Clause 35

Flood and Water Management Bill – in a Public Bill Committee at 2:00 pm on 21st January 2010.

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Provision of infrastructure

Photo of Anne McIntosh Anne McIntosh Shadow Minister (Environment, Food and Rural Affairs)

I beg to move amendment 19, in clause 35, page 18, line 1, leave out subsection (2) and insert—

‘(2) The regulations must allow a water undertaker or sewerage undertaker to undertake an infrastructure project which is to be put out to tender in accordance with the regulations.’.

Photo of Ann Winterton Ann Winterton Conservative, Congleton

With this it will be convenient to discuss the following: amendment 20, in clause 35, page 18, line 1, leave out subsection (2) and insert—

‘(2) The regulations may allow the Minister to prohibit a water undertaker or sewerage undertaker from undertaking a specified infrastructure project which is to be put out to tender in accordance with the regulations for a period of no more than one year from the date of specification.’.

Amendment 21, in clause 35, page 18, line 6, at end insert

‘and shall not prohibit the water or sewerage undertaker from preparing its own plan in relation to a specified infrastructure project.’.

Photo of Anne McIntosh Anne McIntosh Shadow Minister (Environment, Food and Rural Affairs)

The amendment highlights an unintended consequence of the Bill that the Minister may not be aware of, and the difficulty that the Government have created for themselves. We believe that when allowing major infrastructure projects to be tendered, it is regrettable that under proposed new part 2A, water companies would be prevented from tendering. I do not know whether it is intended, but proposed new section 36B(2) states that water companies are excluded from tendering. The amendments, therefore, are exploratory probing ones, to ask why water companies are excluded, and why a water or sewerage undertaker would be prevented  from tendering when they might have the expertise and might be best placed to submit a tender. They might come up with the most competitive tender for a major infrastructure project, and that would help the consumer or the developer. We seek to allow water companies and sewerage undertakers to participate in the tendering process.

Amendment 19, which would perhaps be more elegantly phrased if it said “regulations” rather than “regulators”, would allow a water or sewerage undertaker not just to undertake an infrastructure project but to tender in accordance with the regulations. Amendment 20 would allow an incumbent water or sewerage undertaker to tender for and carry out projects from which they are currently excluded, and amendment 21 would enable the sewerage or water undertaker to prepare its own plan for a specified infrastructure project, and therefore participate in the competitive process for major infrastructure projects.

The amendments, I hope, recognise the skills, experience and expertise that the water and sewerage companies hold for the benefit of the customers in those circumstances. Amendment 20 would allow the incumbent water or sewerage undertaker to carry out a project itself, if there had not been a successful outcome to the tender project within a year. We would allow the tendering to run for a year. We believe that it is a missed opportunity that the Government would exclude those water companies, whom we believe might be best placed, from participating in the process.

Photo of Roberta Blackman-Woods Roberta Blackman-Woods Labour, City of Durham

It is a pleasure, Lady Winterton, to serve under your chairmanship.

I thank the hon. Member for Vale of York for tabling the amendments. I have great sympathy with her sentiment, and wish to ask the Minister for some clarification as to why water companies or their associates are not able to bid for those large-scale infrastructure projects.

Photo of Huw Irranca-Davies Huw Irranca-Davies Parliamentary Under-Secretary (Department for Environment, Food and Rural Affairs) (Marine and Natural Environment)

I thank the hon. Member for Vale of York and my hon. Friend the Member for City of Durham for their introduction of, and response to, those amendments, which probe why the Government are where they are on the matter. It is worth while putting some comments on the record.

We have carefully considered these amendments on large, exceptional and/or high-risk water infrastructure projects. The Bill amends the Water Industry Act 1991 to allow undertakers to carry out preparatory work for such projects, but prohibits them from delivering the projects for two main reasons, the logic of which is important. First, the undertaker will manage the tendering process, so it would be a conflict of interest to allow it to participate further in that process by submitting a bid, for example. We have to avoid that conflict of interest.

Secondly, because regulated projects will be exceptionally large and/or high risk, prohibiting undertakers from participating in their delivery should reduce customers’ exposure to what could be the far-reaching effects of  cost overruns, for example, which as we all know are far too common on such large projects. To take advantage of their considerable experience, the Bill requires undertakers to manage the tendering process for such projects. They know the areas and how the projects should go ahead in detail. Nevertheless, the projects subject to the regulations will be of a nature that has not been delivered by the water industry since at least privatisation, if not longer. As such, elements of the projects will require, for example, construction and financial expertise that undertakers may not currently possess, although that is not the same for all of them.

