SUBGROUP ON THE ECONOMIC CHALLENGES Wednesday 26 October 2006 Members in attendance for all or part of proceedings: Witnesses: The subgroup met at 10.12 am. (The Chairman (Mr McClarty) in the Chair.) The Chairman (Mr McClarty): The Consumer Council has been allocated one hour to give a 15-minute presentation to the Subgroup on the Economic Challenges facing Northern Ireland, which will be followed by questions. The Consumer Council has already provided the subgroup with a written submission, and it will also table a bullet-point presentation, together with a letter of support signed by business, community, voluntary and trade union partners. I ask members to keep their questions to the witnesses brief. Members should focus on the relevance of the Consumer Council’s proposals for an economic package. I also remind members of the sub judice requirement. Members should avoid raising any matters that are subject to the ongoing judicial review, including the process that the Department for Regional Development (DRD) used in the preparation of the draft Water and Sewerage Services (Northern Ireland) Order 2006, and the Department’s consultation procedures. Otherwise, members and the witnesses are at liberty to discuss the general rationale for water-reform costs and its potential inclusion in an economic package. Mr Neeson: I know that Hansard will record this part of the meeting. However, will Hansard record our consideration of next week’s meeting with the Chancellor? The Committee Clerk: No. After the witnesses leave, we will immediately go into closed session, of which there will be no Hansard record. Mr McNarry: Why is that? The Committee Clerk: We need to consider any possible recommendations that arise from the evidence and to prepare for the meeting with the Chancellor on 1 November. It is normal practice that such issues be considered in private session. Mr McNarry: The subgroup has not been asked to meet the Chancellor. The Chairman (Mr McClarty): The subgroup was not invited to meet the Chancellor. The invitation was sent to the parties, and they will decide who will represent them at the meeting. Mr McNarry: Our later discussion is relevant to a meeting that we will not be attending, so why is it not being recorded? Our opinions should be recorded, as they are highly relevant. 10.15 am The Committee Clerk: It is a matter for the subgroup to decide whether it wants parts of the meeting in closed or open session. Mr McNarry: We should not debate this matter in front of our guests. Perhaps we should discuss it later. The Chairman (Mr McClarty): OK, we will do that. Good morning to our witnesses. You are both very welcome. Neither of you needs any introduction to members, but for the record, Steve Costello is chairman of the Consumer Council, and Eleanor Gill is its chief executive. Mr Steve Costello (The Consumer Council): Thank you for the invitation to give evidence on this important issue. I will say a few words about principles and then hand over to Eleanor, who will make a more substantial presentation. The first fundamental principle is that high-quality public services, including water and sewerage, must be paid for. However, our caveat is that the payment must be fair, affordable and sustainable: fair, in that it must represent true value for money; affordable, in that it must help the disadvantaged; and sustainable, in that water is a precious long-term resource, and the business model must reflect that. We are prepared to pay more for public services if necessary, but our basic principle is that we must get this right as opposed to simply getting it done. This is a £3 billion capital investment project based over 20 years. We estimate that the average household will pay about £10,000 for water and sewerage services in that time. We are here to question the scrutiny that has gone into the draft Water and Sewerage Services (Northern Ireland) Order 2006. Legislation has been laid before Parliament, but it is currently deferred; there is no licence — that is work in progress; there is no letter of governance; and, above all, the strategic business plan has not been signed off — it is now on version three as there have been difficulties with it. That is the context, the scrutiny and the building blocks that we are being asked to sign up to, and it cannot be right that the legislation should be dealt with by Order in Council. If the Assembly is restored, the funding gap will become the Assembly’s problem, as will debt and public confidence. Some issues of accountability will not make sense to the public, so there will be a crisis of confidence. There is cross-sectoral support for our views at social and business level, and the subgroup will have received a copy of a letter to that effect. There is also the need to get it right. The risk and the cost of getting it wrong are greater than the initial cost of not getting it right. Over the past few weeks, I have written letters to Minister David Cairns containing proposals on ways of ensuring that consumers are charged a fair price. The Minister’s response was that he could not commit the Assembly to such a proposal. He said that he could not commit to certain elements of our policy, though he is going to commit a new Executive to the Water and Sewerage Services (Northern Ireland) Order 2006. That does not make sense. The cost of getting this wrong is that customers will be charged £62·7 million in year one. Northern Ireland will have to repay £58 million to the Treasury in year one as the return on assets. That is a difference of some £4 million to £5 million. That is a simplistic comparison, but looking at the economy in the long term, we know that it will take the new Northern Ireland Water Ltd up to 2015 to get the efficiencies into place. Therefore, over an eight-year period, Northern Ireland will pay £600 million back to Treasury. Some £70 million of that will be above the