking the House to approve his autumn statement. In chapter I, "Economic prospects for 1987", the Chancellor makes it clear that the Government still regard the containment of inflation to about 3 per cent as one of the cornerstones of their economic policy. Yet the Government persist—the hon. Member for Eastbourne (Mr. Gow) started the policy when he was Minister with responsibility for the water industry—in telling the industry that it must repay money and make such charges as will inevitably cause the consumers to pay substantially more than the rate of inflation, which they regard as unacceptable. It is not acceptable in terms of economic logic or in terms of who should bear the cost burden of the water industry. Above all, it is not acceptable to the consumer.

The Minister referred to many points, some of which we do not disagree with—for example, the need for investment. There is clearly a substantial need for investment and greater efficiency. However, he did not-explain that the policy will substantially increase the price of water for people in Tory-held constituencies in the Thames region and elsewhere. The Government must accept the responsibility for that.

The Minister knows that in October the chairman of the Thames water authority wrote to all hon. Members representing constituencies in the Thames water authority region—all 148 Members, the majority of whom are Conservatives, including the Prime Minister and the Minister responsible for the water industry—stating that if the policy were pursued there would be an increase of about 10 per cent in the forthcoming year. One high-ranking Government source—who appears unnamed at the relevant time—made it clear that that was an entirely unacceptable way for the chairman of the Thames water authority to behave and that he would not be reappointed.

It is unacceptable for someone who is appointed by the Government to run a quango to be criticised when he tries this year, for the third year running, to say that the authority does not want or need the increase. The authority does not regard the increase as reasonable or appropriate because it is doing perfectly well and should be left to its own devices.

It is unacceptable that, for the third year in a row, we have an order before us requiring a return on assets that has not been asked for by the authorities. The rate of return is higher than ever before. It increased from 1.4 per cent three years ago to an average of 1.62 per cent last year, and the average is 1.88 per cent this year.

The debate will again reflect anger at the Government's failure to comprehend. They have chosen the wrong criteria for calculating the way in which historical and actual costs should be financed. They have neglected the fact that if they did not require the money to be paid back to the Treasury, it could be invested in infrastructure. They have also neglected the enormous environmental demands and requirements that proper investment could allow to proceed.

The Government have become hooked on an economic policy that is nonsense. They want to make the fatted calf ripe for slaughter when they privatise the industry. I do not believe that they will privatise it. If they put privatisation up front in their election shop window, their natural supporters will claim that privatising the water industry and the environment is unacceptable. In the same way this increase in water charges is unacceptable. It will remain unacceptable every time the Government try this con on the country. They could avoid it if they only had the guts to do so.

11.13 pm

Mr. Tony Speller (Devon, North)

The hon. Member for Southwark and Bermondsey (Mr. Hughes) made an interesting speech. It appears that the Liberal party has made a good economic case for privatisation. That is not the point that I seek to make. The test must be whether the order fulfils the wishes of the consumers—the users of water, the residents of the area. I must say to the Minister that, frankly, the order does not meet their wishes.

The water authorities are inevitably the least popular authorities of all unpopular bodies. That will always be the case as their responsibilities are so vast and their areas so huge. It is no accident that there is a triangle of colleagues in the Chamber representing constituencies in the South-West water authority region. We all suffer from old mains, over-developed rural areas, low pressure and everything that is costly and where improvement is inevitable. Therefore, anything that we allow our authorities to invest in the mains and the infrastructure must be welcome. I do not go as far as the hon. Member for Southwark and Bermondsey because it is also inevitable that we must turn to the idea of privatisation to give the consumer that which he wishes to have.

I do not put that forward as an argument for voting against the order. My fear is, quite simply, that someone in the Department thought of an acceptable figure—5 per cent or 7 per cent—about which people would not complain. I find that an unacceptable and unreasonable way of conducting matters.

My hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) spoke about one area where the sewage is macerated before being put into the estuary of two most beautiful rivers, the Taw and the Torridge. Someone somewhere has to permit water authorities to spend their money on things that we must have, such as clean, pollution-free water.

