HC Deb 26 May 1989 vol 153 cc1285-91

1 pm

Mr. Ian Gow (Eastbourne)

The Eastbourne Water Company is one of the 29 statutory companies which provide fresh water to almost a quarter of the people in England and Wales. One hundred and thirty years ago, when Eastbourne Water was incorporated by Act of Parliament, it had 5,000 customers. Today, the company serves nearly 220,000 domestic customers as well as industry for the whole of my constituency and for parts of the constituencies of my hon. Friends the Members for Wealden (Sir G. Johnson Smith), for Lewes (Mr. Rathbone), and for Bexhill and Battle (Mr. Wardle). They have authorised me to say that I speak for them as for myself this afternoon.

In January this year, the Eastbourne Water Company increased its charges by 19.5 per cent. In February it was taken over by a French company called SAUR. In April, now French-owned, it put up its charges by a further 15.8 per cent. amounting to an increase over 15 months of 38.4 per cent. Quite rightly, those increases have caused dismay to my hon. Friends, to me and to our constituents. That was the second highest increase in the kingdom. Only the West Kent company, with a 42 per cent. increase, has a more shameful record. West Kent, like Eastbourne, has recently been acquired by SAUR.

In his statement of 27 February 1989 published in the annual report of the Eastbourne Water Company, the then chairman said: At least half of the January increase of 19.5 per cent. could be attributed to the Government's policy of privatisation. On 3 May, my three hon. Friends and I had a meeting with some of the directors of the company. The meeting took place in a Committee Room. It would have been a fascinating experience for you, Madam Deputy Speaker, had you been able to join us. We listened with disbelief as the managing director of the company told us in the presence of one of the newly appointed French directors that no other member of the board agreed with the chairman's statement or with the chairman's refusal to accept the invitation from my hon. and learned Friend the Minister for Water and Planning to meet him in London. It was clear to me and my hon. Friends that the board, in their failure to stand up to the chairman, was composed of mice rather than men.

It was clear that the prospective privatisation of the water industry, bearing in mind in particular that the Eastbourne Water Company was already in the private sector, could have had nothing to do with the increase in the charges announced with effect from 1 January. My hon. and learned Friend the Minister wrote to me on 15 March stating: The increase he is proposing"— the increase of 19.5 per cent. — cannot be justified by privatisation or anything to do with it. I am pleased to say that the new chairman, in a letter to the Minister dated 15 May, a copy of which he was kind enough to send to me, has offered to meet my hon. and learned Friend. I welcome that warmly. What I do not welcome is the decision of my hon. Friend the Under-Secretary of State for Corporate Affairs not to refer these price increases to the Monopolies and Mergers Commission. I wrote to my noble Friend Lord Young on 6 April. On 19 April he replied: You requested that the matter of the water charges increases should be referred to the Monopolies and Mergers Commission. Your request has received the most serious consideration but we do not propose to make such a reference. I understand the concern of your constituents, faced with a price rise of this order. My noble Friend continued: The new pricing regime for the water industry introduced in the Water Bill does provide for the regulation of price increases. While these prohibitions will not have any retrospective effect, I understand that appropriate adjustments will be made to the price ceiling set initially by the Secretary of State where the price for this year cannot be justified. I pause there to ask the Under-Secretary, my hon. Friend the Member for Lewisham, East (Mr. Moynihan) whether he can reassure my three hon. Friends, me and our constituents that if, when my right hon. Friend reviews the charges that the Eastbourne Water Company will seek to levy with effect from 1 April 1990, he considers that the charges for this year are unreasonable he will require the Eastbourne Water Company to abate the charges for the next financial year. That is what was said by my hon. Friend the Under-Secretary of State for Corporate Affairs. I want to receive an identical assurance from my hon. Friend the Member for Lewisham, East who is to reply to the debate.

Another aspect of my concern is the decision of my right hon. Friend, announced on 11 January, that there could be a reference to the Monopolies and Mergers Commission only if the assets of a privately owned water company exceeded £30 million. I have before me the Official Report for 11 January. In answer to a question from me, my right hon. Friend the Secretary of State for the Environment said that at present three water companies are controlled by non-British companies."—[Official Report, 11 January 1989; Vol. 144, c. 847.] Since 11 January the position has changed dramatically. There are now 12, or perhaps even more water companies that are controlled by non-British companies. I hope that my hon. Friend will be able to tell us how many are controlled by those companies. In answer to a question by my right hon. Friend the Member for Tonbridge and Mailing (Sir J. Stanley) on 10 April my hon. and learned Friend the Minister for Water and Planning told the House that 12 of the statutory companies—that is getting on for half—were owned at that date by the French.

