HC Deb 17 December 1991 vol 201 cc247-54

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

10.17 pm
Sir Marcus Fox (Shipley)

This debate may be wider than the Minister anticipates. If so, I am sure that he will be primed with the right answers. The debate is about specific problems relating to the provision of sheltered housing in both the public and private sectors. I must declare an interest because I am a non-executive director of McCarthy and Stone, which is probably No. 1 in the private sector. To balance that, my wife has been on the board of the Bradford and Northern Housing Association for more years than I have been a non-executive director of that company, so my family can truly speak for both sides of the industry.

Because of the recession, which, I hope, we shall soon see the end of, the housing market is suffering. I am concerned not just about sheltered housing but about the whole problem of low-cost housing. Water companies are not the most popular companies in the country. I do not wish to quote the Prime Minister in this debate, but when certain salary increases were given to the chairmen of the privatised water authorities, he was somewhat critical, because they are not exactly on the bread line. The infrastructure charges, in particular, are causing enormous anguish to the construction industry, which is always the last to come out of a recession. Confidence needs to be restored and positive help is needed.

May I point to a direction in which such help could be given? I do not suggest that section 79 of the Water Act 1989 was wrong. Indeed, the great success of privatisation has been freeing the water industry from Treasury control, enabling it to operate in the market and raise the financial resources to invest in whatever is needed to enhance pollution control in line with EC regulations. Much of what was provided by the 1989 Act was welcomed, but, in one respect, we seem to have gone too far.

Section 79 of the Act provided for infrastructure charges to be paid for all new domestic connections to water and sewerage services which range from £370 per house in parts of the north-east to more than £2,000 per house in parts of the Wessex water district. That may not seem to be too penal, but I shall widen the debate because it is about sheltered housing. If we consider housing associations providing accommodation with 40 units, that makes a total of about £80,000 in addition to what they would normally have paid. The same applies in all sorts of other spheres. Someone with a small house in that district will face exactly the same charge.

The relevant clause was introduced in the House after the Bill had completed its Committee stage, and was finally agreed to by the House on 3 July 1989 as part of a package of 460 amendments from the other place guillotined in two short sittings of this House. It was a major amendment, but received no proper consideration or debate in this House.

My hon. Friend the Member for Rutland and Melton (Mr. Latham), who is knowledgeable on housing, recently wrote in Building magazine that the episode represented a shameful failure of Parliament to scrutinise the proposed arrangements properly. My hon. Friends the Members for Rutland and Melton and for Crosby (Mr. Thornton) went to see the Minister for the Environment and Countryside to put the case. It was argued by the water industry that the charges were required due to the excessive load imposed on the system by new development, particularly new housebuilding. In summary, their argument was that existing consumers were cross-subsidising the purchase of new houses and sheltered schemes, and house builders were not making an adequate contribution to the costs that they imposed.

Having re-examined all those facts prior to and following the passage of the 1989 Act, I am satisfied that that is a substantial misrepresentation of the true position. Under the Water Act 1948, the Public Health Act 1936 and the Water Act 1973, the developers have made substantial capital contributions to many large and small housing and other development schemes, either through the requisitioning formula in those pieces of legislation or as a result of negotiated agreements with the former water authorities. Those contributions helped to offset the reduced Treasury funding of the water industry after 1974. It can be argued that new development, far from paying its way, contributed substantially, even prior to privatisation, to improvements in the system. Payments continue to be made under the terms of the earlier agreements. The Bill, when published in 1988, contained extended formulas for the requisitioning of water and sewerage services. Those provided for payments for additional items.

All that is unbelievable in terms of the negotiations that took place between the parties involved. Having followed the brief carefully, I find it unbelievable that, having determined that the agreements represented a fair balance between those involved—consumers, developers and their customers—a bombshell should fall on housebuilders on 11 May 1989, when they were called to meet the Minister and were told that there was to be a new clause introducing a tax on new houses.