I am entirely in favour of privatising what might be called a water company, but there is no way in which we can privatise and put on the meter the cost for coastal protection, prevention of urban and rural pollution and the riparian interests. We must think a great deal harder and a great deal further ahead before we bring any water body to the marketplace. I am not against the marketplace. I believe in it, and I was fascinated to hear the argument in favour of a market operation. However, I could never support an operation that meant saying to the business man or the farmer with a meter, "It is your job to pay for every bit of water pollution, recreation and coastal defence." That would be illogical, and we must not follow that road.

Having said that, I congratulate my hon. Friend the Minister, who has given long and hard consideration, under some very hard pounding—

Mr. John Patten

And long pounding.

Mr. Speller

Indeed, and especially from the west country. That pounding will continue. It will be as the water breaking on the breakwater, until the ministerial breakwater gives way.

1.17 pm

Mrs. Ann Clwyd (Cynon Valley)

The old-age pensioners and the low-paid workers who come to my surgery clutching their water bills from the Welsh water authority despair when those bills arrive in their post because they know that they will not obtain any help towards payment. That means a fall in their already poor standard of living. They live in an area of low income, high unemployment and rotten housing. The incredibly high water bills are yet another injustice perpetuated by this Government.

There is an abundance of water in Wales. Water charges and standards of service have been emotive and keenly debated issues in Wales for a long time. Customers of the water services in Wales have many reasons for feeling that they are at a disadvantage compared with people in many areas of England. The average water rates bill in Wales of £110 is the third highest in the country and £34 higher than in the Severn-Trent area, where much of the water comes from Welsh reservoirs. Indeed, more than 20,000 Welsh ratepayers have withheld payment of their water bills in protest at what they see as discrimination in water charges.

Two years ago, the Welsh Affairs Select Committee put forward important proposals to deal with water rates. The two key proposals—that there should be a system of partial equalisation of water rates and a water rates rebate system to ease the burden on Welsh water ratepayers—were rejected, of course, by this Government. The Secretary of State for Wales derided the idea of an equalisation system, saying that it could be achieved only if a national water authority for the United Kingdom was created with all the penalties in terms of inefficiency and lack of local sensitivity, which would probably be the price of such a large organisation."—[Official Report, Welsh Grand Committee, 21 March 1984; c. 11.] What could be more insensitive to local feelings than the imposition of these higher water charges on the people of Wales which the Government are trying to enforce tonight?

The Government are proposing to hit the people of Wales again. They are ignoring the sense of grievance over the water issue. Since 1979 the overall increase in Welsh water rates has been 132 per cent in cash and 40 per cent in real terms. That is wholly unacceptable to the people of Wales. I assure the Government that they will make their displeasure known in no uncertain terms.

11.19 pm

Mr. Roy Hughes (Newport, East)

The order lays down the return on assets for water authorities in England and Wales. The figures look modest, but with the arcane system of accountancy they constitute a considerable burden, as my hon. Friend the Member for Houghton and Washington (Mr. Boyes) made clear. The figure for Wales has risen from 1.45 per cent in 1985–86 to 1.7 per cent in 1986–87 and will rise to 1.95 per cent in 1987–88.

The Government's policy towards the water industry has been spawned over a number of years. What was essentially a local government service has been taken over. By 1981 our water authorities were committed to current cost accounting, a system most unsuitable for that industry. Reservoirs and sewage installations are built to last a hundred years. Why should people living today bear the whole cost of installations that will serve people not yet born? These are essentially long-term investments and should be financed accordingly.

We know of the Government's obsession with the public sector borrowing requirement, but the fundamental reason for their approach is the pursuit of privatisation. Juicy profits make water installations a rosier prospect for the market place. Water is big business today. The 10 water authorities of England and Wales spend more than £2,000 million per year and employ more than 50,000 people. A great sell-off of those undertakings would certainly enrich the Government's coffers.

Meanwhile, consumers suffer. In Wales we have become accustomed to a standard seasonal announcement. The columns of our newspapers regularly blurt out the message, "Water to cost more next year", but many of the increases are entirely unnecessary. As my hon. Friend the Member for Normanton (Mr. O'Brien) pointed out, there is a contradiction in the Government's policy. Water charges are based on rateable value. The Government are leaning on local authorities to keep rates down, but they are actively striving to drive water charges up. Water is a basic and essential commodity, and in Wales we have an abundant supply, yet further increases of up to 10 per cent are expected in the new year. That is more than double the rate of inflation. It will increase the average Welsh water bill to £124 and make Welsh water the most expensive in the country. It is no wonder that water in Wales is an emotive subject.