market rate, because Northern Ireland has been asked to repay the money to the Treasury at a rate of 5·8%. The Office of Water Services (OFWAT) cites a figure of 5·1%, which the private companies in England repaid as a return on the asset base. Therefore £70 million out of the £600 million will be repaid at a rate above the market rate, and that is crazy. There will be substantial debt occurring from moneys given by the Department for Regional Development (DRD), and it will be repaid as a long-term debt. That money will also be repaid at 5·8%, which is above the commercial rates, and £60 million of that will be uncompetitive. Therefore out of the £1 billion that we will be paying back as either a return on assets to the Treasury or as a repayment of a debt to the Government here, we will be paying £120 million in interest. For the sake of the progress of small private-sector businesses in Northern Ireland, it is imperative that water charges are kept as low as possible. The Consumer Council is concerned that that is achieved, because water rates will be a significant business cost. Everyone knows what expenses businesses have in relation to transport, power, electricity and insurance. Small businesses are at the tipping edge, and this issue must be settled properly for their sake. The Consumer Council is in no doubt that water charges will be the biggest rising cost in the household budget between 2010 and 2015. It is impossible to put a figure on what it will be, but we estimate that it will be close to 10% of a household budget. That will bring with it a basic lack of confidence on the part of customers, who will want to know why a Government-owned business is causing more damage to their pockets than anything else. People will have less money to spend, so they will put demands on the Assembly to get this right. Mrs Eleanor Gill (The Consumer Council): I will detail some of the issues that the Consumer Council believes should be looked at, and I will follow that with details of what the Consumer Council believes are the ways ahead and on which we ask for your support and action. These are not only the thoughts of the Consumer Council, but of the business and social sectors, the Northern Ireland Local Government Association (NILGA) and other union interests with regard to the debate. One cannot look at the draft Water and Sewerage Services (Northern Ireland) Order 2006 in isolation. It is part of a critical element of packages within water reform that must be investigated. That must begin with the financial agreement that was signed by the Treasury and the Secretary of State in 2005. The Consumer Council has not seen that agreement, and I do not know anyone who has seen it or understands what it is. However, we know that it is central to the decision-making and to the principles and policies that are pushing the draft Order, and the licence, etc, that go with it. As members will know, the draft Order has been finalised and laid before Parliament, and the licence is still a work in progress. The Consumer Council is involved in the licence-development working group, and although we have managed to get ourselves to the table, we are ill-equipped to do anything. There are many solicitors and advisers for the Water Service — which will become a Government-owned company (Go-co) in 2007 — for DRD and for the regulator at the table. Our aim is to ensure that we understand the developments that are taking place and to make an input at the table. It is not a level playing field, and we are unclear as to what shape the consultation on, independent scrutiny of, and review of the licence will take. The outcome on the licence is critical because it will transfer the assets and the responsibility for the delivery of the entire financial model over to the Go-co. Since June, three iterations of the strategic business plan have been produced. Not only that, but there are also two versions of two scenarios being worked on. DRD and the Water Service are working closely together on those; the Consumer Council is not involved at this stage. There is currently no clarity even on how the business plan will be consulted on or scrutinised. Ultimately, it may be signed off among the Department for Regional Development, the Water Service and the regulator with no opportunity for scrutiny. The Consumer Council has commissioned independent research into the second iteration of the business plan, expertly carried out by a London economist. During my presentation, I will refer to comments in that report, which we received in September 2006. Furthermore, the Consumer Council has been advised that no one will see the governance letter, which will be transferred from DRD, as the shareholder, to the board of the new Northern Ireland Water Ltd Go-co. The contents will not be shared but will be passed over with the transfer of assets. The Consumer Council expected that the licence development group would discuss issues such as who would get the proceeds from the disposal of land. The Consumer Council has written to the Minister on many occasions asking him to clarify that. We also wrote to the Secretary of State but have received no clarification. In fact, last month, Minister Cairns declined our request for public consultation. We must not simply allow a draft Order to be passed now and consider the detail of the other elements later. They are all linked and must be viewed and scrutinised as an entire package so that customers, businesses and the Northern Ireland Assembly know what they are being expected to buy before signing up to it. There is a blank cheque, and this package contains many risks unless it is scrutinised. We hope and pray that the further work being done will address some of the issues that the Consumer Council has raised. However, five months before the crucial establishment of a Go-co and the introduction of a water charge is too little time to