Financial assistance for major works
March 14, 2012
Mark made the following contributions to a debate on the construction of the Thames Tideway Tunnel, a new sewer project for London.
Mr. Mark Field (Cities of London and Westminster) (Con): I appreciate that the right hon. Gentleman’s debate is not entirely abstract, but on amendment 5 how would the Government be able to judge financial assistance on the basis of that debt to equity ratio? Presumably, assistance will come in different tranches, so any group company’s activity might at various times fall on either side of any category that the right hon. Gentleman has in mind, and any assistance might be for a specific project in different tranches. Does he not feel that his amendment would over-complicate what he is trying to achieve? Will he detail precisely how he thinks it would operate?
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) Some of this is quite technical, but these are important issues. The reason I chose that figure, which is not a matter of precise science but a starting point for debate, is a Financial Times article in 2006 suggesting that Ofwat’s expectation was that gearing levels for Thames Water should remain below 65% for any project. There was then a debate, in public, between Thames Water and its owners—they have a history in this matter—and the regulator as to what the percentages of borrowing against capital, borrowing against income, and borrowing against profits should be. The company should have sufficient capital to fund the project and should not be giving away its capital by way of dividends such that it has to look elsewhere for funding that it could have had if it had not been paying out capital that it had acquired previously from its investments.
Mark Field (Cities of London and Westminster, Conservative) The right hon. Gentleman will be aware that Thames Water is looking to secure a large-scale investment from a Chinese sovereign wealth fund. Is he concerned that such an investment—this is a specific case, but it could apply generally to anyone who was getting such financial assistance—would help to distort, and could, at particular levels of investment, deliberately distort the debt to equity ratio in such a way as to negate any benefit created by the provision that he hopes to put into the Bill?
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) As the hon. Gentleman knows, Thames Water has a very complicated corporate structure: the graphic picture shows that there are about 10 layers of corporate entities. At the top are investors Macquarie—an Australian company—and the new Chinese investor that was recently announced when the Chancellor was in China, and there have been other acquisitions.
Mark Field (Cities of London and Westminster, Conservative) I thank the right hon.Gentleman for making clear his concerns. I hope that he and I will both speak on Monday in the debate on the Government’s waste water national policy statement, specifically on the issues relating to the Thames tunnel, which concern many of us as Members of Parliament. It is rather distressing that a very small minority of us seem to be concerned about this, yet no fewer than 144 Members, many of whose constituencies are well outside London, but none the less within the Thames Water area, will be directly affected by the huge and ongoing increases in bills to which he refers.
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) I am not pretending that we are hugely disadvantaged in the Thames Water area at the moment. My colleagues in the south-west and their constituents have had hugely greater bills over very many years. I am not arguing that we should not have to pay more money as Thames Water ratepayers, but that if we are going to do so, we should be paying it for a project, if it is agreed, where we know that the taxpayer is not being fleeced and water rate payers are not paying more than they should be. This must not be seen as a method for allowing private sector companies—all the water companies are now, in effect, private sector companies—to export profits indefinitely, at a higher level than they ought to, when they should be putting that money into the project and making sure that bills are lower.
Mark Field (Cities of London and Westminster, Conservative) It is important that we do not just see this as a problem with Thames Water. This is a fundamental issue about the financial structuring of a range of companies, many of which are getting ongoing financial assistance from PFI schemes, which often have years or decades to run. The right hon. Gentleman has made it clear that he will not press the amendment to a vote. I hope, however, that not only this Department, but other Departments that have responsibility for companies that have gone through this sort of financial restructuring and that are receiving ongoing financial assistance give serious thought to the matter.
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) That point is very helpful. I have raised this subject as a matter of general Government policy with my right hon. Friend the Chief Secretary to the Treasury, because it is not just an issue for the Department for Environment, Food and Rural Affairs, but an issue across Government and for the Treasury in particular. It is also a matter for the Public Accounts Committee, audit organisations and others. In a second, I will link the points that I have made with the PFI issue, which my hon. Friend just raised, and other places where we are spending public money on projects that are excessively encouraging or facilitating private gain to the disadvantage of the state and the taxpayer.