The infrastructure charge does not relate to any specific supply of service to any particular development site. It is a payment for the benefit of the community as a whole, based on cost spread over a company's operational district. We in the industry have been making this complaint for some time. The Director General of Water Services has accurately summarised it in the following terms: When a customer pays his infrastructure charge, he cannot identify what item he has contributed to, nor can he verify that the works generally described as being covered by his infrastructure charge do not overlap with one of the other charges he has paid, or something that a different customer has paid. It is argued that this charge is intended to pay for works beyond those covered by the extended powers.

All this highlights the injustice to house builders. It is obvious that much of what was neglected before is now recognised in the charges that are levied. With all this in mind, the Director General of Water Services said in the 1990 annual report that he had reservations about whether the infrastructure charges are the most suitable way of recovering costs and extending water and sewerage systems. That was a significant comment by the official appointed by Ministers to monitor and review the operations of the Act and to regulate the newly privatised industry.

The end of last week saw the publication of the document "Paying for water: the way ahead" by Ofwat. It concludes under the heading "Capital charges": In particular, infrastructure charges, introduced at privatisation, have aroused criticism"— that is an understatement. I remain concerned that the level of infrastructure charges, and the variation in charges between companies, is hard to justify…I believe that in many cases the current level of infrastructure charges represent a cross-subsidy from new customers to customers generally. The profits of the industry. at £1 billion, are about 12 per cent. higher than Government expectations and the director general is saying that something is wrong. He is absolutely right. The house building industry is suffering from the worst recession in 40 years while the profits of the water industry are excessive. There are great problems in all areas of the trade, not only in the private sector. It is nonsensical that the Housing Corporation should subsidise housing associations and take taxpayers' money to swell the profits of the water companies.

This request has been made before and resisted, but I ask Ministers to consider it once again. We need to restimulate the economy and the house building industry by reducing its costs. I urge the Minister to ask the director general to look again at these arrangements. He can do that now; he does not have to wait until 1994 for the quinquennial review. The director general intervened earlier this year on profits, price rises and dividends. The voluntary restraints were agreed by the water companies, which admit that they comprehensively outmanoeuvred the Government when negotiating the privatisation regime in 1989.

Everyone understands that these charges are not right. Something must be done about them. Something can be done, and I appeal to the Minister to note carefully what I have said.

10.27 pm
Mr. Steve Norris (Epping Forest)


Mr. Deputy Speaker (Sir Paul Dean)

Does the hon. Gentleman have the leave of the hon. Member for Shipley (Sir M. Fox) and of the Minister to speak?

Hon. Members


Mr. Norris

I congratulate my hon. Friend the Member for Shipley (Sir M. Fox) on securing this debate and I am grateful to him for the chance to speak briefly.

I declare my interest as chairman of Haven Services Ltd., a private sector manager of sheltered housing, probably second in the market behind the company with which my hon. Friend is associated.

The whole purpose of sheltered housing is to allow people who become more and more dependent in their later years to trade down the capital value of their properties and convert their capital assets into smaller properties and into an income stream to pay for the increasing care needs of later life.

On that basis, while special pleading is not appropriate, it is clearly right that we should seek a regime which allows such accommodation to be built economically, whether in the public or in the private sector. It is also clearly inappropriate that we should have a regime of charging here which disadvantages in many cases the potential owners of small, modest properties such as sheltered housing. There is only one way in which such very large connection fees are recovered. Our experience is straightforward: they are simply passed on to the eventual purchaser. There is no other route.

In the circumstances, I hope that when my hon. Friend replies he will bear in mind the fact that water charges generally will in the future—I understand this from the report that my hon. Friend the Member for Shipley quoted—be based on the council tax banding which we discussed earlier this evening. It might be appropriate for connection charges, too, to be related to some degree, within an individual water authority's area, to the aggregate of the council hand value available to the water authority in a way that would thus reflect the actual value of the properties, whether in the public or in the private sector.

10.31 pm
The Parliamentary Under-Secretary of State for the Environment (Mr. Tony Baldry)

My hon. Friend the Member for Shipley (Sir M. Fox) raises a serious issue and the level of concern is evidenced by the fact that a number of my hon. Friends have stayed for this Adjournment debate—my hon. Friends the Members for Epping Forest (Mr. Norris), who intervened, for Cardiff, North (Mr. Jones), for Cardiff, Central (Mr. Grist), for Keighley (Mr. Waller) and for Taunton (Mr. Nicholson), who have been present throughout most of the contribution of my hon. Friend the Member for Shipley.