allow for scrutiny and review in order to ensure that the package is right. I will develop that point later. Based on our independent, expert research, we believe that the legislation is incredibly short term in nature. There is much security and certainty until 2010, which is a crucial date because consumers and businesses will then be expected to take on the entire costs of the Go-co. Therefore, until 2010 we know what the price will be and that the Government will centrally fund the affordability tariff. However, in 2010 all those certainties disappear. The draft Order is fundamentally flawed in many respects, the main four being price, affordability, land and protection. I will expand on those areas later in my presentation. When considering the draft Order, the Consumer Council drew on its experience in energy, transport and food. The draft legislation, as it stands, will facilitate the development of an unfettered monopoly. It will allow the shareholder to retain significant areas of responsibility, such as giving guidance to the Department that shall be taken into account by the regulator when setting a price; holding on to the authorisation and disposal of land, and holding on to the principal responsibilities for sewerage and waste-water treatment until a later date to be agreed by the shareholder because, as has been put in writing, there are concerns about the infraction costs that may be landed upon Northern Ireland Water Ltd in the near future. There is, therefore, a pathway development towards a privatised model. That may or may not be the right approach. However, without the information being in the public domain, who can judge whether that is the direction in which Northern Ireland wants to go? From our consumer research, every time that we have asked — and we have undertaken independent baseline research with a follow-up report and further research three years later specifically on water — that there is no thirst among consumers or social and other partners for a move to privatisation. There is a fear that Northern Ireland will lose yet more of its family silver and that money will drain away from here and go elsewhere. That is a huge issue. The current legislation would create a monopoly, and we must not allow it to be passed. The draft Order must be deferred. That must be an issue for the Northern Ireland Assembly. If the Order is not deferred, it must be amended before it is passed. It is not a matter of passing the Order now and fixing it later — there are big issues involved. The Consumer Council believes that the Assembly should decide the best way forward, including how people in Northern Ireland should pay for public services, such as water and sewerage. There must be a proper, informed debate. There will be a £3 billion investment over 20 years. About £1·4 billion of that is made up of the capital backlog. That is the cost of decades of under-investment. 10.30 am Consumers should not be expected to pay for past under-investment. They are expected to fund 50% of the overall 20-year plan, and that would add over £80 to each bill. We know from the Water Service that, despite the current level of investment, Northern Ireland Water Ltd will still be some 10 to 15 years behind the English and Welsh infrastructural set-up. Therefore we do not have a level playing field. The Government argue that knocking down the value of the assets of Northern Ireland Water Ltd from £5·6 billion to £1 billion is the equivalent of them giving us back £4·6 billion as part of the peace dividend. The Consumer Council believes that consumers, businesses and taxpayers have paid for those assets over the years. We rightfully own those assets, and we should not have to pick up that cost. The cost of under-investment is one matter, but the extent of infraction costs poses a greater risk. Everyone predicts that a bill for infraction is on its way. What are the risks that are connected with that? Those risks are not built into the price, and therefore we could be subject to even greater costs due to lack of investment and rising bills. The Assembly should include that point in negotiations with the Treasury over the investment package and argue that it should pick up the capital backlog cost. However, I will return to that point. Given that the Go-co will be the accepted business model and will substantially dictate performance, quality standards and price over the next 20 years, its stability causes the Consumer Council and others concern. We have commissioned independent research, the results of which are in a report that I provided to the Committee on the Preparation for Government. That report also contains privileged figures from our independent research. That research reveals that the version of the strategic business plan that was current in September does not set out a sustainable future for Northern Ireland Water Ltd. It also states that there is insufficient evidence to assuage the idea that, in the medium term, the Go-co is sustainable only with significant price increases. The research elaborates on what those increases might be. We must then ask who carries the risk in the development of the legislation and of the business plan and licence. We know that £58 million will have to be paid next year from the Go-co to the Treasury. That money will not remain in Northern Ireland to fund other services. We estimate that by 2015 that dividend will be some £600 million. That figure might be slightly inaccurate; we have to guess a lot because we do not receive all the information for which we ask. However, we do not think that we are too far out. Dr McDonnell: Is that per year? Mrs Gill: No; that figure covers the period from now until 2015. As Mr Costello said, £62 million will be collected from customers next year, and £58 million of that will be sent away. Much of that is based on borrowing to deal with the past capital backlog of