Consumer Accountability and New Mutuals (Hansard, 14 February 2001)

§ Mr. Gareth R. Thomas (Harrow, West)

I beg to move, That leave be given to bring in a Bill to emend the Industrial and Provident Societies Act 1965 to allow for the creation of community mutuals; and to improve accountability of key services to consumers.

Community mutuals offer a marriage between low-risk community ownership of key services and a competitive, efficient operation and culture. They offer an approach that pulls together the best aspects of both public and private ownership. In short, the new mutuals could be powerful efficient enterprises, accountable to the communities and consumers who only on their services. They offer, for example, a different option for the future of the water utilities and for Railtrack, currently in the private sector. Equally, they offer new options for services now in the public sector, such as care services, housing and so on.

The privatised water companies have been successful in many ways, but they have not succeeded in winning the trust of the many consumers genuinely concerned that shareholders' interests be placed ahead of their own. There is on-going concern about the commitment of water companies to the investment necessary to enhance water quality and modernise the water deli very infrastructure.

There has also been considerable concern at the performance of Railtrack since the privatisation of the rail network, and especially since the Hatfield crash. Railtrack has refused to say whether the cost of the repair work since Hatfield meant that it would cut its annual dividend for the year to April. Indeed, its dividend payment to shareholders was in fact increased t y 5 per cent. for the first half of the year. That insistence on financing dividends, when moneys could he used to increase investment levels and help improve services to rail consumers instead, has inevitably increased concern about the sense of priorities among the members of the Railtrack board.

At the same time, equity investors, notably in the water industry, have seen the end of substantial growth in returns because of the entirely welcome and overdue intervention by the regulator. The need to increase returns has driven the search for non-core to business, which many companies have entered into, in an attempt to increase their profits and shareholder returns That additional risk has often been reflected in the cost of capital available to the utilities, reducing their future profitability.

In addition, many utilities feel increasingly pressured and constrained. The pressures of me regulatory system mean that their core monopoly earnings will be highly controlled. Moreover, there is little new equity coming into the water utility sector, with new capital programmes in general having to be financed by debt.

Community mutuals offer a vehicle to deliver significant private capital into key services while increasing the accountability of those services to their consumers in a cost-effective and efficient way. How will they work? Several water companies are already at different public stages of considering how they could vest the core monopoly assets of their business—those 322 controlled by the regulator, having identifiable income streams and providing essential services to local communities—into the ownership of those same communities via a mutual. Glas Cymru, which was recently allowed by the regulator to take over Hyder's core water business, will be 100 per cent. debt funded, rather than equity funded, because all risky speculative ventures have been stripped from the core business. The lower risk profile will provide high levels of capital efficiency and long-term security, both of which will feed back and benefit customers of the core services.

According to the Financial Times, Glas Cymru is reducing the cost of its capital by almost 25 per cent. by moving to debt finance. The money saved will be reinvested elsewhere within the business to improve the core service further. In addition, the day-to-day operation of that core business can be contracted out in a competitive market to outsource suppliers, who are incentivised to deliver operational and service efficiencies, the benefits of which can also be passed back to the consumer.

A community mutual would own the service. All customers of that service would be entitled to one nominal share in the business and to a vote in electing a board of non-executive directors. In turn, their role would be to provide a strategic direction for the business, to maximise the benefit to the community. Professional executives, who would be responsible for the day-to-day running of the business, would be subject to the control of the elected board, and would be committed to providing only the core monopoly service, while outsourcing any operation that could be provided competitively.

The responsibility of the management of the mutual to achieve success in running the business is no less hard-edged than in any other corporate model. The management would be incentivised by rewards based on achieving targets. Management and the board would be accountable to their consumers for their performance, with those consumers ultimately having the ability to determine who should run the organisation.

As well as offering the powerful attraction of the community owning, and indeed running, the key services on which they rely more efficiently and effectively than at present, community mutuals have other benefits. The ability to become a member, to receive information, to attend and speak at meetings, to vote and to participate in democratic structures, all provide opportunities for individuals in a community to participate and have a role as citizens within that community. As membership is open to any person who is in receipt of the services, there is no financial barrier excluding those who could not afford membership, so those running a community mutual are truly accountable to the entire community that they serve. Hard decisions will inevitably still need to be made by the mutual, but they will be based on the interests of those whose lives will be immediately affected.

Investor-owned services listed on the stock exchange have, on occasion, been criticised for short-term thinking. The focus on the best interests of the company—effectively share price and profitability—and on executive reward schemes based on share options, encourages decision making that brings tangible, quick results. Investment for the long term is clearly necessary and takes place, but commercial expediency determines spending priorities.

323 The boards and executives of new mutual organisations are free from that disadvantage. They can and must make decisions based on what is in the best interests of the business in serving its community. Clearly, that includes the long-term interests of current members of the community as well as those of future generations.

The most obvious long-term needs that ought to inform day-to-day commercial decisions are environmental issues. Unless there is a specific statutory requirement or an unarguable commercial reason compelling a company to choose a less environmentally damaging but more expensive option, commercial companies' legal duty, whatever they might want to do, is to put the needs of the shareholders first. That will inevitably drive directors to choose the cheaper option, even if it is more environmentally damaging. In a new mutual, carrying on business for the benefit of the community, the directors would be at liberty, and may be legally obliged, to choose the less harmful, albeit the more expensive option.

The opportunities for my constituents as consumers to have a direct influence on the policy and direction of organisations delivering key services such as water, rail, care of the elderly and leisure are negligible and, in truth, would remain limited if the services were, or continued to be, administered by the public sector.

The Government's efforts to modernise local councils, the Strategic Rail Authority and the new water regulator are making important differences in improving the responsiveness of these services to public concern. Community mutuals offer another option—another weapon in the armoury, which is not appropriate in every circumstance—to increase the accountability of key services to their consumers.

I commend the Bill to the House.

Question put and agreed to.

Bill ordered to be brought in by Mr. Gareth R. Thomas, Mr. Andrew Love, Dr. Doug Naysmith, Mr. Paul Clark, Mr. Phil Hope, Mr. David Taylor, Mr. David Drew, Mr. Mike Gapes, Angela Smith, Mr. Adrian Bailey and Mr. Alun Michael.