As my hon. Friend the Member for Shipley recounted, provision for these charges was introduced as a Government amendment to the Water Bill in another place. The proposal for the charges was first raised in Committee on the Bill, when it was put to the Government that the existing system of funding new infrastructure to serve new development was both confused and unfair to existing customers. That is a dilemma to which we shall return again and again—the difference between existing customers and new customers.

Before the introduction of the charges, new infrastructure capacity needed to serve new customers—such as treatment works and reservoirs—was largely met from charges to existing customers. In some instances, mostly in the case of major development proposals, new infrastructure capacity was funded through planning agreements, whereby developers would make a contribution towards the cost as a part of their proposal. This approach to the provision of new infrastructure capacity meant that existing customers subsidised new customers and planning applications hinged on complicated legal agreements, the negotiation of which unnecessarily complicated and delayed the planning process.

To overcome these obvious anomalies in the provision of new infrastructure capacity, it was proposed that a simple scheme of charges for each new connection to domestic mains water and sewerage be introduced. The advantages of such a system lie in the simplicity of its operation: developers would know in advance the cost of their proposals; it would take away the element of uncertainty in planning consideration; and it would place the burden of the provision of new infrastructure on those who would be served by it rather than on customers generally who would gain no direct benefit from its provision.

We saw the merit of these arguments and agreed to provide for infrastructure charges as a Government amendment to the Water Bill. In May 1989 we announced our intention and consulted the house building industry on the details of the operation of the system, which was included in the conditions of appointment of each of the water and sewerage companies.

I think that my hon. Friend, while he has a number of good points, is less than fair when he says that when in due course the Water Bill became an Act this was a sudden bombshell landed on development companies. They were consulted fully and throughout.

As part of the process, limits were set for each of the companies on the charge which would be payable for each connection. Those limits were based on the detailed analysis of companies' forward investment programmes which were being undertaken as part of the K setting process. That applied limits on companies' general charges increases through the formula represented as RPI + K.

Again, I resist any suggestion that in making those connection charges there has been any element of profiteering by the water companies. Either they charge for new connections or they charge existing customers. That is the dilemma that we have to meet.

The process of K setting, involving detailed scrutiny of companies' investment programmes by independent engineering consultants, enabled us to ensure that infrastructure charges specifically excluded the cost of the general upkeep, improvement and repair of the existing system. Those costs continue to he met by charges to customers generally.

There has been some comment on the costs being incurred because water companies are insisting on each dwelling within a development of flats being supplied separately, so attracting a charge for each dwelling. It was the intention that a charge be made for each dwelling and that was made clear when the amendment was presented. In calculating the initial charge each individual connection was included regardless of the demand each would impose on the overall services.

Following representations from many people, the Director General of Water Services undertook a review and agreed a licence amendment with the industry, linking the level of payment to the demand by reference to the facilities provided by the development. That is not cast in tablets of stone. There has been movement by the director general. The level of infrastructure charge to a development of flats under that arrangement is unlikely to differ very much whether it is based on a charge for each flat or on the overall demand scale introduced by the amendment.

Under the terms of the Water Industry Act companies can insist upon a separate service pipe for each connection. That provision exists for good reason—to protect supplies to customers. It has been represented to us that, in some instances, that action could impose a considerable cost burden in supplying water and sewerage to new developments and in those circumstances there is potential for dispute between the companies and the parties. The director general has said that he would like a power to consider and rule on such disputes. That we are considering in the context of the new disputes power contained in the Competition and Service (Utilities) Bill which, I am glad to say, completed its Committee stage today.

I appreciate that the introduction of the new charges came at a difficult time for the house building industry. We recognised that at the time and delayed the introduction of the charges until April 1990, nearly a year later. Additionally, specific provision was made for circum stances in which existing development proposals were already the subject of planning agreements to contribute towards infrastructure costs, to ensure that those were taken into account. However, we recognise that there will inevitably be circumstances where development proposals were already under way and where the introduction of the charges will have led to increased costs. We recognise also that, in the present market, developers may face difficulty in absorbing or passing on such costs. Ultimately we would expect the cost to be reflected in the price that developers pay for land, just as with other development costs.