investment. The Go-co model is premised on the fact that the water company must be sufficiently efficient to produce dividends. If it is not efficient, that dividend must be met from within the departmental expenditure limit for the Department for Regional Development. The cost of that will be reduced public transport, fewer roads or reductions elsewhere. The Financial and Strategic Review of Water Service, which was undertaken by the UBS Investment Bank and others and based on the Water Service’s data for November 2005, stated that, in order to produce the required dividend, the Northern Ireland water company would have to produce 40% efficiencies in its operating and capital costs. In February or March of this year, the Department for Regional Development advised the Consumer Council that it would exert upon Water Service efficiency targets of 35% for operating costs and 27% for capital costs. In the past month the Department has, in writing, rolled back from that position, saying that that was merely a starting point to focus the company on what it needs to do over the next few years. Our point is that any shortfall must be met. Who will pick up the bill? As the Go-co model stands, reduced public services and higher percentage water bills will be necessary to compensate for that shortfall. Alternatively, given that the shareholder has sole responsibility for authorising land disposal, there may be a temptation to sell land to make up for some of the shortfall. Again, we may find ourselves selling off the family jewels to others. The current model assumes that the level of bad debt will be 5%. In January 2005, the Consumer Council met the then Minister, John Spellar, and told him that, based on evidence from elsewhere, it believed that the figure of 5% was a severe underestimation and that the level of bad debt could be anything from 10% to 15%. The council provided him with empirical evidence of that assertion. Since then, the situation in England and Wales has worsened. Last year, there was a 43% increase in the number of people against whom legal action was taken for unpaid bills. Our independently commissioned report shows that the success or failure of the Go-co will very much be determined by the estimation of the level of bad debt within the company. I return to the Treasury deal and the strategic business plan. The rules of the game within the proposed financial model are such that all debt will automatically be passed through to customers’ bills. We do not even know how much that debt might be. Everyone knows that the level at which the debt is currently set is too low. I now turn to the £220 million worth of public-private partnership (PPP) contracts — the Alpha and Omega contracts. Another rule within the proposed financial model is that all present commitments within those PPP contracts will be passed straight to customers’ bills. The Consumer Council has not seen those contracts, nor do I know of anyone who has. We do not know what commitments are contained within them; we only know that we will be committed to picking them up. That raises an issue for us, and it also raises an issue for the Go-co. The new Go-co — which will be Government-owned, and, by 2010, paid for by every customer and business in Northern Ireland — will operate one of the most savage debt-recovery systems that I have ever read about, and yet the Consumer Council, which has primary legislative responsibility for examining the handling of customer complaints, billing and debt, has not been consulted. The system that the Go-co will put in place is known as a “smart debt” system, which tries to identify which consumers are most likely not to pay, based on their incomes and their higher balances. That system categorises some of those who are not able to pay as being at “rock bottom”. People are mapped so that all those who are deemed “rock bottom” are marked in red on a map of Northern Ireland. However, it does not stop there. The new system will chase consumers who are categorised as “rock bottom” twice as quickly as those who have the ability to pay or who pay by direct debit. From the information that the Water Service has provided to us, we know that reminders will be sent out to those consumers in half the time that they will be sent out to other consumers — 15 days compared to 28 days. They will have 28 days before recovery proceedings begin and 49 days before legal action begins, compared to 56 days and 83 days respectively for those who are less likely not to pay. That system savagely chases debt to secure an income stream for a Go-co, but we believe that that income stream is very unstable and that it hits at the most vulnerable and the least able to pay. The Consumer Council’s question is: do we want such a system to provide our most scarce and valuable resource? The Consumer Council believes that the answer is no. It believes there must be full independent scrutiny of the Go-co strategic business plan; it should not simply be signed off in a hurry to get things done in time for April 2007. Time is just too pressing. The council and its partners believe that it should be the Assembly’s responsibility to secure the most sustainable business model, although we recognise that we have to pay more if we want the type of service that we desire. We must find a solution to that. We are all very proud of the affordability tariff. Members may know that, in the end, the Consumer Council’s model was adopted, as opposed to the model that proposed a 25% discount on the capital value of one’s house. The affordability model is based on income and income-related ability to pay, and it is now being put forward as a potential solution to some of the anomalies in the rating system. The affordability tariff will help more than 200,000 vulnerable households that are on certain passport benefits. Of course, there are many near-benefit households that need help, but