The Government are responsible for that preposterous situation. The price of water is being driven up to absurd levels because of their policies. The Secretary of State for Wales sits in the Cabinet and allows these things to happen. A couple of days ago he announced that he would not be standing at the next general election, so he will be little more than a lame duck until then. His staying on is understandable, given the paucity of talent on the Tory Benches.

Yesterday, that most authoritative journal, the Financial Times, in an article by Peter Riddell, considered who would be the next Welsh Secretary.

Mr. John Patten

My hon. Friend the Member for Watford (Mr. Garel-Jones).

Mr. Hughes

The caption to the photograph said that the Secretary of State was "leaving the bridge uncrossed". The headline proclaimed: Tories scour Wales in the search for Edwards' successor. The article ran in the form of an advertisement and said: WANTED: A Welsh-born Tory MP with some administrative and political talent and potential to become a Cabinet minister. The article said that the existing Under-Secretaries of State were inadequate and that The other 10 MPs consist mainly of a mixture of those nearing the end of their careers, perpetual undistinguished backbenchers, the unpromotable and the inexperienced.

Mr. Deputy Speaker

Order. I hope that we can get back to the prayer.

Mr. Hughes

What a party claiming to represent Wales! All I can say is that there is no problem for the Tory party, because after the next general election the Secretary of State for Wales will he my hon. Friend the Member for Alyn and Deeside (Mr. Jones).

11.26 pm

The Parliamentary Under-Secretary of State for Wales (Mr. Mark Robinson)

It is a great pity that the hon. Member for Newport, East (Mr. Hughes) chose the opportunity of what has otherwise been a serious debate to indulge in a personal attack on my right hon. Friend the Member for Pembroke (Mr. Edwards), and to have the discourtesy to do it when my right hon. Friend is not in the chamber to defend himself.

Mr. Roy Hughes

It was not an attack.

Mr. Robinson

My right hon. Friend has done a superb job as Secretary of State for Wales and will continue to do so as long as he is in this House.

Many Opposition Members, while extolling the virtues of increased investment in the water industry, failed to acknowledge that that can be achieved only in the context of authorities being efficient and effective. I entirely agree with my hon. Friend the Member for Eastbourne (Mr. Gow) about the benefits that will be derived from water privatisation. I assure my hon. Friend that it remains our policy that water authorities should sell off land that is surplus to their requirements.

Privatisation will give the water industry freedom to operate in the capital markets and render the need for a debate such as this completely unnecessary. We have heard some alarmist and fictional figures for the likely rise in water charges, including charges in Wales. I am assured that Yorkshire Water charges will go up by only about 5.5 per cent., which I am sure is welcome news to the hon. Member for Normanton (Mr. O'Brien).

Mr. Boyes

Does that include inflation?

Mr. Robinson

Yes.

We expect charges to rise in a band of between 4.5 per cent and 7 per cent. On the basis of my conversation with the chairman of the Welsh water authority, I expect its rise to be within that band rather than the alarmist 10 per cent which the hon. Member for Newport, East mentioned. I do not know where he got that figure from. He is clearly not living in the real world.

Contrary to what the hon. Member for Newport, East said, we have improved the efficiency with which the water industry is run and provided the basis on which we have been able to improve the infrastructure through which water is provided. We have also set out, through such investment, to improve water quality.

The success of the Government's financial policy for the water authorities is clear. Investment has increased by more than 55 per cent., or about 35 per cent in volume terms, after taking account of inflation in construction prices. At the same time, the Government have taken a grip on the legacy of water authority borrowing. Water authorities' operating costs have also been substantially reduced. There can be no turning back on this policy. Therefore, I commend the f order to the House and urge hon. Members to vote against the prayer.

Question put:—

The House divided: Ayes 110, Noes 160.

