Clause 2 — Financial assistance for major works
Oral Answers to Questions — Prime Minister
2:00 pm

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

I beg to move amendment 4, page 3, line 3, at end insert—

‘(5A) Financial assistance may only be given under subsection (1) if the financing of the infrastructure is being secured by a group company which has adopted the equator principles.’.

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Lindsay Hoyle (Chairman of Ways and Means; Chorley, Labour)

With this it will be convenient to discuss the following:

Amendment 5, page 3, line 3, at end insert—

‘(5A) Financial assistance must not be given to any company which has a debt to equity ratio of more than 65%.’.

Amendment 10, page 3, line 3, at end insert—

‘(5A) The Secretary of State may only grant financial assistance after a business plan for the proposed infrastructure has been approved by Ofwat and the National Audit Office.

(5B) The business plan must demonstrate that the company carrying out the infrastructure has adequate capital resources to complete the infrastructure project.’.

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

This issue is of significant interest to those of us who live in the Thames Water area. Some 20% of the population of the United Kingdom do, so it is not an irrelevant issue to people across the country who pay water rates. Specifically, I am talking about colleagues who have constituencies in Gloucestershire, Northamptonshire, Essex, Kent, Hampshire and Greater London, and the issue raises broader questions about how the Government and Ofwat, the regulator, deal with water companies, their financing and, specifically, the financing of major projects.

I shall make some preliminary comments that relate to all three amendments. I am grateful to the Minister and to the Secretary of State for engaging on the issue; I am grateful for the engagement on Second Reading; and I am grateful for the correspondence that I have had with the Secretary of State since Second Reading. I shall refer to that and read some of it into the record.

First, in parts of London and, certainly, in my constituency, one of the most significant current debates is about whether there will be a Thames tunnel, and Thames Water’s proposal is that to address the current system’s inefficiency and inability to deal with London’s sewage, understandably because the system was created in the Victorian era, new infrastructure—a main sewer, in effect—needs to be built to cope with current and future needs.

There is an ongoing debate, which I do not propose to get into today, about whether the current plan for the proposed tunnel is the right answer. In summary, sewage capacity is already being built to the east of London, in the Lee valley; and there is a proposal—the projected costs of which have risen to £4.1 billion—for a long tunnel, travelling from west London not far from here, along my constituency and ending up at the sewage treatment works in east London.

Some people say that the only solution is the currently proposed tunnel; others say that it would be better to have a shorter tunnel and some other forms of sewage alleviation. That debate is ongoing, but in the end decisions will have to be made. There is a whole planning process for deciding whether the tunnel will be built.

Secondly, there is a debate—in constituencies such as mine and in boroughs such as Hammersmith and Fulham, and Wandsworth—about where, if there is to be a tunnel, the main sites of activity should be. In the middle of Bermondsey, a very large site is proposed for drilling down to create the shaft from which the tunnel

boring will happen, both west and east, at a place called Chambers wharf. In the first round of consultation, the proposed site was King’s Stairs gardens, by the Rotherhithe tunnel. That is a greenfield site, and the proposal was not at all popular. We have managed to persuade Thames Water that that is not a good idea, but there is a tale of unexpected, or unwished-for consequences, because having won a battle to save one site we then found that the company came up with another site next door, taking the pressure off one community but immediately transferring it not far away. That is a separate debate, and I do not propose today to get into the detail of where the sites should be. I see my constituency neighbour and colleague, Mark Field in the Chamber, and many of us have a constituency interest—big and small—in where the sites should be.

The third issue—the issue of the Bill—is whether the Government should, if necessary, provide financial support to Thames Water for such a project, and if so the terms and conditions under which it should be granted. Clause 2, which all my amendments would change, is entitled “Financial assistance for major works”. I shall not read it all into the record, as people can turn to it, but it proposes the insertion into the Water Industry Act 1991 of a new provision, section 154B, of which I shall read the first proposed subsection:

“If the Secretary of State considers it desirable to do so, the Secretary of State may give financial assistance in connection with—(a) the construction of water or sewerage infrastructure, or (b) the carrying out of works in respect of existing water or sewerage infrastructure.”

In further proposed subsections, there are various conditions, one of which is:

“Financial assistance may be given in any form and in particular may be given by way of—…grant…loan…guarantee…indemnity…the provision of insurance, or…the acquisition of shares in or securities of a body corporate.”

My first amendment, amendment 4, proposes:

“Financial assistance may only given under subsection (1) if the financing of the infrastructure is being secured by a group company which has adopted the equator principles.”

I shall come back to that.

Secondly, I want to test the Government’s reaction to amendment 5 and my proposal:

“Financial assistance must not be given to any company which has a debt to equity ratio of more than 65%.”

That precise figure is relevant, but there is a much bigger issue about what the financial past and present of a company should be if it is to receive Government support.

My third amendment, amendment 10, states:

The Secretary of State may only grant financial assistance after a business plan for the proposal infrastructure has been approved by Ofwat”—

the regulator—

“and the National Audit Office…The business plan must demonstrate that the company carrying out the infrastructure has adequate capital resources to complete the…project.”

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Mark Field (Cities of London and Westminster, Conservative)

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?

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

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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?

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

We must not prevent Thames Water and its holding company, and its holding companies, from obtaining money from external investors; indeed, we need to encourage that. However, we, the Government and Ofwat must ensure that we do not condone, particularly in relation to Kemble Water, which is the relevant driving company, and Macquarie, a practice that is unacceptable in two respects. First, it allows the company to pay out in dividends to its shareholders very large profits while not retaining the money that it needs for its capital investment, thereby forcing it to come to Government and, in turn, to the taxpayer, to underwrite something for which it should not have had to come to the taxpayer. Secondly, these processes should not result in our corporate sector avoiding the taxes that we would expect it to pay. One of the issues for next week’s Budget is the need to ensure that people, personally and corporately, who can afford to pay their due taxes do pay those taxes. There has recently been a pretty unpleasant history regarding Kemble, Macquarie and Thames Water whereby people have paid far less tax than Mark Field and I would

believe to be acceptable. They have been using various onshore and offshore mechanisms to avoid tax liabilities involving money that should have come back into the Treasury to the general benefit of the taxpayer.

Ofwat has said that on the previous two occasions when it carried out price reviews, it assumed, for the purpose of setting price limits, a gearing within the range of 55% to 65%. It worked from that starting point, although it was simply an assumption for the purpose of price setting, not a requirement. My suggested figure is therefore also a starting point to see whether we should write in a figure that requires a balance between payment out of dividends and the retention of capital and earnings to ensure that there is no abuse of the relationship with the taxpayer, to the detriment of the consumer.

At the end of the day, this is about the level of water bills for people in the Thames Water area. The current projection is that as a result of the Thames tunnel project, bills will rise by about £80 a year indefinitely. I do not want Thames Water to charge every ratepayer roughly £80 a year extra and, at the same time, not pay much money into the Treasury by way of tax and indefinitely siphon off huge amounts of profits to national or extra-national investors while we are paying for something that we ultimately do not own. There are parallels in the history of the private finance initiative regarding public sector investment in projects where the money then goes off into the private sector. The M6 toll road, in which Macquarie had an interest, has not been a happy tale of investment benefiting taxpayer and users, with some people apparently creaming off the profit to the disadvantage of those taxpayers and users.

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Dan Rogerson (North Cornwall, Liberal Democrat)

My right hon. Friend has set out a number of measures relating to safeguarding public investment. Is it fair to say that he is seeking to bring a far greater level of transparency where matters are a little opaque, particularly because we might see an emerging relationship between private companies and levels of public subsidy, and that makes the need for transparency paramount?

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

That is exactly the position. I want us to address this now and not to discover, when the system gives planning permission for this big project, that we have a corporate financial structure that is not going to work for the interests of the water rate payer or the taxpayer. I have a double interest on behalf of the water rate payers of the Thames Water area—144 colleagues represent people in that position—and on behalf of the taxpayer. I want to ensure that we are not shelling out money when we should not be doing so and the private sector should be picking up the tab. Transparency is hugely important, and it is not helped by a corporate structure that has 10 layers of involvement where it is not clear who owns what, and where one of the layers at the bottom appears to be based in the Cayman Islands. That is not a place where I thought that we were encouraging schemes that we, as taxpayers, were supporting financially.

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Mark Field (Cities of London and Westminster, Conservative)

There is plenty of water around the Cayman Islands, but that may not be entirely what Thames Water had in mind. 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.

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

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Andrew George (St Ives, Liberal Democrat)

Bearing in mind that the probity or otherwise of Thames Water is outwith the purpose of the Bill, would my right hon. Friend care to comment on the fact that, as I understand it, Thames Water might not undertake this project and that the question then arises of what happens to the asset, which is the tunnel? Surely that is the key issue, and then there is the separate issue of the probity, management and proper regulation of Thames Water as a company.

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

My hon. Friend is right. Perhaps it would helpful if, rather than trying to go round the circuit twice, I quickly summarise my letter to the Secretary of State in which I set out my concerns and the history of the matter, summarise the key points of her response, which deal exactly with my hon. Friend’s point about the mechanism regarding the tunnel, and then raise the three specific issues that should be addressed before colleagues and the Minister speak.

The provisions could, of course, apply to any water company. I am talking about Thames Water because we know that the Thames tunnel is the big project that the Government have in mind. However, the Bill relates not just to Thames Water, but to financial assistance for major works by any water company throughout the country, so the issues could relate to any constituency across the United Kingdom.

I will give a brief history. Thames Water was previously owned by the German utility company RWE. As I well remember, at that time it had one of the worst records for leaks and failed to meet its agreed targets for remedying leaks for four consecutive years. Despite that, RWE raised the dividend that Thames Water paid out to the company by 52%, took £216 million from the company and simultaneously announced a rise in profits as it prepared to sell the company on. At that time, Thames Water had a debt to capital ratio of about 45% and an excellent credit rating with all the major rating agencies.

Thames Water was bought by Kemble Water in 2006 in a deal worth £8 billion. Kemble Water is a financial vehicle for a consortium of investors, primarily made up of private equity funds led by Macquarie, the Australian bank. The deal included £3.2 billion of debt, which was incorporated into the company through whole company securitisation. That was undertaken for a special purpose finance company that Thames Water set up in the Cayman Islands, presumably to allow the owners of Thames Water to avoid taxes on the income that they received from the interest raised. That increased the debt ratio sharply to 67.9% of regulated capital value. The company has continued to borrow heavily and the debt to capital ratio has now increased to 72.9%.