It is not appropriate for undertakers to take risks of which they have little to no recent experience. To return to the point made by the hon. Member for Vale of York, that is all the more important as the customers will ultimately bear such risks. There is the question of assessing where the risk and the burden should lie in such a project. It is worth countering the remarks made, because I think that all hon. Members acknowledge the impressive achievements of the industry in delivering some £85 billion of infrastructure since privatisation. We do not wish the new regulations to be perceived as punishment for a job well done. On the contrary, the regulations will catch only a very few projects in the first place.

Eligibility criteria will be clearly specified on a case-by-case basis after the statutory consultation process. Moreover, if a project meets the criteria that require the provisions to be applied, the resulting tendering process will be planned carefully and executed deliberately. The undertaker will manage the tendering process, and, subject to consultation with Government or Ofwat, will be permitted to define the terms of the tendering proposal. I am going somewhere with this, so bear with me. In that way, the provisions provide scope for the undertaker to the deliver project elements in which it is expert, while tendering for those elements in which it is not. The provisions also expressly permit undertakers to conduct preparatory work, which may, on a case-by-case basis, also include run-of-the-mill project elements.

Finally, the Bill also accommodates the possibility of a failed tender, even though we do not expect an exhaustive process to produce such an outcome. A lengthy tendering process will also make it clear, on a case-by-case basis, whether undertaker-led project planning is warranted. To dictate that an undertaker may always conduct detailed project planning, as amendment 21 does, exposes customers to the possibility of paying for work that ultimately might serve no eventual purpose. We must be aware of that.

The Bill does not prohibit affiliates of undertakers from taking part in the tendering process, including project planning, provided that an undertaker is insulated from its affiliate in case of the latter’s financial distress, which is an important point. That brings us back to the point about not exposing the customers of a company to the consequences of a large infrastructure project going belly-up. It is crucial to maintain that financial insulation, particularly in light of heightened concern about financial risks.

We acknowledge that establishing affiliates will require several very highly indebted undertakers to renegotiate existing debt covenants at uncertain, and potentially high, cost. Those incremental costs may make their bids less competitive than they would have been without  them. However, we note that the covenants that require renegotiation were drafted specifically to protect lenders from risks different from those in the traditional regulated water and sewerage business. The Bill is equally alert to those risks for the very good reason that those very highly indebted companies do not have as much capacity to absorb cost overruns as a less indebted company might have.

Photo of Martin Horwood Martin Horwood Shadow Minister (Environment, Food and Rural Affairs) 2:15 pm, 21st January 2010

I am interested in the Minister’s argument. Is there not a risk that the best will be the enemy of the good? If companies think they have a good opportunity to tender for the projects and are willing to take those risks, why should they be excluded? Surely that is a decision for them and financiers, not for the Government.

Photo of Huw Irranca-Davies Huw Irranca-Davies Parliamentary Under-Secretary (Department for Environment, Food and Rural Affairs) (Marine and Natural Environment)

It is about them and their financiers and Ofwat, but also, crucially, the customers. This is the dilemma: if a company overextends itself on a large or potentially high-risk project, and the burden of that does not lie on an affiliate or separate company but on the water and sewerage company, that is literally where, on this occasion, the buck stops, but ultimately the cost will be passed on to the customer.

There is a real issue here. I have already undertaken to meet representatives of the water companies next week regarding other issues that we need to resolve. I have had a brief discussion with representatives of the industry already, and I am happy to put the item on the agenda, to see whether we can find a way forward that squares the triangle. We do not want to expose customers to risk, or to allow companies that do not have expertise, even if they think they do and then go belly-up, to land all that damage on their customers. There is an issue about how we allow companies to use their expertise in some way, perhaps to the benefit of the customers, to get involved in such projects.

Again, I am happy as part of the meeting on Tuesday to put this issue on the agenda and then to come back promptly to members of the Committee with the outcome. Either we will have a way forward or, alternatively, hon. Members can table amendments if we have not made satisfactory progress. With that, I ask the hon. Lady to consider withdrawing the amendment.

Photo of Anne McIntosh Anne McIntosh Shadow Minister (Environment, Food and Rural Affairs)

If only the rest of the Committee’s deliberations over the past two weeks had proceeded as smoothly. If the headline is to read, “Conservatives set the agenda and the Government follow,” it would be churlish of us to persist in this regard. However, we reserve the right to return to the matter on Report. Obviously, we would like to be reminded at the end of the proceedings what the deadline is for amendments on Report. We do not wish to press the amendment to a vote at this stage, but we reserve the right to return to it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 35 ordered to stand part of the Bill.