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§ Ms Roseanna Cunningham (Perth)
I am grateful for this opportunity to raise the financial crisis facing the Scottish Environment Protection Agency. The Government are fully aware of the matter, and I seek more than just kind words and platitudes in the Minister's reply.
SEPA needs a commitment of more money or, alternatively, a decision to allow it to reclaim VAT in the same way as its sister body in England and Wales. Scotland will regard anything less as the Government undermining environmental protection. It will show that the Prime Minister's words in the United States on the environmental crisis facing the planet were nothing more than empty rhetoric and an attempt to spin a feel-good story for the UK press.
Many hon. Members will remember the debate surrounding the creation of SEPA and the broad welcome that the body received from a variety of organisations and interest groups in Scotland. A powerful environment agency has long been the policy of the Scottish National party. We want the existing powers strengthened and the agency's resources increased.
In the first year of its operation, SEPA earned positive comment from key environmental groups in Scotland. The head of research at Friends of the Earth Scotland said:Our view is that SEPA has now found its feet and shown itself to be competent and even-handed …The Agency has shown itself to be fairly open, not afraid of tackling big issues and reasonably forward thinking.The head of policy at the Royal Society for the Protection of Birds in Scotland, Mr. Steve Sankey, pointed out that SEPA made an impressive start in its first year of operation. However, it now needs to move on to much more proactive work, where it could have a significant input. A sustainability concept is built into its remit and it needs to be able to argue that, in Scotland and for Scotland.
However, SEPA's initial success in getting its work up and running, and in building a fully integrated agency, is threatened by a funding crisis that will prevent any truly proactive work. Resolving the problem lies fairly and squarely in the Government's hands. I wish briefly to explain the basis of the financial crisis, before highlighting in detail the impact of the resulting cuts.
A number of observers estimate that SEPA faces a potential £5 million shortfall in its budget this year. That is due partly to past underfunding by the Scottish Office, but also largely to a tax anomaly, which allows the agency's English and Welsh counterpart, the Environment Agency, to reclaim VAT from Customs and Excise but prevents SEPA from doing the same. The ability to reclaim VAT under section 33 of the Value Added Tax Act 1994 is worth some £50 million to the English and Welsh agency, and could be worth £2.7 million to SEPA. That is a significant sum—some 10 per cent. of SEPA's overall budget.
Bodies whose responsibilities SEPA inherited, such as the Scottish River Purification Board, could reclaim VAT, and SEPA rightly set its budget projections assuming that it would enjoy the same rights as its predecessors and the Environment Agency. The Scottish Office settlement for SEPA for this financial year was based on the assumption 811 that VAT would be recoverable, which has been the assumption since 1 April 1996. Indeed, it was reiterated as recently as 9 May 1997 at a meeting between Scottish Office officials and SEPA.
The Scottish Office seems to have been every bit as certain as SEPA, as recently as last month, that VAT would be recoverable. From the outset, plans have been made on that basis, and on the Scottish Office's reassurance that negotiations between it and Customs and Excise were continuing to resolve the problem.
The Minister can miss out the section of his speech where I anticipate he will offer various legal excuses for not granting SEPA the same reclaim status as the Environment Agency. I understand that the Environment Agency receives its section 33 refund because it receives funding from local authorities, whereas SEPA, as a quango, does not. The current feeling is that to allow a quango to reclaim would open up a precedent for other quangos to demand precisely the same.
I would argue that that is a technical excuse, and one which the Minister has already used in his replies to my recent questions on that issue. I do not want to hear excuses; I want the Government to come forward with solutions; otherwise, the crisis facing SEPA will have extremely damaging consequences for Scotland's environment.
The chair of SEPA's main board, Professor Turmeau, said that the current situation is "daft". Expanding on that, Beth Corcoran, SEPA's head of finance, summed up the problem in the New Statesman, when she said:It is an anomalous situation that does not make logical sense.The Government must act now to resolve that anomalous, illogical problem, not run away from it or hide behind civil service excuses.