That has happened at a time when Thames Water has paid extremely high dividends, which have regularly exceeded its earnings. For example, in 2010, the ratio was 141.5%. In other words, it paid out in dividends nearly one and a half times as much as it received in earnings. By contrast, South East Water, to take another local example, had a payout ratio of 48%—just a third of that of Thames Water. That strategy has had a serious detrimental effect on Thames Water’s credit rating. It has fallen from a corporate credit rating of A plus on the Standard & Poor’s rating scale when the company was bought by RWE in 2000 to a position today in which some of Thames Water’s debts have been assigned a triple B rating, which is considered to be the lowest investment grade rating possible.

For 10 years, Thames Water has been owned by two companies that have sought to extract the maximum possible value from the company. It has prioritised that over the necessary prudential financial arrangements that would have allowed it to make the large, long-term capital investments that it knows it has to make. As a result, Thames Water no longer has the capacity to access the finance required to make large infrastructure investments. It is not as if this project is a new idea. It has been, excuse the pun, in the pipeline for a long time.

The company has therefore asked the Government to provide financial backing for its Thames tunnel scheme. It is not yet clear to me why our Government should help this company after its years of excessive and unjustified borrowing and extraordinary dividend payments, which have eroded the company’s capital position. At the end of the Second Reading debate, the Minister said that the financial arrangements of the company are a matter for the regulator, Ofwat. That is in part true, but Parliament certainly has an interest and the Government must have an interest. If Ofwat’s controls are not sufficient, we need to address that. That is why I have raised this matter in the amendments.

Before the sale of Thames Water by RWE, Ofwat made a clear statement warning potential investors not to follow the very strategy that Kemble Water has since followed. Ofwat said that potential bidders should preserve Thames Water’s investment grade credit rating, which would have meant keeping the company’s debt to capital ratio below 65%. That is the link between solvency, external financial respect for the company and the percentage ratio, which my hon. Friend the Member for Cities of London and Westminster raised with me earlier. Since then, the regulator has, in effect, stood by and done nothing to prevent Kemble Water from further

saddling the company with debt. Ofwat has stated that that is acceptable because the company has kept its investment grade credit rating. In fact, the credit rating has deteriorated to the lowest investment grade possible. Ofwat appears to have neglected the need for the company to incur more debt in the future to pay for large capital investments.

I am troubled that, unless we amend the Bill, there will be nothing to prevent that behaviour from continuing. I am trying to make the Government address how we will prevent it. I do not propose to force the amendment to a vote, but I want to hear the input of Members, if they want to contribute, and the Minister’s response. I am keen to ensure that we do not let go of this matter. My constituents want me to raise it now and the constituents of many colleagues in London have an equally strong vested interest in it.

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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.

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

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Dan Rogerson (North Cornwall, Liberal Democrat)

My right hon. Friend is making some excellent points and shedding a little light on fairly shady areas of corporate restructuring. Sports fans are well aware of such things going on at their beloved sports clubs. He referred to Ofwat’s handling of the situation over a number of years. He has clearly raised the matter with the Department. In his scrutiny of these affairs, has he received any response from Ofwat on why it has not taken action up to now?

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

I have sought from Ofwat an explanation of its current policy. I have not sat down with Ofwat to go through what more it might do. I want to raise the matter here and see what colleagues think. There is a debate to be had about Ofwat and I hope that changes in what Ofwat does and how it behaves will come out of it. These issues also relate to other regulators, such as those for gas and electricity. This is an issue about regulators and private utilities.

The Secretary of State kindly replied to me, as the Minister knows. I will quote the key points from her letter that responds to the issues that I have raised in

Committee. The first matter relates to the point made by my hon. Friend Andrew George:

“I would first like to point out that it may not be Thames Water Utilities Limited who carry out the project. We have consulted on provisions that would enable the project to be delivered by a separate Infrastructure Provider to be regulated by Ofwat separately from Thames Water Utilities Limited. Any contingent financial support will be directed at assisting the entity that is building the Tunnel—and so not necessarily Thames Water Utilities Limited.”

I understand that. It does not change things, but it is important to realise that although Thames Water may be the supplicant, it may not be Thames Water that does the building.

The Secretary of State continued:

“The level of gearing and the securitised structure of Thames Water Utilities Limited is similar to that of some other water companies. Our and Ofwat’s analysis shows that contingent financial support from government would be required for Thames Water Utilities Limited (or any other water company) to build a single project of the scale and complexity of the Tunnel whatever its financial structure (within the norms for water companies).”

I do not dispute that. I am not denying that this is a very big project, or that it may need the reassurance that comes from being supported nationally, rather than just being the project of a regional water company.

The Secretary of State went on:

“Our goal is to ensure that the level of this contingent financial support is kept to a minimum and that we achieve best value for money for customers.”

Amen to both of those things. We all have the same objectives. She continued:

“It is in that context that we are considering whether the Tunnel should be built by the Thames Water Utilities Limited or a separate entity.”

The Secretary of State then discusses the question of where Ofwat’s rules currently bite. She states:

“Ofwat regulates each water and sewerage company in England and Wales under the terms of its Instrument of Appointment…The licence contains conditions aimed at ensuring that each water and sewerage company has sufficient financial and managerial resources to carry out its functions and that the regulated company is operated separately from the rest of the group.”

That is quite important. She continues:

“These licence conditions are collectively known as the regulatory ring-fence.

It is Ofwat’s view that it is for the management of each regulated water company to determine its own optimal financial structure.”

Within limits, I do not dissent from that, but it seems to me that Ofwat is there to hold the reins properly.

The Secretary of State continues:

“Where companies have proposed alternative financial structures, including refinancing arrangements which include securitised structures, it”—

Ofwat—

“has introduced amendments to the regulatory ring-fence to reassure itself and customers that companies remain in a position to finance their functions and that consumers’ interests are not adversely affected by a company’s capital structure.”

I could go through the finances of Thames Water since its last purchase in 2006, but I will not, to save the Committee’s time. Instead, I shall summarise them. The Secretary of State confirms:

“The publicly available Regulated Accounts of Thames Water Utilities Limited show that the only year in which Thames Water paid out unusually high dividends was in 2006-07 following the capital restructuring. In 2010 for example…the dividend paid out was a total of £307.9 million…covered by profits after tax at £331 million.”

It paid out in dividends nearly as much as it received in profits—just £30 million short. In the previous year, 2009, the dividend paid out was £222 million and the profits after tax were £314 million. That was obviously a more healthy balance.

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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?

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

The figures that I have show that 2008 and 2009 were the only recent years in which dividends did not exceed profits. I understand that in 2010 there were £295 million of dividends and £237 million of profit after tax. Probably 30% or 40% more was paid out in dividends than received in income and earnings.

The Secretary of State rightly says that Ofwat does not enforce limits on dividend payments. I do not dispute that in principle, but she states:

“However the licence conditions of each water company’s licence include a requirement to ensure the dividend policy rewards efficiency and good management of economic risk, and will not impair the company’s ability to finance its functions as a water undertaker…Ofwat does not place a cap on levels of gearing. Instead, it determines a notional capital structure for an efficiently financed and operated company for the purposes of setting the cost of capital and assessing the financeability of the price limit it sets. This approach is consistent with the approach Ofgem has adopted in its regulation of the gas and electricity sectors. In the last two Price Reviews this nominal capital structure assumed that water companies would have gearing”—

the figure that I have mentioned before—

“in the range 55%-65%; this was a modelling assumption and not a requirement. The requirement was that they should maintain an investment grade credit rating, plus some headroom and it is this together with the regulatory ring fence that provides the protection for customers. Several of the large water and sewerage companies have a similar gearing ratio of around 80%.”

I pause there to note that if the licence conditions are meant to be about both the ratio and the credit rating, it seems to me that we again have cause for concern.

The Secretary of State continues:

“The regulatory ring-fence also requires a company to ensure that it, or any Associated Company, maintains an issuer credit rating which is an investment grade rating. If a company’s investment grade is threatened, the cash lock up provision within the licence means that if a company is placed at the minimum level for investment grade (i.e. BBB- or equivalent)…the Appointee cannot transfer cash or other assets to an Associated Company without the prior consent of Ofwat.”

Thames Water is moving slowly down towards that position. She continues:

“Moody’s provides a corporate family rating of Baa1 to the whole business securitisation that encompasses Thames Water Utilities Limited. Standard & Poor’s do not provide an equivalent rating for whole business securitisations; instead they rate individual bonds…These bonds are rated in the range A- to BBB…These credit ratings are very similar to other water and sewerage companies and provide headroom against the floor for investment grade credit quality.”

However, it remains the case that we have seen a drop in the credit ratings of Thames Water collectively, and some of its activities particularly. That should start ringing alarm bells with us.

The Secretary of State ends:

“Finally, discussions with Thames Water on financing the Tunnel are ongoing. Achieving best value for money for customers and safeguarding taxpayers are top priorities for Government”.

I wish to mention two other matters, if I may. I am conscious that this is a much longer speech than I would normally want to make, but I am dealing with all my amendments together and this is a fairly complex issue.

Ofwat’s statement of its position is that the ring-fencing licence conditions require a company to

“conduct its business as if the regulated business were substantially its sole business”

and

“have adequate financial, and facilities and management resources to carry out its regulated activities and to confirm each year that it will do so for the following 12 months.”

A further condition is that a company must

“ensure that its dividend policy will not impair the company’s ability to finance its functions”.

I am not sure that Thames Water has done that. It seems to me that its dividend policy has impaired its ability properly to carry out its functions, but it has put it in a position whereby it may not be able to finance on its own, or principally, a project that it knew it would want to finance.

Ofwat states:

“Our long established policy is that it is for each company and its management to determine a capital structure that is appropriate for its circumstances. But our view is that if investors choose to adopt highly geared structures, it is right for customers that both those investors and the companies bear the risks associated with their choice of financial structure.”

That is fine, but now the company is coming to the Government to ask for help to support it. Finally, Ofwat states that capital restructuring generally

“involves the replacement of equity capital with debt capital. This can have a tax benefit.