My right hon. Friend should reduce the figure of £30 million to £20 million. The asset value of the Eastbourne Water Company is approximately £20 million. It should have been possible for my right hon. Friend to refer to the Monopolies and Mergers Commission the proposed takeover of that company by the French company SAUR, which now owns four of our statutory water companies—Eastbourne, Mid Southern, Mid Sussex and West Kent; West Kent being the company which had the largest increase in the whole of the United Kingdom, and Eastbourne being the company which had the second largest increase in the whole of the United Kingdom.

One aspect of the takeover has caused me concern. I have sent the Minister a copy of page 36 of the offer document that was sent out before acquisition of the Eastbourne Water Company by SAUR. There we read: Eastbourne Water employees' share club was established in 1987 to facilitate the acquisition of ordinary stock by Eastbourne's employees. I want to make it absolutely clear that I am strongly in favour of extending the opportunities for home ownership. I believe deeply in the concept of worker shareholders. I approve of the policy whereby those who are employed by the Eastbourne Water Company or by other companies within and without my constituency, have an opportunity to become shareholders. I have always believed that, and I believe it strongly today.

What worries me is that, at the time of the takeover, there was an acquisition not by those whom one might think were employees but by the then managing director who is presently the chairman, of the company. I wrote on 17 May to the chairman, Mr. Hoskins, and this is the question I put to him: Am I correct in concluding from page 36 of the recommended offer that in March and April last year you bought for £8,000 ordinary stock from the Eastbourne Water employees' share club and that subsequently you sold that ordinary stock for £240,000? I sent copies of the letter to my hon. and learned Friend the Minister for Water and Planning and to my noble Friend the Secretary of State for Trade and Industry, with both of whom I have been in correspondence about the Eastbourne Water Company for many months.

Mr. Charles Wardle (Bexhill and Battle)

I am grateful to my hon. Friend for giving way. He has already referred to me and our hon. Friends the Members for Wealden (Sir G. Johnson Smith) and for Lewes (Mr. Rathbone), and we wholeheartedly support his vigorous representations on behalf of Eastbourne Water's customers.

Does my hon. Friend agree that it is reprehensible that, at the meeting on 3 May here in the Palace of Westminster, the managing director of Eastbourne Water told us that he was unable to contain this year's price increases, that he had been unable to persuade the late chairman to meet our hon. and learned Friend the Minister for Water and Planning that he had been unable to prevent the late chairman from writing a chairman's statement for the annual report which was highly critical of Government policy and that he was unable to declare to us that he had bought and sold shares within a very short period of time? What are his customers to make of that? They have been saddled with a price increase of 38.4 per cent. I believe that they will discover that the new chairman, until recently the managing director, has dealt quickly in and out of the shares at a very considerable profit. Presumably he has no faith in the new controlling shareholders because he decided not to stay for the ride with his equity investment. What are customers to make of that?

Mr. Gow

The questions posed by my hon. Friend will be asked by some of the customers of Eastbourne Water Company.

My concern is that it was from a club, whose purpose was to offer opportunities for employees to become shareholders, that in March and April last year the then managing director bought the shares—£8,000 worth nominal of ordinary stock for which he paid £8,000—which he sold for £240,000 well under a year later.

Should there have been an opportunity for other employees to acquire shares? That is a matter about which I have already written to my hon. Friend the Minister. I have already read out to the House part of my letter dated 17 May and I want to read the reply dated 23 May, from the present chairman. It says: The figures in the offer document you quoted and your conclusions therefrom are correct. I asked for a copy of the trust deed which set up the club, but no copy has been forthcoming. The chairman wrote to me saying: The share club was set up at short notice. We are told in the offer document that it was set up in 1987. He went on to say that it was set up along the lines of an existing club in another water company. I am informed that the declaration of trust was still at the stage of a draft prepared by counsel for the trustees at the time the bid was made. If the club was set up in 1987 and the bid was made in 1989, it took a long time to draft the document.

The letter went on: The next meeting of the trustees is expected to be an annual general meeting at which it is most likely a resolution will be proposed to wind up the club. I have asked for a copy of the rules of the club and when I receive them, I shall send them to my hon. Friend the Minister.