As my hon. Friends will be aware, we were asked by the house building industry to consider transitional relief for developers, in particular a moratorium on the charges in respect of development land held as "stock in trade" land. That request was given careful consideration, but we concluded that for practical reasons a moratorium could not he justified. We recognise that the infrastructure charges system may not be perfect—I believe that all right hon. and hon. Members agree with that—and that it may require adjustment to achieve the right balance between charges to new and to existing customers. Whatever happens, someone will have to pay—and if that is not done by new customers, it will be done by existing ones. However, we believe that the system's inherent advantages far outweigh its disadvantages.

In the long term, a wider system of "impact charges" could, if properly calculated, complement the planning system by encouraging development towards areas where there is unused infrastructure capacity rather than just provide for the funding of infrastructure for new development—but perhaps that matter is for consideration on a future occasion.

For the present, the conditions of appointment that govern the application and levels of infrastructure charges are the responsibility of the director general. As part of his recent review of future charging methods, the director general has also been considering whether a thoroughgoing review of infrastructure charges might be appropriate—and whether there is scope for changing the basis of the charges, in the way that my hon. Friend the Member for Shipley would like. The director general concluded that, at present, such a change would not be possible in advance of a periodic review of the industry's overall charging framework, which he proposes to carry out in 1994.

The provisions of companies' conditions of appointment prescribe the circumstances in which the director general may review their charges. He is already proposing a review at the earliest opportunity. It is not possible for the levels of infrastructure charge and their relationship to charges to customers generally to be considered independently of that review.

The present levels and operation of the infrastructure charges system have been calculated by reference to the cost of the provision of new infrastructure, to serve new development over the period to the year 2000. It would not be possible for the companies to meet the cost of that requirement in addition to their existing commitments.

While I understand the desire to institute a review at the earliest opportunity—I will certainly draw the remarks of my hon. Friends the Members for Shipley and for Epping Forest to the attention of the Director General for Water Services—the infrastructure charges are inextricably linked to the level of charges to customers generally.

All water and sewerage companies are undertaking programmes of work to improve river and bathing water quality, repair and renew aging mains and sewers, and meet new standards for drinking water quality. We would not be thanked for returning to the system whereby existing customers were asked to subsidise new customers as well, and therefore we must be extremely careful not to rush any changes to the present charges system without careful consideration of the impact that they may have on other customers.

I assure my hon. Friends that the director general will continue to monitor the way in which companies apply charges in practice. Recently, he wrote to the companies about the need for common sense and flexibility in the application of charges. He cited in particular cases where sites that previously included connections are being redeveloped.

Companies are required to give a credit in respect of any previous connections. Where the redevelopment may attract a multiple of the standard charge to reflect demand, the director general suggests that there is nothing to prevent them from similarly taking account of the demand that probably existed before.

Companies have flexibility in implementing charges and are not required by the conditions of their appointment to tie themselves without question to the terms of the infrastructure charges system laid down therein.

My hon. Friends have raised an important matter, but one that ultimately comes down to this question: how do we strike the right balance between existing customers and new customers? The Government listened to a number of representations during the Committee stage of what is now the Water Act 1989 and sought to act on what seemed at that time to be a general consensus. They consulted broadly those concerned and presented measures that commanded the House's support. The implementation of those measures is now a matter for the Director General of Water Services.

The director general is, I think, aware of the concerns that have been raised by my hon. Friend the Member for Shipley and others. I shall ensure that he is fully aware of the anxieties that have been reinforced and echoed this evening; but it is not easy to strike a balance between existing and new customers, particularly against the current background in the housing and development markets.

I hope that my hon. Friends will accept that we and the director general seek at all times to find the fairest possible balance in ensuring that new infrastructure capacity comes on stream and is costed fairly between existing customers and the new customers who will benefit from it.

Question put and agreed to.

Adjourned accordingly at fifteen minutes to Eleven o'clock.