Consistent with our view that capital structures are a matter for the companies, we set the price limits for companies on the basis of a notional financial structure for an efficiently operated and financed company”.

The Secretary of State also made that point. Ofwat continues:

“We do not set the cost of capital on the basis of each company’s actual capital structure.

However, in setting price limits, we separate the treatment of tax from the cost of capital. This includes tax as a company-specific cost based on the company’s actual gearing projections.”

We could well do the following things. First, if we applied the equator principles, we would put in place a credit risk management framework for determining,

assessing and managing environmental and social risk in project finance transactions, which is recognised in this country and around the world. Equator principles financial institutions—there are four eminent ones in the UK, Barclays, HSBC, Lloyds and Standard Charters—commit to

“not providing loans to projects where the borrower will not or is unable to comply with their respective social and environmental policies and procedures that implement”

the equator principles. There are 76 financial institutions in 28 countries that have adopted the principles, covering more than 70% of international project finance debt in emerging markets. If we were to have that accountability mechanism, which would allow communities to have redress when companies do not meet environmental and social norms, that would provide added reassurance that companies involved in financing large infrastructure projects would uphold high standards. That would apply not just to the water industry but to public financing as a whole.

My amendment 5 suggests that no financial assistance be given to a company with a debt to equity ratio of more than 65%. That ratio is a measure of a company’s financial strength and demonstrates how much the company has borrowed against its assets. It has a direct effect on a company’s credit rating, and consequently on its ability to borrow on the financial markets. I appreciate the Government will not accept the principle of the amendment today, but they might do so in the other place or in another way. If they did so, they would send a message to water companies that if they want Government support to build new infrastructure, they will need to demonstrate that they have the financial strength to be a credible and reliable partner of the Government.

That is also the purpose of amendment 10, which would require any company seeking financial support to come forward with a business plan. Any bank or building society would ask that safeguard of any business in our constituencies. They would say, “Show us your business plan. We’ll then tell you whether we are willing to lend you the money.” A reputable bank involved in financing an infrastructure project would demand to see a business plan, but so far, Parliament is being asked—unless I am corrected by the Minister—to allow the Secretary of State to give financial assistance to water companies, which may include grants, loans, guarantees, indemnity or equity, without any obligation on the Government to seek such guarantees.

We should be concerned about that not just because of the recent history of Thames Water, but for the reason given a moment ago by my hon. Friend the Member for Cities of London and Westminster and given the history of the private finance initiative. The previous Government went through a period of giving blanket permission—effectively—to engage in large-scale infrastructure projects financed by PFI, to build hospitals, schools and many other things. The Treasury Committee has made it clear that PFI projects often lead to higher costs and produce poorer-quality buildings and services. It has said that those costs are eventually borne by the taxpayer, and that PFI projects were unacceptable if the costs were simply diverted to private profits in the private sector for companies that pay little or no tax.

A further disadvantage of PFI—this was touched on by my hon. Friend the Member for St Ives—is that the asset passes from the public or accountable sector into

the private sector. We therefore lose the asset and the revenue stream to the public purse. We do not reduce the public’s payment, which in the end is more expensive.

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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.

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

The M6 is the best example I can find. The M6 toll road is currently the only cash motorway in the UK. In May 2003, Macquarie executive Dennis Eager boasted:

“'We can put up the tolls by whatever we like and start the tolls on day one at whatever we like. If motorists don’t complain about it being too high, we have done our job properly.”

I went through the toll the other day and paid £4.60 or something. That was the weekend rate, which is slightly cheaper, but cars using the toll during the week are charged £5.50, and lorries pay £11, making the M6 toll one of the most expensive toll roads in Europe. You, Mr Hoyle, may know the price more accurately than me because you have probably used it more frequently than I have.

Traffic using the M6 toll is declining, but it is soaring on the neighbouring non-toll M6. The number of cars using the M6 toll declined by 10% in the past year, meaning that it is ineffective at relieving traffic on the M6, which was its whole purpose. In 2005, the company operating the toll road had a net worth of £67 million and paid no corporation tax.

Photo of Mark Field

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.

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Simon Hughes (Deputy Leader, Liberal Democrats; 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.

In 2006, Macquarie Infrastructure Group, the owners of the M6 toll, cashed in £392 million in profits despite contributing only £1.5 in equity to the scheme. The link is that Macquarie is behind Kemble Water, which owns Thames Water. My concern is exactly that alluded to by my hon. Friend. There is an incentive to build the biggest, most expensive tunnel because the largest amount

can then be charged to get the maximum revenue stream indefinitely, and no incentive to have a cheap, good-value product at the end of the day. My question to my colleagues in government is this: are we asking the serious questions as to whether the taxpayer should be putting up any financial support for the scheme?

Since 2003, RWE and Kemble have vastly increased the debt held by Thames Water. Debt has been taken out of the company not because of a vast capital renewal programme or investment in infrastructure. A normal company might take out debt to invest in capital, increase assets or pay down debt over time. Under those circumstances, we could expect to see a short-term increase in debt, which would fall over time as the debt is paid off, and expect shareholder equity to increase to reflect the value of the investments made.

Thames Water, despite being a highly profitable company, has shown no increase in shareholder equity in almost a decade. That is demonstrated by the Thames Water balance sheet, which since 2003 has shown a fall in shareholder equity at a time when the company has taken out more than £5 billion in additional debt. Last year alone, the company increased its debt by £1.25 billion. The accounts of Thames Water show that it paid out £271 million in dividends and moved £685 million of loans to other group companies—almost £1 billion in assets were moved out of the company, to be covered by even more borrowing.

Given that we now have a project estimate cost of £4.1 billion, Thames Water should be asked whether it would have been able to finance the tunnel project had it followed a different policy over the last decade. The policy has clearly had a serious impact on its ability to borrow. The company’s corporate rating on the Standard & Poor’s scale has gone from A plus with a positive outlook to a position in which some of its debt has been downgraded to triple B, which is just above junk bond status.

What has the regulator done about that? Thames Water steadily degraded its credit rating to the point at which it does not have the capacity fully to borrow all that it wants, and has asked the Government for financial support. Ofwat regulates the industry to ensure that companies do not get themselves in a position in which they can no longer operate as going concerns. That is entirely right: water companies are local monopolies, and there would be devastating consequences for the local population were they to fail, because people cannot go anywhere else to get their water.

Provisions include companies having to keep their investment grade status and the ring-fencing of capital assets. If the credit position of water companies falls below investment grade, a cash lock-up mechanism prevents them from paying dividends and ensures that profits are kept within companies. That mechanism is intended only to stop companies going bust; it is not intended to encourage prudential long-term financial management that allows companies the capacity to borrow to make large capital infrastructure investments when they need to do so. The case is perfectly demonstrated by Thames Water, which is currently right on the margin of losing its investment grade status despite the fact that it has known for many years that the tunnel is coming. I believe that that needs to be addressed as a matter of urgency.

My last point is that the current system allows companies to move their money around. Among Thames Water’s debts is a £4 billion debt to a post box in the Cayman Islands. The post box is called Thames Water Cayman Finance Ltd, which is based in Ugland House—I have never been to the Cayman Islands and cannot tell the House exactly where that is, but 18,000 other companies use it as their registered address.

Thames Water Utilities Cayman Finance makes no profit because it owes £4 billion to its creditors. It might be a bit difficult to follow the trail of corporate involvement, but as my hon. Friend Dan Rogerson said, it does not seem like transparent public accounting in the interests of the taxpayer and water rate payer. This company, being a monopoly supplier of water to 20% of the UK’s population, needs to be transparent.

Furthermore, Thames Water can deduct its interest payments from its taxable profits, which is one reason that on the £600 million in operating profits that Thames Water made last year it paid only—wait for it—£16 million in tax. That was after a £400 million deduction for interest payments. And guess where they went! Most went to its subsidiary in the Cayman Islands. If we are about closing tax loopholes and dealing with tax avoidance, the regulators should not be condoning mass tax avoidance by companies providing a monopoly utilities service such as water to people in London and the surrounding counties.

Ofwat’s position paper on the Kemble takeover of Thames Water stated that tax efficiencies from capital restructuring should be passed on to consumers. I do not sense that consumers are getting the benefit, although I do not think they should get benefits as a result of a tax dodge involving huge sums of money that ought to be going into the UK Treasury to deal with the public financial crisis. A sensible gearing ratio of about 65% would also limit tax avoidance by limiting how much interest could be deducted from taxable profits.

I am grateful for your indulgence, Mr Hoyle. I am sorry if it was a rather longer perambulation even than what people thought the ring main would have been had it been a ring main—although actually it is going to be a long pipe. There will be further debate next week on other issues, but I am keen that DEFRA, the Government and all other Departments focus on the need to end this scandal, which has existed for several years, and do not allow Thames Water to get away with what is probably the worst example of financial management leading to the worst exploitation of the consumer and the taxpayer. I hope that the Government will be robust in their response.

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Lindsay Hoyle (Chairman of Ways and Means; Chorley, Labour)

The good news is that I am not going to judge the speech or the ring main.

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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

I will, I hope, be a little briefer than Simon Hughes. I just want to make a few remarks arising from his comments and amendments.

I am absolutely with the right hon. Gentleman on the general principle that in going ahead with the Bill, which I believe has all-party support—I am not sure about him but he is not pressing his amendment—we

must protect both public money and the money of the public. By public money, I mean, first, any underwriting of major capital schemes, such as the Thames tunnel. Secondly, this is a large private multinational company—I appreciate his research into its holdings and complex structure—and we must ensure that it pays taxes in the UK.

At the same time, however, we must also look after the money of the public and ensure that not a penny more is paid in increased water charges, particularly given that water charges are already rising above the rate of inflation for all water users across the UK, including Thames Water customers. I was somewhat reassured on Second Reading when the Minister said that the Government shared those concerns and that he was sceptical about the project—at least about whether its financing was what Thames Water said it was. There would be broad agreement on that.