Division No. 46]	[11.30 pm
AYES
Adams, Allen (Paisley N)	Lamond, James
Alton, David	Lewis, Ron (Carlisle)
Archer, Rt Hon Peter	Lewis, Terence (Worsley)
Ashdown, Paddy	Livsey, Richard
Atkinson, N. (Tottenham)	Lloyd, Tony (Stretford)
Banks, Tony (Newham NW)	Lofthouse, Geoffrey
Beckett, Mrs Margaret	Loyden, Edward
Beith, A. J.	McCartney, Hugh
Bell, Stuart	McDonald, Dr Oonagh
Benn, Rt Hon Tony	McGuire, Michael
Bennett, A. (Dent'n & Red'sh)	McKay, Allen (Penistone)
Bermingham, Gerald	MacKenzie, Rt Hon Gregor
Blair, Anthony	McWilliam, John
Boyes, Roland	Madden, Max
Brown, Gordon (D'f'mline E)	Mallon, Seamus
Callaghan, Jim (Heyw'd & M)	Marek, Dr John
Canavan, Dennis	Martin, Michael
Clark, Dr David (S Shields)	Maxton, John
Clay, Robert	Maxwell-Hyslop, Robin
Clelland, David Gordon	Meadowcroft, Michael
Clwyd, Mrs Ann	Michie, William
Cocks, Rt Hon M. (Bristol S)	Nellist, David
Cook, Robin F. (Livingston)	O'Brien, William
Corbyn, Jeremy	Owen, Rt Hon Dr David
Craigen, J. M.	Park, George
Cunliffe, Lawrence	Patchett, Terry
Cunningham, Dr John	Pendry, Tom
Dalyell, Tam	Penhaligon, David
Davis, Terry (B'ham, H'ge H'l)	Pike, Peter
Dixon, Donald	Powell, Raymond (Ogmore)
Dobson, Frank	Raynsford, Nick
Dormand, Jack	Redmond, Martin
Dubs, Alfred	Robertson, George
Duffy, A. E. P.	Rooker, J. W.
Dunwoody, Hon Mrs G.	Rowlands, Ted
Eadie, Alex	Shields, Mrs Elizabeth
Eastham, Ken	Skinner, Dennis
Fatchett, Derek	Smith, C.(Isl'ton S & F'bury)
Fields, T. (L'pool Broad Gn)	Smith, Rt Hon J. (M'ds E)
Fisher, Mark	Snape, Peter
Foster, Derek	Spearing, Nigel
George, Bruce	Steel, Rt Hon David
Godman, Dr Norman	Stott, Roger
Hamilton, James (M'well N)	Straw, Jack
Harrison, Rt Hon Walter	Thomas, Dafydd (Merioneth)
Hogg, N. (C'nauld & Kilsyth)	Thompson, J. (Wansbeck)
Home Robertson, John	Wallace, James
Howarth, George (Knowsley, N)	Wardell, Gareth (Gower)
Howell, Rt Hon D. (S'heath)	Wareing, Robert
Howells, Geraint	Welsh, Michael
Hughes, Robert (Aberdeen N)	Wigley, Dafydd
Hughes, Roy (Newport East)	Winnick, David
Hughes, Simon (Southwark)	Young, David (Bolton SE)
John, Brynmor
Johnston, Sir Russell	Tellers for the Ayes:
Jones, Barry (Alyn & Deeside)	Mr. Ron Davies and
Kirkwood, Archy	Mr. Sean Hughes.

NOES
Aitken, Jonathan	Budgen, Nick
Alison, Rt Hon Michael	Cockeram, Eric
Baker, Nicholas (Dorset N)	Colvin, Michael
Batiste, Spencer	Conway, Derek
Bellingham, Henry	Cope, John
Benyon, William	Dorrell, Stephen
Boscawen, Hon Robert	Douglas-Hamilton, Lord J.
Bottomley, Peter	Dunn, Robert
Bottomley, Mrs Virginia	Fallon, Michael
Brooke, Hon Peter	Favell, Anthony
Brown, M. (Brigg & Cl'thpes)	Forth, Eric
Buck, Sir Antony	Fox, Sir Marcus