Mark Field (Cities of London and Westminster, Conservative) While the right hon. Gentleman is going through the financial figures, it would be useful to know what the level of reserves was during those years. Were they building up, or had Thames Water, in its own mind, already built up a war chest for the works that it is looking to do—or was it essentially draining its profits by more than 90% year on year?
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) I do not want to misrepresent the position, and I do not have with me the full accounts over those five years—the Minister may be able to help us with that—but my understanding is that the reserves have reduced over that five-year period. That is one reason for my concern about the balance of decisions on dividend payments and capital retention. That should trouble us and cause us to ask questions.
Mark Field (Cities of London and Westminster, Conservative) An issue not specific to this debate is ongoing financial assistance from the public purse for many years to come, often through an artificially created special purpose vehicle rather than a more straightforward process. Such vehicles, as the right hon. Gentleman rightly points out, are often driven by maximising profits, potentially by minimising tax and all other returns to the Treasury.
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) To turn that into a picture, that could mean that the Thames tunnel will be built by a separate company, not Thames Water. The company will own the tunnel indefinitely, and rent, as it were, the use of the tunnel to Thames Water. It will collect the income indefinitely and do what it will in terms of distributing the profits, while we—the 12 million people in Thames Water constituencies—continue to pay charges, with no control over the profit being made by the owners.
Mark Field (Cities of London and Westminster, Conservative) One concern with the Thames tunnel is that there is so little incentive for Thames Water to have a cost-effective scheme in place because of the nature of the payouts. Many hon. Members will recall that at the outset, the project was to cost £1.6 billion, but we are now looking at a £4.1 billion project. There seems to be no sense whatever of an incentive for Thames Water to have something that is more cost-effective, which would obviously benefit hard-pressed bill payers from 144 constituencies in the House.
Simon Hughes (Bermondsey and Old Southwark, Liberal Democrat) That is exactly the point. I should have gone on for another paragraph before I let my hon. Friend intervene. I shall finish the figures on the toll and then address the point he makes.
Mark Field (Cities of London and Westminster, Conservative) I do not necessarily regard the proposals as a scandal, as Simon Hughes seemed to suggest when moving his amendment, but I share many of his general concerns about the financial engineering. I say that as the very proud Member for the Cities of London and Westminster. I do my bit to stand up for the banking fraternity and for large corporates, many of which are based in my constituency. Deep concerns have been raised by the amendments, however.
The amendments will not be put to the vote; they are testing amendments that will enable us to have a useful debate on this matter. I would not wish this debate to be seen as hostile to Thames Water. I have had fairly positive dealings with it over the significant amount of work that is being done in my constituency, in the City of London and in the City of Westminster. It is carrying out a huge amount of work there, and there is no doubt that it has been very disruptive, but I hope that central London will have a far better water system in the years to come as a result. Deep concerns have been raised about how necessary it is to spend as much as £4.1 billion. It is quite respectable for the right hon. Gentleman to raise his concerns, although I suspect that he might have been less concerned if the huge amount of building work had been due to take place on the other side of the river, perhaps in Wapping rather than Rotherhithe.
We all know that there has been a lot of disruptive work. I have seen it happening in my constituency with Crossrail. I have always been a firm supporter of Crossrail, although I have often said that there were no votes in taking that position. Indeed, votes have been lost through so doing. We are proposing to spend a huge amount of money on the Thames tunnel, and I am not convinced that that is entirely justified. I do not disagree with what has been said by the hon. Members for Hammersmith (Mr Slaughter) and for Islington North (Jeremy Corbyn). Significant work clearly needs to be done to improve the quality of the water in the Thames, although, compared with early Victorian times, it is now wonderfully clean. That is no cause for complacency, however.
The financial structuring of the Thames tunnel project seems almost to provide an incentive for Thames Water to adopt a bells-and-whistles approach. As I mentioned earlier, the total bill has gone up from the £1.6 billion that was being touted four or five years ago to the present figure of £4.1 billion. The impact on bill payers will be enormous, particularly in these times of austerity, which will be with us for some years to come. I suspect that the measures will go through, but Thames Water customers will be up in arms only when they are faced with an additional £80 a year on their bills, much of which will be justified on environmental and other grounds. By that time, it will be too late, as the permission for the project will already have been given. I hope that the Minister will look seriously at this, and make his own representations to Thames Water.