In recent months, the impact of the budget crises on SEPA has become clearer. John Beveridge, director of SEPA's western region, summed up the broader impact of the threatened shortfall in the New Scientist in April, when he said:A lot of what we have achieved in the past 12 months is now in jeopardy. Just when we were getting into our stride, we have been stopped in our tracks.Nationally, SEPA has frozen all job vacancies, halted all capital expenditure and slashed environmental monitoring around factories, sewage works, nuclear plants and fish farms. SEPA's eastern region has suspended monitoring of pollution incidents outside office hours, halved the number of inspections of waste tips and scrapped air sampling around large industrial sites. The impact of such cuts should not be underestimated. The Prime Minister has made much of a claim that the UK will further cut carbon dioxide emissions, but in Scotland essential monitoring of industrial sites' emissions simply will not be done.
My hon. Friend the Member for Angus (Mr. Welsh) has had constituency experience of the impact of those cuts. A number of his constituents have had great difficulty even contacting SEPA, never mind getting it to act on the pollution incident that was the focus of their concern.
§ Mr. Andrew Welsh (Angus)
My hon. Friend is aware of the atrocious and long-standing environmental 812 problems affecting the Hospitalfield housing estate in Arbroath, with which SEPA simply cannot cope, because it lacks the equipment to measure pollution and has withdrawn the weekend monitoring service. If we are to have a genuine environmental protection agency, it must be properly equipped and financed, not starved of equipment and finance.
§ Ms Cunningham
Indeed. Such sentiments are echoed by others.
Judith Nicol, clerk to the River Tweed commissioners, highlighted the risks surrounding the removal of out-of-hours water pollution cover for a river renowned for its salmon runs, and for which water quality is key to a multi-million pound salmon industry. She said:The emergency cover is something that should be removed as a last resort, not first; whoever is responsible should sort this out as soon as possible because these are fundamental services that need to be maintained.Thus far, the Government have failed miserably to "sort this out". They must be aware of the consequences of their failure.
In SEPA's western region, plans to clean streams and introduce flood warning systems have been abandoned. In the northern region, laboratory maintenance has ceased. I do not know whether the Government think that some cuts are justifiable, but what has been cut and what is threatened by SEPA's budget crisis include key areas of environmental monitoring, the maintenance of which is essential. For example, does the Minister believe that monitoring radiation levels in the Holy loch should be cut? Well, they have been.
As a result of the costs of monitoring for radioactive particles at Sandside bay, near Dounreay, investigations and monitoring for radiation at other sites will have to be curtailed. Is it acceptable to the Government that SEPA may no longer be in a position effectively to regulate the nuclear industry, or is that part of the plan, with the Environment Agency in England and Wales increasingly encroaching on SEPA's nuclear monitoring responsibilities, especially in the UK Radioactive Incident Monitoring Network?
In addition to SEPA's current duties, which it is struggling to meet, a range of new statutory responsibilities are to fall on the agency. Those include consultation on the national waste strategy and the national air quality strategy, ensuring compliance with waste packaging regulations, and overseeing the extension of pollution controls to small businesses.
On 26 April, The Scotsman quoted an unidentified board member as saying:There is no way these new responsibilities can be met, it is as simple as that—the Scottish Office needs to give up more money or they can forget it.That quote identifies the problem and points to the solution.
Professor Colin Reid, professor of environmental law at the university of Dundee, is similarly succinct in his proposed solution. I hope that the Government will respond positively to at least part of his suggested strategy for removing the current burden from SEPA. In a letter to my hon. Friend the Member for Angus on 7 May, he stated:A remedy is required, whether short-term support to 'fill the gap' until future budgeting is done on the new basis, or through amendments to the law to relieve SEPA of this burden in the future.813 That is the choice facing the Government. They can either make good SEPA's shortfall, or they can pursue a legal solution which would alter SEPA's status to allow the agency to reclaim VAT, or provide a specific exemption that would allow SEPA access to a section 33 payback.