I also agree with many of the comments of the right hon. Member for Bermondsey and Old Southwark about Thames Water, particularly under the ownership of RWE. During my first two or three years in the House, Thames Water was my bête noir, partly because of how it dealt with leaks—digging up roads all around London in a completely ad hoc, unconcerned way and leaving workings for months at a time—while still not getting to grips with the problem. Furthermore, the problem of sewer flooding, particularly in west London, has been a blight on people’s lives. Year on year, thousands of basement and ground-floor properties in my constituency are flooded by sewers, yet little attention is paid to it. And, indeed, there are Thames Water’s financial arrangements, which the right hon. Gentleman spoke about.

It is only right to balance that, however, by mentioning that Thames Water’s performance has improved markedly in the past few years in many of those areas, although we should continue to be concerned about its financial structures. A lot has been written in the papers in the past few days about the current drought and impending hosepipe ban and other possible measures, and the water companies are rightly under scrutiny. I note that in total—this is not just Thames Water—water companies are likely to report annual profits of £1.5 billion and that they are currently leaking about one quarter of the water they provide. They provide about 14.6 billion litres daily, and about one quarter of that is being leaked. It has been pointed out quite correctly that the hosepipe ban will save only 20% of the water being leaked daily.

The water companies, then, have a long way to go. Many of their problems were caused by the botched privatisation under the then Conservative Government and the fact that, as the right hon. Gentleman said, there has been an incentive for companies to beef up their profits to make themselves ripe for takeover, to sell on at a profit and not to worry during those years about their consumers and the cash cow that comes from having an effective local water monopoly.

Everyone will be grateful for the research that the right hon. Gentleman has done into the financing structures. I am less sure, however, that his amendments would deal with that. I will not spend long on this because I suspect that the Front-Bench spokesman, my hon. Friend Gavin Shuker, will explain, not as eloquently as me but forensically and

analytically, how the Labour amendments would provide the necessary safeguards in a less prescriptive and detailed but more effective way to ensure that if any projects come forward for financial assistance, they are tested in the House first to ensure that the assistance is necessary.

I depart from the right hon. Gentleman in respect of the effect that his amendment might have on the clause. In the end, we need a project in London that will resolve the daily, sometimes weekly, regular flow of huge quantities of sewage into the Thames. On this, I am not sure where he is coming from. When we debated this matter last September in Westminster Hall, he said:

“I also put in a short response to the private commission that was set up by some interested local authorities and chaired by Lord Selborne.”—

in fact, it was set up by Hammersmith and Fulham council—

“The commission has argued that we must have a totally different direction. I am not persuaded by that. The Thames tunnel is the best direction. The previous Government came to that view and the present Government have held to it.”—[Hansard, 14 September 2011; Vol. 532, c. 316WH.]

That was in September. In February, he said:

“I am now clear that, since the end of the first round of consultations in 2011, the arguments for a review of the full tunnel proposal and possible alternatives have substantially increased.”—[Hansard, 29 February 2012; Vol. 541, c. 391.]

I am not sure what happened between September and February. This is important because we must find an effective solution. There is no point putting forward half measures.

Photo of Jeremy Corbyn

Jeremy Corbyn (Islington North, Labour)

I have met Thames Water and looked at the situation. Pollution of the Thames is totally unacceptable—as are the levels of sewage going into the Thames. There has to be a better drainage system to ensure that that does not continue. However, does my hon. Friend agree that after this process we need much tougher regulations to deal with the paving over of large areas of London and the Thames basin, which leads to excessive water run-off from rain fall, which then joins the sewage, becoming a sewage surge in the Thames? That water should be replenishing ground water, not being flushed away with the sewage and thus causing pollution in our river.

3:00 pm
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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

My hon. Friend is absolutely right. The schemes that he describes, which are collectively known as SUDS

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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

I am grateful to my hon. Friend for that prompt. Local authorities have woken up to the possibility of SUDS, albeit perhaps somewhat late in the day. Many are now insisting in planning applications that there should be no more paving over, while many are rightly taking enforcement action where those conditions are disobeyed. However, it is quite wrong to think that SUDS on their own will be a solution to the problem; rather, they offer additional assistance. The idea that we can suddenly convert road surfaces and pavements into permeable surfaces across London is highly impractical—look at the problems we had with simply replacing the

water mains—and it would also cost four or five times more than the highest estimated cost for the tunnel. However, we must use SUDS, and indeed other measures

I am grateful to my hon. Friend Jeremy Corbyn for his intervention, because he brings me back to the point that I was making. I was pleased to receive an invitation from the right hon. Member for Bermondsey and Old Southwark to attend a meeting on 6 March in this place. This perhaps draws attention to the point that Mark Field raised, because although probably 140 to 150 MPs would have been invited if the right hon. Gentleman had asked all those with an interest in Thames Water, I think only three turned up—me, Mr Offord, who is in his place, and my right hon. Friend Mr Raynsford, who was here a moment ago. That perhaps shows a certain lack of interest among some of our colleagues. I am sure that the hon. Member for Cities of London and Westminster would have been there, had he not had a more pressing engagement—I am sure that it was not the Campaign for Real Ale reception that was on at the same time, but there we go.

The invitation asked us to come and listen to Chris Binnie, the engineer who served as the independent chair of the Thames tideway strategic study steering group, which recommended the full tunnel solution. He was going to be present to explain

“why he now believes the costs have exceeded the benefits, and why there are quicker and cheaper solutions that should be considered urgently.”

I am familiar, as many Members are, with Mr Binnie’s proposal, which is what he has called the “Binnie Bubbler”, It is designed to aerate the Thames in a way that prevents the death of the fish and other livestock—if that is right phrase—in the Thames. I have read the arguments for and against the “Binnie Bubbler”, and I have always been rather sceptical about it, because I am not sure that it is suitable for the tidal Thames—it has apparently worked in Cardiff bay in a lagoon area—and also because I do not think it acceptable to allow raw sewage into the Thames at current levels and then simply to try to aerate it and possibly skim off the worst of it.

I therefore went along to the meeting—although I am sorry that I could not stay for the entire time—to see whether Mr Binnie had something more to say on that issue. It would be fair to say that he had something quite surprising to say. I appreciate that I am about to read from a note about the meeting that was written up by a supporter of the tunnel—I had left by this stage—but it says:

“Chris Binnie announced that he had changed his mind again and now supported Thames Water’s view that we should implement the single Thames Tunnel option. Wow! You could hear the gasps around the room and Simon Hughes’ chin nearly hit the floor.”

That might be slightly unfair: the right hon. Member for Bermondsey and Old Southwark is unfazed even by things greater than engineers changing their minds, for the second time. However, this issue draws attention to an important point in the argument about the Bill, and brings us back to the financing. I think everybody—certainly everybody present in the Chamber today and most other Members of the House, albeit with certain exceptions, my neighbouring Member of Parliament being one of

them—supports the idea that something must be done to relieve sewer flooding of the Thames in a substantive way that will last us, we hope, as long as the Bazalgette solution did.

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

I do not want to prolong this unnecessarily, but would like to say clearly that my presumption has always been that something needed to be done. I started from the view that the Thames tunnel was the right solution. However, I want to be sure—not just for myself, but for my constituents, for the reasons that have been set out—that we are not about to embark on an expensive project if it is not entirely needed and has not been objectively assessed to be the right solution. Hence, I come to this issue with a “Let’s check and be certain before we press the button” approach. That was my view before I went to the Binnie meeting and when I came out of it, and it remains my view today.

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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

I am grateful for that clarification. I have never signed up to the concept of the tunnel uncritically or without reservations—or, indeed, at all—because I have always held open the option that there might be a better solution, and if that is what the right hon. Gentleman is saying, then we are on all fours with each other. That is why I have looked in some detail at proposals such as the “Binnie Bubbler”, SUDS and the idea of separate rainwater and sewerage networks, which would also create the problem of huge disruption and much additional cost. Some of those projects, including water conservation, can be done and should be effective, both environmentally and from a cost perspective; the difficult thing is to find an alternative that does what the Thames tunnel would do.

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Jeremy Corbyn (Islington North, Labour)

My hon. Friend represents a riverside constituency, and therefore must have studied the issue in detail. I understand that the tunnel will not last for all time and will become overloaded within the next three or four decades. Therefore, we need to examine how we use water and how drainage systems operate, rather than hitting another crisis in three or four decades’ time.

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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

I agree, and something that is effectively a large sewer pipe stuck under the River Thames can sometimes look like old technology in some ways. There has to be a more organic and continuing process of developing solutions to avoid tunnelling, but it remains the case, first, that this solution has been preferred in many other capital cities around the world and, secondly, that at the end of the day, it is the simplest, clearest and most effective solution. Therefore, as well as considering other, additional measures, all our attention should be focused on how the Thames tunnel can be contained as a project, particularly financially, but also in terms of the disruption that it would cause.

However, I take my hon. Friend’s point entirely, and conclude by going back to basics and why we need this project. When I spoke on Second Reading last week, I invited my hon. Friend the Member for Luton South to join me last Saturday on the foreshore of the Thames by the CSOs—combined sewer overflows—in Hammersmith for the Thames21 clear-up. I was very disappointed to see that he obviously had pressing constituency business, because he would otherwise have joined me and about 100 of my constituents—although they might have been

from Bermondsey and Old Southwark or Cities of London and Westminster. However, they were all hard-working people—they worked longer than I did. Together, they cleared up several skips of industrial, commercial and consumer waste—if I can put it that way.

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Jeremy Corbyn (Islington North, Labour)

I rise to intervene on my hon. Friend for the last time and to thank him, because I visited the Hammersmith shoreline on Saturday evening, and it was absolutely brilliantly clean. I looked over that pristine area of mud and sand, and thought, “This is amazing! This is how the Thames can be. I wonder which guardian angel has been here and cleaned it up”—and now I know.

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Andy Slaughter (Shadow Minister (Justice); Hammersmith, Labour)

Modesty forbids; all I would say, without going into too much graphic detail, is that when I left, I washed everything that I was wearing, yet it was still Monday morning before I got the smell out of my nostrils. Unfortunately, I did not go and wash everything I was wearing immediately, because I had to go canvassing for Mr Livingstone in between. I cannot think how many votes I must have lost in the condition I was in, following my outing on the foreshore.

It is a lot cleaner on the foreshore, and I appreciate absolutely what the Thames tunnel coalition, Thames21, has done, and all the fantastic consumer groups involved, in organising the clear-up. I pay tribute to them, although I wish that they did not have to do that work in those appalling conditions.