This brings to mind an important point made by the right hon. Member for Bermondsey and Old Southwark about the more general problem of financial assistance for a range of deals that are already in train, particularly in relation to private finance initiatives in schools, hospitals and roads that have already been built but which have not been fully paid for. The financial engineering that could be put in place could be detrimental to the Treasury, and to taxpayers and ratepayers, for a considerable time to come. This has been a worthwhile debate, in that it has allowed us to discuss those matters. No one disputes the fact that we need to do something about the Thames Water area and the Thames tunnel, but there is a notion that that should be driven by Thames Water alone.
As I have said, Thames Water has no disincentive to raise the cost, knowing that it will be reflected in higher bills in perpetuity. We had a good history lesson from the hon. Member for Hammersmith earlier, and we clearly need to do some work to ensure that the arrangements are fit for the 21st century, rather than being set in aspic in the 19th, but I am concerned about the financial arrangements. This relates to my more general concern about the controversy that will inevitably surround many City-related financial deals in the future. It will do great discredit to the large amount of financing that goes on if there is a sense that the wool is being pulled over the eyes of taxpayers and residents in this kind of scheme. That will undermine the credibility of the important infrastructure work that needs to be done in the interests of us all as users of Thames Water’s products.
Jeremy Corbyn (Islington North, Labour) I missed the first 45 minutes of the speech by Simon Hughes, but I have discussed this matter with him before and I am aware of his concerns. He is quite right to raise the financial issues surrounding the Thames tunnel, because they are serious matters. Bazalgette and his colleagues who did such fantastic work in the 19th century to create the London sewerage system created a world-class achievement. However, they could never have predicted the way in which London’s population would change, or the great increase in the use of appliances such as washing machines, which use much more water. Those changes have led to an increase in waste, the overflowing of the sewerage system and the pollution of the Thames. Having improved the condition of the river from being foul and putrid to very clean, we are now heading quickly back in the wrong direction. Not so long ago, we were all very proud of the water quality in the Thames; we are not any longer. We see what happens every year when storm drains overflow into the river. We need to think carefully whether the proposed measures are the solution, and whether they are the solution for all time.
Mark Field (Cities of London and Westminster, Conservative) I hope that the hon. Gentleman would agree that this is also a reflection of much higher expectations. We rightly have higher expectations in relation to water quality. It would be wrong to suggest that we have gone in totally the wrong direction, although there are problems with water quality. I accept that problems of sewage and effluent in other parts of London, which do not affect my constituency, are agood reason for implementing some improvement, but it does not need to be the all-embracing scheme that is being proposed at the moment.
Jeremy Corbyn (Islington North, Labour) There is a serious danger of many Members agreeing with each other here, which will not do the House’s reputation any good at all. [Interruption.] It will not do the reputation of Mark Field or mine any good at all, either.
Mark Field (Cities of London and Westminster, Conservative) Does my hon. Friend not accept that legislation is the only mechanism whereby Members can address fundamental issues such as this? Many of us find it quite distressing that Ofwat, as the regulator, is not doing the job that it should be doing in relation to what are fairly high-profile issues. Is he suggesting that we can rely entirely on Ofwat to judge whether debt equity relationships are appropriate? Simon Hughes pointed out that although there are distinct guidelines in Ofwat’s own documentation, they seem to have been largely ignored by Thames Water, and may well have been ignored by other water companies. Indeed, the same may apply to other regulators which many of us believe are simply not delivering the goods.
Richard Benyon (Parliamentary Under Secretary of State (Natural Environment and Fisheries), Environment, Food and Rural Affairs; Newbury, Conservative) My hon. Friend makes an entirely legitimate point. It is absolutely Parliament’s role to hold debates and adopt positions and, in many cases, hold to account corporations who are responsible for products such as water, which is so important to our constituents’ lives.