If necessary, the issue must be pursued vigorously with the Treasury. In particular, I hope that the Minister will not allow the Treasury to get away with the sort of nonsense contained in its answer to the hon. Member for Greenock and Inverclyde (Dr. Godman) on 19 June 1997, which stated:Tax liabilities of publicly funded bodies are taken into account when setting levels of public expenditure in Scotland."—[Official Report, 19 June 1997; Vol. 296, c. 270.]SEPA has been stumped by a loophole—a technicality—which has punched an enormous hole in its budget. That irrelevant ministerial reply displays a lack of understanding of the problem and a contempt for the needs of Scotland's environment.
The Scottish Office has been guilty of a similar contempt in its reply to my own questions on SEPA. The Minister tells me rather uninformatively in a written answer that the Secretary of State for Scotland "regularly discusses various issues" with the Chancellor of the Exchequer. It is clear from the Minister's reply that he has not discussed SEPA's VAT reclaim. That is a failure on the part of the Scottish Office to defend Scotland's interests and its environment. I hope that the current Secretary of State will not, like his predecessor, be more the Cabinet's man in Scotland than Scotland's man in the Cabinet.
If the Government fail to take either of the suggested routes to a solution, they will be sending a clear signal that, despite the green commitments from the Prime Minister's spin doctors this week, the Government's environment strategy will be no more than hot air, adding to the global warming crisis. We need more than words; we need urgent action.
I shall end with two thoughts from the period when SEPA was created. As I said, SEPA was widely welcomed by, among others, the editorial pages of Scotland's newspapers. The Herald editorial on 2 April 1996 warned that, if SEPA was to be effective, itwill have to have teeth, and know how to use them.As things stand, SEPA's teeth have been blunted. That cannot be allowed to continue.
When the Minister's predecessor, the Earl of Lindsay, officially launched SEPA, he boasted:SEPA will be Scotland's first national agency with the resources and expertise to tackle the distinctive needs of Scotland's environment".I doubt whether the Minister could make that boast today, because, despite the good works and the great promise of the Scottish Environment Protection Agency, it no longer has the resources to complement its undoubted expertise. It certainly does not have the resources to move into a more proactive role, which many would welcome.
I am sure that the Minister will be keen to kick off his ministerial career by being able at least to match the boasts of the Conservative party. I give him that opportunity today. I am not interested in apportioning past blame for the situation. What is needed is a resolution now of the problem. The Minister must meet the needs 814 and expectations of Scotland and act to save SEPA from a legal technicality that was unforeseen and yet will be unforgivably damaging to the effectiveness of environmental protection in Scotland.
§ The Parliamentary Under-Secretary of State for Scotland (Mr. Malcolm Chisholm)
I am grateful to the hon. Member for Perth (Ms Cunningham) for raising the debate today. The issues that she has mentioned are an important matter of great public concern, and have been the subject of considerable media coverage recently. I am glad, therefore, of the opportunity to put the record straight.
It may be useful if I begin my response to the hon. Lady with a little background. Following the passage of the Environment Act 1995, the Scottish Environment Protection Agency was established in October that year. Labour Members supported the creation of a single pollution control body for Scotland.
On 1 April 1996, SEPA took over the responsibilities of a range of predecessor bodies. It inherited the water pollution control functions of the river purification authorities—that is, the seven mainland river purification boards and the three islands councils—and the waste regulation and certain air pollution functions previously delivered by the district and island councils. From the Scottish Office it acquired the functions of Her Majesty's industrial pollution inspectorate and the hazardous waste inspectorate.
The other necessary piece of background information is section 33 of the Value Added Tax Act 1994. That section allows certain bodies to reclaim the VAT that they incur on the purchases attributable to their non-business activity, in addition to the VAT that they can recover in the normal way on their business purchases.
For Government and public bodies, including organisations such as SEPA, activities that they are required to carry out by law are generally regarded as non-business. Section 33 status therefore enables such bodies to reclaim tax associated with activities that they are required by law to carry out.
As the hon. Lady knows, SEPA's predecessor bodies had differing VAT status. The district and islands councils and the river purification boards were entitled to claim refunds of VAT, whereas the two Scottish Office inspectorates were not. The reason for this difference was that the former bodies had the right to precept on local taxation, but the others did not.