Franks, Cecil	Nicholls, Patrick
Fraser, Peter (Angus East)	Norris, Steven
Freeman, Roger	Osborn, Sir John
Galley, Roy	Ottaway, Richard
Garel-Jones, Tristan	Page, Sir John (Harrow W)
Goodlad, Alastair	Page, Richard (Herts SW)
Gow, Ian	Patten, Christopher (Bath)
Greenway, Harry	Patten, J. (Oxf W & Abgdn)
Gregory, Conal	Pollock, Alexander
Griffiths, Peter (Portsm'th N)	Portillo, Michael
Grist, Ian	Powell, William (Corby)
Ground, Patrick	Powley, John
Grylls, Michael	Proctor, K. Harvey
Hamilton, Hon A. (Epsom)	Raffan, Keith
Hamilton, Neil (Tatton)	Rathbone, Tim
Hanley, Jeremy	Rhodes James, Robert
Harris, David	Ridsdale, Sir Julian
Harvey, Robert	Roberts, Wyn (Conwy)
Havers, Rt Hon Sir Michael	Robinson, Mark (N'port W)
Hawkins, Sir Paul (N'folk SW)	Roe, Mrs Marion
Hayward, Robert	Rowe, Andrew
Heddle, John	Sackville, Hon Thomas
Hickmet, Richard	Sainsbury, Hon Timothy
Hind, Kenneth	Sayeed, Jonathan
Hirst, Michael	Scott, Nicholas
Holt, Richard	Shaw, Sir Michael (Scarb')
Howard, Michael	Shelton, William (Streatham)
Howarth, Alan (Stratf'd-on-A)	Shepherd, Colin (Hereford)
Howarth, Gerald (Cannock)	Silvester, Fred
Hubbard-Miles, Peter	Sims, Roger
Hunt, David (Wirral W)	Skeet, Sir Trevor
Hunt, John (Ravensbourne)	Speed, Keith
Jackson, Robert	Speller, Tony
Johnson Smith, Sir Geoffrey	Spicer, Jim (Dorset W)
Jones, Gwilym (Cardiff N)	Spicer, Michael (S Worcs)
Jones, Robert (Herts W)	Stanbrook, Ivor
Key, Robert	Steen, Anthony
Knight, Greg (Derby N)	Stern, Michael
Knowles, Michael	Stevens, Lewis (Nuneaton)
Lang, Ian	Stewart, Allan (Eastwood)
Lawler, Geoffrey	Stewart, Andrew (Sherwood)
Lawrence, Ivan	Temple-Morris, Peter
Leigh, Edward (Gainsbor'gh)	Terlezki, Stefan
Lennox-Boyd, Hon Mark	Thatcher, Rt Hon Mrs M.
Lester, Jim	Thomas, Rt Hon Peter
Lilley, Peter	Thompson, Donald (Calder V)
Lloyd, Peter (Fareham)	Thompson, Patrick (N'ich N)
Lord, Michael	Thorne, Neil (Ilford S)
Lyell, Nicholas	Thurnham, Peter
McCurley, Mrs Anna	Waddington, David
MacKay, Andrew (Berkshire)	Wakeham, Rt Hon John
MacIean, David John	Wall, Sir Patrick
McLoughlin, Patrick	Waller, Gary
McNair-Wilson, M. (N'bury)	Ward, John
Major, John	Wardle, C. (Bexhill)
Malins, Humfrey	Warren, Kenneth
Marlow, Antony	Watts, John
Marshall, Michael (Arundel)	Wells, Bowen (Hertford)
Mather, Carol	Wheeler, John
Mayhew, Sir Patrick	Whitfield, John
Merchant, Piers	Wiggin, Jerry
Meyer, Sir Anthony	Wilkinson, John
Miller, Hal (B'grove)	Wolfson, Mark
Mills, Iain (Meriden)	Wood, Timothy
Moate, Roger	Woodcock, Michael
Morris, M. (N'hampton S)	Yeo, Tim
Morrison, Hon C. (Devizes)
Moynihan, Hon C.	Tellers for the Noes:
Nelson, Anthony	Mr. Francis Maude and
Neubert, Michael	Mr. Tony Durant.

Question accordingly negatived.