One of the people who was working hard there on that morning was a young man called Conor Newman-Walley, aged 15. He and his dad were there, working away. He goes to the same school in Hammersmith that I went to many years ago, and he is in the rowing team. It is a very good rowing team, as it was then. He is a founder member of Rowers Against Thames Sewage—RATS—and this is what he has said to the Thames tunnel organisation:

“In Victorian times, the people of London solved the first sewage crisis by implementing one of the most influential engineering projects of its time. As young people we learn and marvel about these feats in history at school. The challenge of sewage in the Thames today is too big for our generation. We look to those above us to put the projects in place that will solve this problem for generations to come. Our call to you is to build something amazing that our children will learn about in school.”

That attitude is one that we should adopt as we contemplate the Bill.

It is our duty to scrutinise the Bill and, more importantly, when it is passed, to scrutinise the project and any public money that might be committed to it and possibly put at risk. I hope that the amendments are not designed to stand in the way of ensuring that the clean-up of the Thames takes place. For Conor, a regular user of the Thames, this is not a lifestyle question, or a matter of the river looking pretty or smelling nice; it is a question of health, and of whether he can feel pride in his community when he goes to the river to take part in his sport. He needs to be able to take part in that sport without feeling personally inconvenienced or put at risk.

The Thames brings huge benefits to people, particularly my constituents who live alongside it and use it regularly. We have a duty to the public purse, as well as to ensuring that London has a river that is fit to look at, to use and to enjoy. I appreciate the right hon. Member for

Bermondsey and Old Southwark’s attention to the financial detail, but I hope that he has not strayed so far from the path that he cannot also commit to those aims.

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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.

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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.

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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.

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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. I think the hon. Gentleman makes a fair point. I do not wish to exaggerate by saying that quality of the water in the Thames is heading back to what it was in the 19th century. It is not, but it is deteriorating because of the amount of effluent being pushed into it and because the sewerage system cannot cope. Ergo, something clearly has to be done.

I have discussed this issue with my hon. Friend Mr Slaughter. As I see it, the Thames tunnel is a solution and it is necessary. My concern is with the cost and the impact; I am also concerned about whether the solution will last. That is why I hope that the Minister will inform us, when he comes to reply, that his Department is seriously looking at other issues, such as permeable surfaces, reducing the use of water, using other forms of drainage that do not pump everything down towards the Thames, and perhaps other forms of sewage disposal that will not lead another generation to have to spend an equally large amount of money on the next new solution to this problem.

I recognise that we have a problem; I recognise that London has to wake up to it. I believe that the Thames tunnel is probably the only solution on offer to deal with it. We have to look ahead as well, just as Parliament was forced to face up to the pollution in the river in the 19th century when it stank Members out of the building. We are not at that stage yet, but Londoners deserve a decent and clean river of which they can be proud. We look forward to the days when the salmon and dolphins are back in the Thames, as they could, should and ought to be.

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Matthew Offord (Hendon, Conservative)

I shall comment on the proposals of Simon Hughes. Some of his comments were interesting and opened me up to some of his concerns, which are shared by some Conservative Members. I shall investigate some further issues afterwards, but I wish to put some comments on the record now.

I am a supporter of the Thames tunnel. I do not think I am considered a spendthrift politician. I am often described as a right-wing Conservative—a moniker with which I am very comfortable. On this occasion, however, I am supporting Thames Water in its endeavours to clean up the river.

I am most concerned about amendment 4, proposed by the right hon. Member for Bermondsey and Old Southwark, according to which financial assistance should be given for “the financing the infrastructure” only if

“secured by a group company which has adopted the equator principles.”

I was not initially aware of what the equator principles were, so I went away to conduct a little research.

The equator principles were established to guide investment for major works and projects in developing countries, particularly those countries that have a limited environmental regulatory framework. Although they are now described as applying to all major projects across the country, the relevant environmental directives here in the UK set much higher standards than anything that appears in the equator principles.

Applications for projects on the scale of the Thames tunnel will be considered by an independent body—in this case, the Infrastructure Planning Commission. I understand that back in September 2010, Thames Water referred the matter back to the IPC. Beyond that, I understand that after investigation, the Secretary of State will be required to look at the project to establish whether it is acceptable; that will be followed by acceptance or rejection by Parliament.

The scale and the nature of the Thames tunnel project has triggered the need to undertake an environmental impact assessment in accordance with the EU EIA directive and the EIA regulations. The EIA process will seek to identify the likely significant effects of the project, which we hope will inform part of the design process and facilitate design improvements, ultimately identifying suitable mitigation measures for any residual environmental and social effects on our constituents. The output of the EIA process—the environmental statement—will convey to decision makers, such as ourselves, the environmental effects of the project, including on local communities.

Other studies have been undertaken that will inform the independent decision makers during the IPC process, including an equalities impact assessment, a health impact assessment and a sustainability assessment. In addition, as we all know, local authorities will be able to make their case directly to the IPC, and they will be able to produce their own local impact statements. Finally, the extensive consultations undertaken by Thames Water comply fully with the Planning Act 2008 and are in line with the Aarhus convention.

It is certainly my view—and I believe it is the view of Thames Water, which is proposing the scheme—that the directives and guidelines are being complied with to an extent that far exceeds the requirements of the equator principles, and I am particularly uncomfortable with that. I am disappointed that the amendment will not be pressed to the vote. I feel that when amendments have been tabled, we should test the view of the Committee on them. I do not understand why the right hon. Member for Bermondsey and Old Southwark tabled this amendment. I would have thought that he had done enough work to be able to speak eloquently about his other concerns. I do not think that he really believes in this measure, which rather muddies the water generally.

The second part of my speech is about the Chris Binnie meeting, which I attended. I was quite surprised to hear that the person who promoted the original plan had decided, after seven or so years, that he felt an alternative was more viable. The viability of the scheme, he said, lay in the fact that it would cost only £60 million as compared with the £4.1 billion he originally envisaged. What he did not address in the meeting, however, was the fact that the £60 million scheme would not fundamentally address the problem of sewage and other contaminants in the river. All it would do is scrape some of the 39 million tonnes of effluent off the top of the Thames and aerate some of the river, affecting fish and livestock living in it. It does not address some of the issues in the EU environmental legislation that we need to address fundamentally as part of the super-sewer scheme.

I was rather concerned to hear that someone who had proposed a scheme only seven years ago had suddenly changed his mind. I felt that some of these aspects

should have been considered seven years ago. He said that circumstances, including the financial situation in which the country and Government find themselves, had changed. That reminded me of an old African proverb—that the best time to plant a tree is 20 years ago, and the second best time is now. I ask myself why he did not push this scheme forward at the time. We have had to wait seven years and he now claims that it is unaffordable. I am very suspicious of people who come forward with a professional opinion and then, when circumstances change, decide that better alternatives could have been proposed. In hindsight, it would have been better if he had advocated these proposals originally.

I do not believe that the amendment will be pressed to a vote. If it were, for the reasons I have outlined, I would certainly be against it. I do not wish to detain the Committee any longer—certainly not for as long as the right hon. Member for Bermondsey and Old Southwark did. I look forward to hearing the Minister’s response to some of the points that have been raised.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

Simon Hughes raises a number of important issues through these amendments. In so doing, I believe he makes our case, which we will come on to discuss in the next group of amendments, for proper parliamentary scrutiny in the exercise of clause 2. However, we take a different view on the correct mechanism in this case. We believe that rather than attempting to restrict the powers of the Secretary of State—despite the rather ingenious way in which he has crafted the amendments—the best way to debate major infrastructure works is through a statutory instrument process, before triggering the powers in clause 2. Because we believe that our amendment provides a superior mechanism, we are reluctant to support the right hon. Gentleman’s amendments, although I accept that he has already said that they are, to a degree, intended to probe the Government’s position.

I admit that I was a little confused about the right hon. Gentleman’s own position. Last week he said that he was no longer convinced of the arguments in favour of the Thames tunnel, and I hope that the amendments are not designed to allow him to sit on the fence. In view of climate projections that forecast a substantial increase in the number of flash floods in the region—it is expected that by 2060 the UK’s current single occurrence in 30 years will become one in 11, and that the current single occurrence in 100 years will become one in 30—we think that the need for the tunnel is obvious.

We do, however, agree that the scheme could be accompanied by a number of other measures. It should be borne in mind that the Thames tunnel will still be overwhelmed by large storms occurring perhaps every three months. That demonstrates that the design is not over-engineered, as some would claim, but provides a decent standard of protection for the Thames.

The right hon. Gentleman has indicated that he does not intend to press his amendments to the vote. I invite him to support our amendment 2 later, when these points can be properly addressed.

We agree that an investment programme to comply with waste water requirements should not disproportionately enrich the balance sheets of a private water company.

That should not be the purpose of installing new infrastructure. It is for the Minister to confirm the exact arrangements, but I remind the Committee that in 2010 we legislated for a financial mechanism allowing the Thames tunnel to be built and operated by a company other than Thames Water to ensure that Thames Water did not profit disproportionately. The current proposals build on that, seeking to enable the Government to take the powers they believe they should take to ensure that the tunnel goes ahead.

Let me conclude by saying—I hope to be painlessly brief—that we cannot support the amendments, and that we call on the right hon. Gentleman to withdraw them in favour of our amendment 2. We also invite him to join us in debating the statutory instrument on the Thames tunnel, and to deploy arguments as skilful as those that he has deployed today.

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Richard Benyon (The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs; Newbury, Conservative)

Everyone in the Chamber recognises that the words “Thames Water” appear nowhere in the Bill. Nevertheless, my right hon. Friend Simon Hughes has raised some legitimate points.

I am certainly not here to be the voice of Thames Water. While I entirely understand the concerns that have been expressed by Members in all parts of the Committee, I think we should be careful about debating the structure of companies, or our perceptions of their virtue or otherwise. It is not for me to talk at length today about tax loopholes, perceived or actual, and in any event you would not allow me to do so, Ms Primarolo. The Government intend to block such loopholes where they exist, and it is the job of Her Majesty’s Revenue and Customs to hold companies to account.