Why is the right to precept the determining factor? The answer lies in undertakings given when VAT was introduced. In 1972, the Government promised that VAT would not fall as a burden on local taxes. Section 33 of the 1994 Act is now the means by which that promise is delivered. It has been the policy of successive Governments that only bodies that have the power to precept on local taxation may be considered for new additions to section 33.
That brings us to the present day. SEPA is a non-departmental public body financed by grant in aid from central Government and by fees and charges. It has no right to precept on local taxation. It is therefore not eligible to claim refunds of VAT on its non-business activity. That is not in itself a disadvantage to SEPA, 815 as the Government ultimately determine the overall resources available to it to ensure that it can meet its obligations.
The hon. Lady referred to a meeting on 9 May between Scottish Office officials and SEPA. I do not recognise her account of that meeting. She claims that there has always been an assumption that VAT would be recoverable. Of course, we have inherited the previous Administration's distribution of resources, and I cannot speak for them. I understand, however, that SEPA's provision was intended to enable it fully to deliver its functions and to meet its obligations.
SEPA is facing financial constraints, but that is a fact of life for all public sector bodies, and private sector ones as well. My noble Friend Lord Sewel, who is the Minister responsible for the environment, has already met SEPA officials to discuss the agency's funding difficulties. We are at present considering with SEPA what is necessary to allow it to carry out its functions related to the protection of the Scottish environment.
The Secretary of State will provide SEPA with all the resources necessary for it to meet its statutory obligations, including the new ones to which the hon. Lady referred. In a normal year, SEPA's VAT liability would be about £1 million—not £2.7 million, as stated by the hon. Lady. That compares with its current budget of about £28 million. While that liability is clearly a pressure on the organisation, it is not as big a problem as some have claimed, and must be viewed in the context of SEPA's overall financial provision.
The hon. Lady contrasted that situation with the treatment of the Environment Agency in England. Although that agency delivers in England and Wales the functions performed by SEPA in Scotland, it has a wide range of other responsibilities that SEPA does not carry out. They include flood defence, fisheries, recreational use of water, and navigation. In particular, it is responsible for flood defence work, which is largely funded from drainage levies on English and Welsh local authorities. Those levies total more than £200 million per year, and contribute nearly 40 per cent. of the agency's income. Therefore, the agency is eligible to claim refunds of VAT.
The Government and SEPA attach the highest priority to SEPA's continuing to perform its core functions, which cover a wide range of activities. SEPA is responsible for 816 promoting the cleanliness of Scotland's fresh and tidal waters by regulating discharges to the water environment and for providing flood warning systems and advising on flood risk. It issues authorisations to operators of processes prescribed under part I of the Environmental Protection Act 1990. It is responsible for licensing waste management sites and waste carriers and brokers. The agency can take enforcement action against anyone who pollutes the environment illegally.
The continued delivery of those core functions, including the availability of emergency and out-of-hours cover, constitutes the day-to-day business of environment protection in Scotland. The Government are committed to maintaining that business.
§ Mr. Welsh
Will the Minister explain what he means by "out-of-hours cover"? He may be aware of the Hospitalfield situation in Arbroath. Residents live in an atrocious environment on weekends, but are unable to contact anyone in SEPA. An out-of-hours or weekend service is surely essential in those circumstances, but SEPA claims that it cannot finance such a service. How does that fit with the Minister's assertion that SEPA's inances are perfectly adequate?
§ Mr. Chisholm
Hospitalfield is an operational matter for SEPA. The Government are committed to providing adequate funding for SEPA's core functions. Beyond delivering those functions, SEPA must determine priorities among its other activities in light of the resources available to it. They include assessments of the general state of the environment, and appropriate research and development. They are desirable, rather than essential, activities, and progress with them is not allowed to undermine SEPA's core business.
I assure the House that the Government are committed to protecting the environment of Scotland. The Scottish Environment Protection Agency has done much since it was established. In a very short time, it has pulled together the functions of 64 predecessor organisations and staff from many of those bodies. It has delivered effective environmental regulation from day one. It has published a state of the environment report and a draft national waste strategy. I congratulate the board and the staff on those achievements. We intend to build on that record of success.