When I arrived at the Department of the Environment in June 1985 I did not realise that, in addition to being the Minister responsible for housing, I would also be responsible for water. Since that time—I spent nearly two and a half years in my hon. Friend the Minister's office—I have retained a deep and concerned interest in the well-being of the water industry. Over the 15 years in which I have had the privilege to represent Eastbourne I have had a happy relationship with Eastbourne Water Company. It is a matter of deep regret that since January this year the trust that I used to have in the company has been eroded.

1.18 pm
The Parliamentary Under-Secretary of State for the Environment (Mr. Colin Moynihan)

It is with some trepidation that I rise to respond to my hon. Friend the Member for Eastbourne (Mr. Gow) for today he is sporting his MCC tie. He has bowled a consistently difficult and tight line to my right hon. and hon. Friends in the Department of Trade and Industry as well as my Department. I congratulate him and the England team on their winning streak. I shall try to keep the Government's wicket standing to the best of my ability.

My hon. Friend the Member for Eastbourne has dwelt in some detail on the increase in the charges imposed this year by Eastbourne Water Company and the circumstances of the takeover of that company. I shall discuss the increase in charges imposed this year by water companies in general and Eastbourne in particular. My hon. Friend asked whether the two price increases by the company earlier this year—20 per cent. from 1 January 1989 and a further 15.8 per cent. from 1 April—should have been referred to the Monopolies and Mergers Commission. Two forms of reference can be made in such cases: first, a reference under section 11 of the Competition Act 1980 but that covers efficiency, not prices; and, secondly a reference under section 51 of the Fair Trading Act 1973, which normally takes much time. Any recommendation would not have been retrospective and could not have been implemented before the operation of price control under the Water Bill. We did not rule out the possibility of reference to the Monopolies and Mergers Commission, but we believed that it was in everyone's interests for the issue to be sorted out as quickly as possible, and we sought to do so by voluntary means.

I should explain why Eastbourne Water Company was granted powers in December 1988 to fix a rate poundage for a three-month period, with the effect that consumers had two charge increases within a short time. As one of the 29 private water companies, Eastbourne is subject to statutory controls on many of its financial limits, which include controls on the amount of capital that it may hold, its rates of dividend and interest and the amount that it can put in reserves. They constitute an indirect control on charge increases because income that is surplus to the authorised limits must be used to reduce charges. At present, there is no direct control on the level of charges. The restrictions meant that Eastbourne could not move to a charging year beginning on 1 April without first obtaining the consent of my right hon. Friend the Secretary of State for the Environment.

There were sound reasons in favour of such a move, including the desirability of bringing the company's charging year into line with the majority of companies under the new regime of direct controls on charges. The Secretary of State gave his consent last December for the company to levy a three-month rate for this purpose. It raised a three-month rate from January 1989 and a 12-month rate from April. Due to the nature of the current controls, the maximum amount that the company could raise for the 15-month period from January 1989 to March 1990 was fixed. The company was unable, therefore, to raise additional money from customers by setting two rates for the period.

On 5 February, the Water Companies Association announced in a press release that its members were likely to raise their charges by 30 per cent. or more. In some quarters, increases as high as 50 per cent. or more were anticipated. My hon. and learned Friend the Minister for Water and Planning wrote on 7 February to each water company chairman, inviting those proposing increases of more than 10 per cent. to see him and to make the relevant financal information available to his consultants, Deloitte Haskins and Sells. Most of the chairmen responded to that invitation. As my hon. Friend the Member for Eastbourne has made clear, Eastbourne's chairman's response was different from that of the other chairmen.

My hon. and learned Friend was able to report the results of the discussions that he held to the House on 14 March in a written reply to my hon. Friend the Member for Bedfordshire, South-West (Mr. Madel). At that time, the average increase in all water company charges was estimated to be about 22 per cent. A later estimate of 23 per cent., based on more complete information, was given in a letter to my hon. Friend. I should emphasise that both figures related to the generality of water company charges, not those faced by domestic consumers paying on a rateable value basis—commonly called the water rate. The latter figures are being collated and will be reported to the House in due course.

My hon. and learned Friend the Minister for Water and Planning has, on several occasions, made clear his anxiety about the scale of increases. He was able to report to the House on 14 March that, as a result of his discussions with chairmen, the average increase in charges had been reduced by 5 per cent., which is equivalent to £16 million in water charges. His consultants' investigations were carried out with the full and voluntary co-operation of each company. Not all the companies accepted the report that the consultants made to the Department of the Environment. Water companies are independent statutory companies and, provided the charges that they propose are within their vires, the final decision lies with the board of each company. My hon. and learned Friend is unable to agree or disagree with companies' charges under the present legislation.