I recognise that there is an issue that needs to be addressed by Thames Water in respect of its customers and the 144 Members of Parliament—including me—who are concerned about it. However, we should be wary of trying to prescribe such matters as debt equity ratios in legislation. Shifting the percentage from debt to equity could have a serious effect on bills in some water companies’ areas, and although debt levels are obviously of concern and we must ensure that they are as low as possible, it is not for Ministers to make such prescriptive decisions.

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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.

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Richard Benyon (The Parliamentary Under-Secretary of State for 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. I am sorry if I gave the impression that that might in some way be diminished. There are many forums within Parliament, not least the Select Committee process, for holding organisations such as Ofwat to account for the decisions they take. I assure my hon. Friend that we have regular discussions with all three regulators of the water industry, as well as with the water companies, to ensure that decisions are taken properly in relation to us in Government, and he is also right that Parliament should debate such matters, too.

I want to rattle through some of the points raised in the debate before addressing the questions asked by my right hon. Friend the Member for Bermondsey and Old Southwark. First, I want to put on the record that I celebrate the fact that another country’s sovereign wealth fund wants to invest in water companies in this country—indeed, that has received a generally positive reception. It is also worth putting on the record that no decision has yet been made as to whether the Thames tideway tunnel should form part of Thames Water’s regulated asset base.

I also want to say that I share the admiration for Thames21 expressed by Mr Slaughter. I have visited that organisation on a number of occasions, and it does fantastic work around our capital, reminding us not only why this river is so important to those who live in London, but also that it passes through one of the seven most important cities in the world. That must motivate us to get this project right.

There has been some comment about this project being a private finance initiative venture. As I am sure Members understand, it is not a PFI project because it would not involve the public sector entering into a contract with the private sector.

Some uncertainty will always be associated with projects of this size and complexity. The current cost estimate of £4.1 billion includes a significant contingency element of £0.9 billion for risk allowance and optimism bias. Together with Ofwat, Infrastructure UK and the Major Projects Authority, we will continue to scrutinise the costs and ensure that the project is delivered efficiently, with a structure and financing mechanism that delivers value for money for customers and taxpayers.

Lessons learned from other successful projects will be applied to ensure that this project is delivered within budget and on time. I promise my right hon. Friend and other Members that I and my ministerial colleagues remain healthily sceptical about the cost of this project. We must remain sceptical about any projects that have such high capital costs and that involve an annual charge for so many people, some of whom are on low incomes. It would be wrong of us to sleepwalk into an arrangement and not be rigorous about the cost element.

We are taking the best possible advice. We have taken on Ernst and Young to advise us on the structure and financing of the project, and we have also taken the best advice on engineering solutions. We talk to Thames Water regularly, too. I cannot share with Members some of the details that I would like to share with them, because we are currently in a very sensitive negotiating time in respect of this project. In due course, I hope, and expect, to be able to share more details, however.

I was asked under what circumstances financial assistance would be given for the tunnel. We are still considering the most effective financing mechanisms for the project. We are talking with Ofwat, Thames Water and our own advisers. No decisions have yet been made on the form of any financial assistance, or how it could work.

I entirely agree with Jeremy Corbyn that we must also have clear policies on public open green space and green spaces generally. We have published policies on that and the green infrastructure partnership that we are creating. We are also working on the use of permeable surfaces, which is largely a building regulations matter, but also comes under the remit of the Department. We will be announcing our policy on sustainable urban drainage systems following the consultation on that in the near future, so he is right to raise the matter.

Let me deal with the points made by my right hon. Friend. He has tabled amendments to attach to the granting of financial assistance several mandatory terms and conditions relating to the financial structure of the undertaker responsible for the construction or works. I take his concerns seriously and share his desire to ensure that should any public financial support go to the Thames tunnel or similar projects—it is important to understand that this is not just about the Thames tunnel—it is tightly controlled.

My right hon. Friend has put on the record his letter to the Secretary of State and much of her reply to him, and I do not intend to go through that in detail. However, in dealing with his amendments, I should, first, reiterate that the clause, as drafted, already allows terms and conditions to be attached to the financial assistance. As with amendment 3, I do not accept, however, that it is necessary or appropriate to include a detailed listing of potential terms and conditions in the Bill. Those may vary from project to project, and it is better to retain flexibility on the most appropriate terms and conditions that would protect customers and taxpayers, and ensure that infrastructure projects can be delivered.

That said, the amendments appear to raise questions about Ofwat’s independent economic regulation of water and sewerage companies. Although the Secretary of State has written recently to my right hon. Friend on this point, it may be useful to set out briefly how the sector is regulated. A greater awareness of this regulatory system may help to reassure hon. Members about the checks and balances relating to the financing of the water sector, and how taxpayers’ and customers’ interests are properly protected. Every water and sewerage company in England and Wales is regulated in accordance with Ofwat’s primary duties to protect the interests of customers and to enable the companies to finance their functions. Each water company is subject to the terms outlined in its instrument of appointment or, as it is more often known, its “licence”. The licence contains conditions to ensure that each company has sufficient financial and managerial resources to carry out its functions, and that the regulated company is operated separately from the rest of the group. Those licence conditions are known as the regulatory ring-fence.

It is for the management of each regulated water company to determine their own optimal financial structure. Where companies have put forward new financial structures, Ofwat has introduced amendments to licence conditions, such as the requirement to maintain an investment grade credit rating, which been mentioned, to ensure

that companies can still finance their functions and that consumers’ interests are not affected adversely. High gearing ratios are, in part, reflective of lenders’ confidence in this regulatory regime.

I will now discuss the amendments in detail. On amendment 4, my right hon. Friend’s intention may be that the project should secure finance only from institutions that have signed up to the equator principles, but that would limit the market from which finance can be sought, thus potentially adding cost on to customers’ bills. In addition, as was pointed out by my hon. Friend Mr Offord, non-membership of the equator scheme does not mean that a financial institution is not following sound principles. My right hon. Friend’s intention may be that the company seeking the finance should sign up to the principles, but it would be inappropriate to ask Thames Water, its holding companies, its infrastructure provider or any other water and sewerage company to sign up to a set of principles designed for financial institutions active in providing project finance, rather than for companies involved in providing utility services under a well-established regulatory regime, which already balances the economic, social and environmental aims of sustainable development.

Amendment 5 deals with debt to equity ratios as a condition relating to the provision of financial assistance. I should explain that Ofwat does not find it necessary to place an absolute cap on levels of gearing. Its requirement for the past two price reviews has been that companies should maintain an investment-grade credit rating. To have this credit rating, companies must maintain sufficient levels of equity in their business. It is that requirement, together with the regulatory ring fence, that provides the protection we all want for customers.

On amendment 10, Ofwat would expect to see proposals on how infrastructure would be delivered and financed before awarding or modifying a licence. We would not want to see legislation enshrining a duplication of effort between Ofwat and the National Audit Office. The clause already allows for terms and conditions to be attached to financial assistance, but, whatever the merits of the specific amendments, I do not believe it is necessary on the face of the Bill to enter into the level of detail proposed by my right hon. Friend on what might or might not be suitable terms and conditions. There are existing mechanisms to regulate water and sewerage undertakers effectively and to protect customers and there are systems to scrutinise and challenge departmental expenditure.

In conclusion, as I said at the outset, it is right that Ministers should be held accountable for the overall cost of this project and for how we approach it with Thames Water. It is also important to understand, however, that this clause and the Bill allow a wider application. Detailed and professional negotiations are taking place with Thames Water. I think they are working well and hope to be able to make more announcements on them in the future.

For the reasons I have stated, I ask my right hon. Friend to withdraw his amendment.

3:45 pm
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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

I am grateful to colleagues who have contributed, from both upstream and downstream. Both banks of the Thames have been represented, which is a

good thing. I should probably have started by declaring two interests. I chair the Mayor of London’s Thames festival, which has a regular interest in ensuring that we celebrate our Thames, and I am a patron of the London Wildlife Trust, which has done lots of work on the Thames. I am also a supporter of Thames21, which has been applauded by Members on both sides of the House and has done fantastic work, as have other environmental bodies.

I join the Minister in celebrating the fact that another country’s sovereign wealth fund is interested in investing. That is a good thing. The announcement of the Chinese investment interest in the past few weeks was very welcome and I share his view.

I shall be brief and shall just pick up on the comments that have been made. The Minister has been very courteous and recognised that I was seeking to put on the agenda items that I and my constituents think that the Government ought to bear in mind as they take the Bill forward. I accept entirely that the Bill, as drafted, has a subsection to proposed new section 154B that allows the terms and conditions for any financial assistance to be inserted by the Secretary of State. The debate we are about to have, which will be initiated by Gavin Shuker on behalf of the official Opposition, is a sort of halfway house. The proposal is that we do not get into the detail but that we have a mechanism—

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

Order. Shall we wait until we start to discuss those amendments before we start referring to them? The right hon. Gentleman should concentrate on the amendments that he has moved.

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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

Thank you, Ms Primarolo, and of course I will.

I understand that the Minister realises what the issues are. I heard what the Minister said, and I tell my hon. Friend Mr Offord that the equator principles are now well-established principles for finance companies that are lending nationally and internationally and they were the best form I could find of a benchmark of ethical standards for financial companies that are lending to utilities. Yes, they were developed in the context of the third world, or the developing world, but they do not just apply there. I understand the points that were made.

The negotiations to which the Minister referred are being conducted confidentially, of course, and I understand that, but I hope that after today’s debate we will be able to ensure—the Minister has offered to do so—that there is engagement across the parties and across the House, including with those of us whose constituents, like his, have an interest in our ending up with a rigorous system for ensuring that Thames Water is accountable. We have flagged up the wider issue, which we want to take elsewhere, with Government.

On the comments of Opposition Members, not least those of Mr Slaughter, about the meeting held upstairs, I am grateful that colleagues came to that meeting and others held in this and other buildings about Thames Water. My view is that an evidence-based conclusion should be reached about what the right systems are for dealing with what has been a growing problem for the Thames. We need to make sure that we are all confident that we

come up with the right solution, and it is perfectly proper to call people who have views and experience to give evidence. Like the hon. Gentleman, I was slightly surprised that Professor Binnie appeared to move from a view that he had moved on to, back to a view that he had originally held. It is important not to ignore the principle that we should not overspend on a capital project if there are other ways of doing things that give better value for money.

I am grateful for the time we have taken to look at this issue, which is now on the agenda. I am determined that engagement with Ministers should continue and I hope that Ministers will be very positive about making sure that not only the Government but Thames Water and Ofwat engage. May I end by correcting one thing that I mis-said when I was talking about an example that should give us a warning? I was talking about the M6 project and the way it had been funded. I said that the company that ran the project, which is linked to the company involved in Thames Water, had a net worth of £67 million and paid no corporation tax, but I should have said that it had a net worth of minus £67 million. I hope that this makes my point a better one—that a company may appear not to have any money but can be paying out large amounts in dividends. I am grateful to have had the opportunity to put that right and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

I beg to move amendment 2, in clause 2, page 3, line 5, at end insert—

‘(6A) No financial assistance may be given under subsection (6) unless the Secretary of State has laid a draft of a statutory instrument setting out the terms and conditions including the duration of such assistance before, and such draft has been approved by a resolution of, each House of Parliament.’.

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Dawn Primarolo (Second Deputy Chairman of Ways and Means; Bristol South, Labour)

With this it will be convenient to discuss amendment 3, page 3, line 5, at end insert—

‘(6B) Before making regulations or an order under this section, the Secretary of State must lay a report before Parliament on her proposals to make apprenticeship programmes including at a Level 5 and Level 6 standard part of any major works, as well as an estimate of the number of jobs created and benefit to the local economy.’.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

In this final grouping, we seek to improve the Bill by ensuring that the same parliamentary scrutiny is applied to the wide-ranging powers in clause 2 as we sought to introduce for clause 1, and that the benefits of major works are shared with the whole community, not just shareholders. Amendment 2 recognises that the powers in clause 2 for the Government to provide contingent financial support for exceptionally large or complex water and sewerage infrastructure should be subject to proper debate in the House before they are triggered. As I have already said, it is not our desire to frustrate the will of the House; indeed, there is, by and large, consensus across the House that something must be done to correct the issues with the Thames and that the Thames tunnel presents the best solution for that problem. However, I feel that the clause needs to be considered beyond the context of today and the policy statement that I believe will come out in the House on Monday night.

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Rory Stewart (Penrith and The Border, Conservative)

Will the hon. Gentleman reflect on the idea that proper debate in the House should be required on triggering very detailed financial amendments? Given the lack of attendance in the broader debate about this Bill, is it realistic to expect proper parliamentary scrutiny of something so minor?

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

I am grateful for that point from the hon. Gentleman who has joined us in the debate. I ask him to hear me out regarding this measure. I am sure he has read the amendment and understands that it refers to the process for statutory instruments under which Members who had a particular interest in the matter would be able to go and make representations. We use that system quite commonly across the House and I feel that such additional parliamentary scrutiny would be appropriate for projects such as those we are discussing, which could involve costs of up to £4.2 billion and a long period of tunnelling works and the like, let alone for other projects that we do not currently know about.

As Members of Parliament we scrutinise, debate and legislate, and we are elected to do so. By putting the power to decide whether public money should be risked on large water infrastructure projects solely in the hands of the Secretary of State, we lose that thorough process, which is the most accessible way for Members to engage in legislation here in Parliament. We will see how much interest the Thames tunnel has attracted in the Chamber today as part of the Bill. The debate so far has allowed MPs who represent constituencies that will be affected by the plans to come forward and express the views of their constituents, but it is limited. The debate has also allowed those with experience and expertise in the field from both sides of the House to feed in their knowledge and advice.

However, the clause in its current form concerns us because it means that from here on we risk writing blank cheques to the Secretary of State and her successors when it comes to large water infrastructure projects. The clause will see the decision-making process remain in the Secretary of State’s office—decisions which might lack awareness of how enormous these infrastructure plans are and how they will affect people’s homes and lifestyles.

Let us compare the Bill with other Bills that will be introduced in this Parliament before 2015. We know that a hybrid Bill process will be used in some cases. This is not a hybrid Bill, so it is important that we get the groundwork right in relation to the decision-making process on the Thames tunnel and other infrastructure.

Our amendment requests that such proposals come to the House for debate and allow Members to contribute their knowledge and experience. Accountability and scrutiny are needed if infrastructure plans are to reshape constituencies that Members are elected to represent. It is only right for their input to be considered. Amendment 2 will improve the Bill in that way.

As an aside, although it is essential to our decision whether to move the amendment, I noted on Second Reading in the discussion of the decision-making process on the Thames tunnel that reference was made to the policy intent in the Government’s document, “Major infrastructure planning reform: Work plan” of December 2010, which states:

“Following Royal Assent of the Localism Bill major infrastructure applications will return to ministers for decision as follows: . . . the Secretaries of State for Communities and Local Government and Environment, Food and Rural Affairs will jointly determine water supply and waste water applications.”

I have checked and DEFRA has confirmed that the joint decision-making process is undertaken by administrative means, not statutory means. In other words, although the Localism Act 2011 amended the planning legislation to give Ministers the final decision-making responsibility for major infrastructure, it did not lay down a legal duty imposing the policy intent. So DEFRA will lead on waste water and DCLG will handle planning, including the report from the planning inspectorate, but the Departments have not yet, as I understand it—I look to the Minister to clarify this—decided how Ministers will act jointly in the final decision. That falls short of a legal duty to make joint decisions that place a legal responsibility on both Secretaries of State. It could result in messy horse-trading between the two Departments. If the Minister clarified the exact process, that would be helpful. It may not address our particular concern that proper parliamentary scrutiny is applied to the decision through the statutory instrument process, but it will help us decide whether to press the amendment.

The Minister said earlier that he would share the discussions that he has had with his officials and, as I understood it, with Thames Water, to reassure us about the cost and the process for implementing the tunnel. We have another debate on Monday to approve the guidance on waste water. If not during this debate or the one on Monday, when will he share the discussions that he has had, which he sought to use to reassure Members that the process would be properly managed?

Amendment 3 will sharpen the mind of anyone proposing major infrastructure works by obliging them to consider the requirement to make apprenticeship programmes a key part of that work. Thames Water estimates that the Thames tunnel project will directly create more than 4,000 jobs in the construction sector. The majority will be employed through contractors. Of course, the true number is likely to be higher, given the secondary employment effect. A partnership is emerging with Crossrail’s tunnelling and underground construction academy, which is currently training and placing about 70 apprentices each year. Last week the Minister gave an assurance at the Dispatch Box that the Thames tunnel project will specify in its contracts the number of apprentices who will be employed by contractors.

In amendment 3 we commend that approach, not just for the Thames tunnel project but for future projects. It would require the Secretary of State to lay a report before Parliament on her proposals to encourage level 5 and 6 training programmes—for those Members not fully versed in those programmes, they are equivalent to foundation and bachelor degree qualifications. These major works can take a decade or more to complete, which means that there is ample time to bring a generation of young people into the trades, if the political will is there to require it.

4:00 pm
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Simon Hughes (Deputy Leader, Liberal Democrats; Bermondsey and Old Southwark, Liberal Democrat)

On that important point, I know from my experience of the Jubilee line extension and other major projects that often the issue is not whether a deal is done that in theory ensures jobs, apprenticeships and

training for local residents, but whether such a deal is then monitored and delivered. Often the will is there but it does not turn out that way in practice.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

The right hon. Gentleman makes his point explicitly and brilliantly. If the lessons of the past 20 years on major infrastructure projects where we have required special social benefits are to be learnt, monitoring is absolutely essential. That is why I think that our amendment’s approach is very sensible. It would require the Secretary of State to bring forward her plan, and an agreement with the infrastructure provider, so that it could be approved by this House. The additional level of scrutiny given would not just be an assurance in the contracts; there would be proper parliamentary accountability to ensure that the benefits, for Londoners in this case, are spread across the capital and give young Londoners a fair start.

We know that the Thames tunnel will be a huge infrastructure project, and we have all seen the bad news on youth unemployment today, so we are calling on the Government to ensure that young Londoners get a fair share of the 4,000 jobs the tunnel will deliver. In short, this is a real opportunity to help guarantee apprenticeships and high-level skills. I hope that the Minister will be able to accept both amendments, which would improve the Bill for Londoners now and for all households in the years to come.

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Rory Stewart (Penrith and The Border, Conservative)

Gavin Shuker has made a powerful case for apprentices and for better scrutiny of financial mechanisms. I stand, with enormous modesty, not as someone representing the Thames, but as someone representing a large body of water in Cumbria. However, my disagreement with the amendments, and I suspect my party’s disagreement, is based on profound Tory principles. It is a disagreement not on the nature of scrutiny or the importance of apprenticeships, but on the basis of law, the way statutes should be created, the way administration should be driven through and the importance of the issue. We begin in agreement: apprenticeships are important, as is scrutiny. But Parliament is not the way to do this.

This is an elegant and unencumbered piece of legislation. What we have seen in infrastructure investment over the past 50 years is a complete misunderstanding in this country about the importance of Parliament in infrastructure and where Parliament should not be involved. We have been a catastrophe— not just the Labour Government, but the previous Conservative Government—when it comes to making the right infrastructure investments for this country. Why? It is because, unlike Denmark and Germany, we have never developed a proper attitude towards infrastructure or investment. We have never developed a national investment bank. We continue to believe that highly technical matters, such as those relating to the deployment of water or the details of the financing of infrastructure, can be resolved by Parliament, rather than the kinds of specialists in the World Bank who deliver these projects effectively around the world. We see that in water and, just as powerfully, in broadband.

If the Government are pushing ahead with this legislation, and if we are pushing back against the Opposition, it is because the failings over the past 13 years in delivering infrastructure are reflected in the

comments of the hon. Member for Luton South. There are better ways of looking at the financing; there are better ways of looking at apprenticeships.

We have in place flexible apprenticeship mechanisms that are currently delivering more than 100,000 apprentices. Encumbering this legislation or, indeed, any future infrastructure legislation with that degree of detail would not only, as my right hon. Friend Simon Hughes pointed out, prove generally ineffective, as it has in the past owing to a lack of monitoring, but take away from civil servants—which is where it should lie—the real responsibility and accountability for delivering good, imaginative infrastructure projects, well financed and with apprentices in place.