The Water Bill provides for a price control to be set, in the first instance by my right hon. Friend the Secretary of State and subsequently by the Director General of Water Services. In setting that control, account must be taken of the spending needs of each appointed undertaker, whether they are statutory water companies or successor companies to the water authorities, which we intend to privatise later this year. Those spending needs over the next 10 years or so are the subject of a far more detailed scrutiny than the exercise earlier this year, to which I have referred.

Each undertaker is required to submit detailed financial projections, supported by engineering studies, to show what is needed to enable undertakers to meet the standards of service that the law requires and the companies expect. I said, "what is needed"—the price control will take account only of what an efficient company needs to spend and will incorporate targets for efficiency savings which will take account of differences in achievements.

With regard to Eastbourne's charges, the company co-operated in the review of this year's increases and in providing information on its future spending needs to enable the price control to be set. However, the late chairman of that company fiercely maintained his independence under the existing statutes and declined all offers to meet my hon. and learned Friend the Minister for Water and Planning to discuss the increases. I regret that, but I must remind the House that he was perfectly within his rights so to do.

As to the consultants' report, the company has informed its consumers that Deloitte, Haskins and Sells has agreed that the operating costs in its budgets were reasonable. Without going into the detail of that report, which must remain confidential to the company and the Government, I can say only that the company's statement is correct. That does not mean that every aspect of this year's increase by Eastbourne, or by any other company, was fully justified. I can reassure the House, as my hon. and learned Friend has already done, that before the price control is set, a much more searching financial and engineering scrutiny will be carried out. That work began several months ago and has yet to be completed, whereas the investigation into this year's increases was undertaken in days. Every undertaker will be examined with equal vigour, irrespective of the size of this year's increases.

To respond specifically to the first of the questions put by my hon. Friend the Member for Eastbourne, if, when setting K with effect from 1 April 1990 my right hon. Friend the Secretary of State considers charges for this year to be unreasonably high—for example, for the reasons outlined by my hon. Friend—charges could be abated. That is certainly a possibility and an important consideration for my right hon. Friend. To be precise, Eastbourne's charges in 1990 will not necessarily be lower if its current charges are too high, but the K charges ceiling would be lower in that circumstance.

The possibility of insider dealing in relation to the securities of the Eastbourne water company was brought to the attention of my right hon. Friend some time ago. The information then available was not considered to be sufficient on which to base a decision whether to investigate under section 177 of the Financial Services Act 1986. Accordingly, as is the practice in such circumstances, officials asked the stock exchange to make some preliminary inquiries. I assure my hon. Friends the Members for Eastbourne and for Bexhill and Battle (Mr. Wardle) that such matters are treated seriously, but I cannot undertake to reveal whether any further investigation is being or is to be made. That is because, in the interests of efficiency and justice, our policy is that investigations of possible insider dealing should normally be kept confidential. However, I believe, on hearing my hon. Friends' contributions, that it is important that their contributions to the debate on this specific point are brought to the attention of my right hon. Friend the Secretary of State for Trade and Industry, and I will ensure that that is done.

On the merger policy and Eastbourne, it is often remarked, and is certainly not disputed by the Government, that the supply of water and sewerage services is a local monopoly and that the incentives of product competition, which usually work to improve efficiency and standards of service to the customer, cannot apply to privatised water companies.

Under our proposals in the Water Bill it will be for the Director-General of Water Services to monitor and protect the standard of services to customers and to ensure that essential infrastructure is maintained, and, bearing in mind the relative performance of companies in the industry to make periodic reviews of the K settings. If the director-general is to have a proper spread of comparative competition, there clearly needs to be an adequate number of independently owned and managed companies in the industry. Our special mergers policy is designed to safeguard that comparative competition. The £30 million asset test applies in existing merger legislation and, applied to the water industry, I am confident that it will ensure that there is an adequate number of companies for comparison. There is no merit in protecting every single company so that the entire structure is preserved like a prehistoric mammoth trapped in ice. That would simply remove the incentive to better management performance that private sector disciplines, including the possibility of takeover, will bring.

I hope that in a very brief response I have managed to cover some of the points raised by my hon. Friends. I am most grateful to them for bringing these issues to the attention of the House.