Given the importance of this issue, given that water matters so much to us, given that the drop in public sector demand means that we should make more infrastructure investment, given that we need to be much more creative about how we bring financial mechanisms to bear, given that it is so cheap at the moment to borrow money, and given that it should be possible to make not just this but many more profitable investments on the basis of public sector insurance or financing, I beg the hon. Member for Luton South to withdraw the amendment. It would tie the hands of the Government at a very important moment, when we need exactly this kind of infrastructure and exactly this kind of investment in water not just for apprentices but for economic growth.

The way to proceed is with a serious, responsible approach to infrastructure investment, which will not be delivered through the kind of statutory committees that the hon. Gentleman proposes.

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Anne McIntosh (Thirsk and Malton, Conservative)

I shall limit my remarks and take a slightly different view from that of my hon. Friend Rory Stewart, because I believe that there is some merit in parliamentary scrutiny and that, often, we have better laws as a result. Given that there is all-party and, indeed, consumer support for what the measure and, in particular clause 2(6), is trying to achieve, I am sure that in moving amendment 2 Gavin Shuker is not seeking to delay matters through parliamentary scrutiny.

Will the hon. Gentleman consider this approach, however, which I have shared with the Leader of the House? When we have—as was mentioned in the debate about the first group of amendments—parliamentary scrutiny of draft orders under the Flood and Water Management Act 2010, for example, is it not unsatisfactory that all we are required to do is to vote for or against the statutory instrument? Would there not be some merit in being able to amend it?

I have chaired and served on Statutory Instrument Committees, as all of us have been privileged to do from time to time—although I hope that the Whips do not take that as a bid to serve on any in the future. As a humble Back Bencher, however, I believe—and this is where I part company with my hon. Friend the Member for Penrith and The Border—that if we are going to have scrutiny we should be able to amend statutory instruments. I find it unsatisfactory that we may have an

amendable motion but not the power to amend a statutory instrument. I just plant that thought in the minds of the hon. Gentleman and of other hon. Members.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

I am grateful to the hon. Lady for her warm approach to our amendments and for her suggestion. To be clear, we would not necessarily have chosen the process that we are engaged in with this Bill, which is a money Bill. A hybrid Bill might have provided an opportunity really to scrutinise the two projects that, as the Minister has already said, the Bill is about.

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Anne McIntosh (Thirsk and Malton, Conservative)

Bearing in mind the history of hybrid Bills in this House, and the length of time and the amount of dissent that they can involve, I am not sure that that is the path the hon. Gentleman really, truly wishes to go down.

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Richard Benyon (The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs; Newbury, Conservative)

I am grateful to Gavin Shuker and his colleagues for tabling the amendments, because that allows me to explain—and, I hope, to reassure the House—about the use and the powers of the clause.

First, I will address a couple of the points that the hon. Gentleman made. I assure him that I am happy to discuss the process with him and for him to meet my officials to see how it is progressing. He is a very honourable individual and he will respect the fact that because some aspects of what we are dealing with are extremely sensitive and are being watched closely by a number of organisations and, not least, the markets, we have to be extremely careful. I am pleased about how things are going. He also has the opportunity to meet representatives of Thames Water, Ofwat and others to express his concerns on this and related issues, and I know that he has already done so.

The hon. Gentleman asked which Ministers will make the final decision on such matters. The Secretaries of State for Environment, Food and Rural Affairs and for Communities and Local Government will jointly take decisions on water and waste water applications. The Secretary of State for Communities and Local Government will take the lead on considering the Planning Inspectorate’s recommendations. My officials are due to meet his officials shortly to agree the process, and I am happy to keep the hon. Gentleman informed as that develops.

I should like to outline the practical problems associated with accepting the amendments. Together with advisers, the Treasury, Infrastructure UK and Ofwat, we are engaged in discussions with Thames Water over the financing of the Thames tunnel project. Those discussions are focused on reaching the right balance between protecting bill payers and taxpayers and ensuring that the project can be financed and delivered by the private sector. By necessity, a project of such scale and complexity as the Thames tunnel involves a complicated and lengthy negotiating process. I can foresee a host of practical problems in stopping that process at the point at which we feel that a reasonable package has been reached, which balances the risks and enables the project to be delivered, publishing a report on apprenticeships and a further cost-benefit appraisal, and then translating the agreement reached into a statutory instrument for debate in both Houses. Even if we can find a way around addressing potentially commercially confidential material in a published draft order, that additional regulatory

process would prolong the completion of the project and add cost that is ultimately paid for by the customer. It would also create an extra layer of risk, with likely implications for securing and retaining the interest of investors in the project.

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Mel Stride (Central Devon, Conservative)

Is it not also the case that, almost of necessity, Parliament will scrutinise very large infrastructure projects in one way or another anyway?

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Richard Benyon (The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs; Newbury, Conservative)

My hon. Friend is absolutely right. It is worth reminding ourselves of the kind of project that we are talking about. Subsection 1(a) refers to

“the construction of water or sewerage infrastructure”

and subsection 1(b) refers to

“existing water or sewerage infrastructure.”

We have therefore narrowed this down to a particular area of work. Subsection (2) refers to

“exceptionally large or complex works.”

Such an item of expenditure could not just sail under the radar of due parliamentary process. I appreciate the comments of my hon. Friend Rory Stewart who eloquently described the necessity for smooth operating in such circumstances, but we are talking about major projects that cannot avoid high levels of scrutiny, and I cannot see that adding an extra tier to that process would be effective.

In the event of the statutory instrument being rejected by Parliament, we would have to return to the negotiating table and reopen discussions. That might put in jeopardy the interest of investors that had previously been attracted to the project. That would add further costs, call into question the project’s viability and ultimately delay action to tackle the significant environmental problems that, in the case that is the driver for the Bill, are being caused by excessive sewage discharges into the Thames. That would, in turn, increase the risk of infraction fines against the UK for non-compliance with the urban waste water treatment directive.

In addition to the practical problems that I have described, I do not believe that the additional layer of scrutiny is necessary. As I mentioned when we discussed the proposed amendments to clause 1, putting a further requirement in the Bill for detailed approval in relation to the use of financial assistance powers is unjustified when there are existing mechanisms for scrutinising and challenging the exercise of financial powers by Departments. In addition to Treasury monitoring and control of expenditure, Government spending is subject to the usual estimates procedure. As always, DEFRA spending would be subject to the scrutiny of the Environment, Food and Rural Affairs Committee and, if it so wished, the Public Accounts Committee.

Given the significance of the Thames tunnel project and the significance that any project that fitted the wording in the Bill would have, I have no doubt that hon. Members will be especially vigilant in ensuring that, as a project proceeds, the House will give proper attention to any events where scrutiny is necessary and appropriate. We have already made statements to the House on the Thames tunnel project and have published several documents explaining our involvement in it and

the progress to date, such as last November’s publications on the strategic and economic case and the cost-benefit analysis.

I am sympathetic to the concerns of the hon. Member for Luton South about jobs and growth, as are all hon. Members. Jobs and growth are central to the Government’s agenda. I agree that large projects such as the Thames tunnel have a significant role to play. As I explained on Second Reading, Thames Water estimates that the project will directly employ about 4,200 people in construction and related sectors. I understand that Thames Water has 40 apprentices in training, and that future intakes are planned to maintain that number. Thames Water’s tunnel team actively support Crossrail’s Tunnelling and Underground Construction academy, to which the hon. Gentleman referred, which is currently training and gaining employment for 70 apprentices a year. The Thames tunnel project is also committed to following the Crossrail model of specifying in its contracts the number of apprentices who will be employed in the contractors’ work force. I hope that that gives him the reassurance that he needs.

4:15 pm
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Rory Stewart (Penrith and The Border, Conservative)

Does my hon. Friend accept, as a general philosophical principle, that one should not micro-manage the detail of a Bill to the extent that is called for in the amendments, because one would end up with endless and voluminous legislation? Does he agree that the issues of apprenticeships and financing are better left to the contracting authorities and to the administration of civil servants, and that if too much of this micro-managing happens on sectoral issues and specific projects, Parliament will be mired in complexity?

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Richard Benyon (The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs; Newbury, Conservative)

I agree with my hon. Friend. It would be wrong to put in the Bill requirements that might or might not suit today’s world, but that would be wrong for the future. The Government, in negotiations with private sector companies and through the planning process, are involved at many levels in the development of such contracts. We can impose our desires and our will. The companies and the Government can be held to account if they fail on these matters. I believe that to prescribe to such a level of detail would be wrong.

Thames Water is holding the launch for a jobs and skills report in the House on 20 March, to which MPs are invited. Its jobs and skills forum will promote the work that it is carrying out in this area. Thames Water will also look to gain from the experiences of other large-scale infrastructure projects. It is right for the Government to support and encourage Thames Water in those efforts.

Apprenticeships are central to ensuring that our work force are equipped to help build economic growth. There are huge opportunities in the project, if we can embrace them, for Londoners who are seeking work and training to be involved in a really high-profile scheme for a number of years. They can then take the benefits into other sectors and industries. However, we do not feel the need for further legislation to provide that encouragement. Nor is it necessary or appropriate to require the terms and conditions involved to be included in a statutory instrument. For that reason, I ask hon. Members not to press the amendments.

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Gavin Shuker (Shadow Minister (Environment, Food and Rural Affairs); Luton South, Labour)

I thank all Members who have participated in the debate. I listened carefully to what the Minister said, and I am slightly concerned that he and the hon.

Member for Penrith and The Border (Rory Stewart) have tried to talk up amendment 3, a modest amendment, into a big, overbearing piece of regulation. It is not. It would not just apply to this project but protect us in future, and I gave a clear commitment to the Thames tunnel throughout my speech.

I listened to what the Minister said about apprenticeships, and I believe that his heart is in absolutely the right place. We will all want to pull together to ensure that the Thames tunnel project, which I am certain will go ahead, employs apprentices and ensures that there is a legacy for London. I will therefore not press amendment 3, but I do seek to press amendment 2 to a Division.

Question put, That the amendment be made.

The Committee divided:

Ayes 231, Noes 300.

Division number 492

See full list of votes (From The Public Whip)

Question accordingly negatived.

Clause 2 ordered to stand part of the Bill.

Clause 3 ordered to stand part of the Bill.