the system is a good start towards trying to help. Importantly, we argued that it was the responsibility of the Government, not of consumers, to pick up the cost of social protection of those in need. The system in place at the moment will cost £30 million in 2007-08, and Government figures show that that will rise to around £50 million plus by 2010. There is no certainty in the legislation that the money will be found from central Government funding beyond 2010. Our point to the potential Assembly-in-waiting is that there will be a £50 million funding gap, and that will rise. The legislation says that the affordability tariff “may” as opposed to “must” be paid, and, therefore, there is no provision for that funding to be made. What is the answer? Do we reduce our public services by £50 million to pay for that gap? Do we increase the bills and make the customers pay, even though they cannot afford it any better — we calculate that that would mean another 10% on the bills — or do we remove the protection from the most vulnerable? In England and Wales, one in four county court judgements is made against people who are being chased by their water companies, and there has been a 43% increase in legal action in the past year. This is a huge issue, which comes on top of fuel poverty. The result might mean that those people who are being chased may pay off their water bills but not turn on their heating, and that will have an underlying impact at a time when the Government are introducing an anti-poverty strategy. The Consumer Council feels that there must be a legislative imperative from the Government to fund the affordability tariff and not place that burden on other customers. I turn to the question of land and who benefits: the land and assets owned by the Water Service are valued at around £5·6 billion. We do not know who will get the proceeds of the land and assets disposal, although we have asked continually. No paper exists to show who controls the assets, or what the rules are about a shareholder authorising the Water Service at any time to dispose of assets. We do not know whether they will stay in Northern Ireland to help. Some £1 billion pounds was lost to customers through the privatisation of electricity. Are we prepared to repeat the mistakes of the past? We have many examples of where we have had to put good money in after bad in an unsustainable and unstable model, and the Water Service has told us in our independent review that that is unsustainable. As to the transfer of ownership by the Go-co, we know that if the Assembly is not sitting, no public voice will be enshrined in legislation before that privatisation, or before any other type of model moves in or out of a Government-owned company, and the public will have no say on what happens to what they own and pay for. When the Consumer Council looked at the recent sale of Thames Water, it found that it increased in profitability by £3·2 billion in six years, and it has just been sold to another private equity firm. There are many other examples, including Phoenix Natural Gas and the buyout by Terra Firma, or the Viridian deal with a Bahrain private equity company. Is that what we want? The land-disposal proceeds must be kept in control for the people, and no ownership should transfer without the people’s deciding that that is what they want. We are imploring the Assembly to take that matter forward. Those are just some of the headline issues. We are happy to explore them further and to answer any questions that members may have. I turn to the potential way ahead. The Consumer Council would prefer the legislation to be deferred to allow it to become a matter for the Assembly. The council feels that if there is no deferment, the Assembly, or the local parties, will need to secure draft Order amendments and commitments from HM Treasury. If the legislation is introduced as it stands, and without looking at the totality of the package, it will be fundamentally flawed and will cause huge problems that will haunt us for the next 20 years. There will be no price protection after 2012. Under price protection, the capital backlog must be paid by HM Treasury, and there must also be price pegging until 2015. The Consumer Council has calculated that if price pegging were negotiated, it would cost around £140 million to ensure that Northern Ireland was pegged to the England and Wales average for the next 10 years. We also need the dividend requirement of HM Treasury suspended, which is in the deal between the Secretary of State and HM Treasury, or suspended until the Go-co was efficient and able to produce the dividend itself. We calculate that it is about £600 million. The cost of borrowing must be renegotiated because it is above the commercial rate: a further £62 million is needed. Affordability must be absolutely enshrined so that those who genuinely cannot afford to pay do not have to worry about how they will pick up the cost. That will mean another bill of £50 million a year — a figure that is rising. 10.45 am The proceeds of land disposal must be kept in Northern Ireland; they must be reinvested into its services and must be aimed towards getting prices as low as possible. None of that is enshrined in legislation, licence or in the strategic business plan. Consultation ownership must change. Legislation on consumer protection must provide truly unfettered independent responsibility for the regulator and the consumer body. I have outlined some of the areas in which that is not the case at present. Without a deferment, strong arguments in favour of amendments must be made to ensure that an Order in Council is not passed. If it were, it would be fatally flawed. The Consumer Council’s preferred option is that all the parties in the subgroup consider a secure deferment for the time that is needed for the Assembly to correct the matter. The council wants that to be part of the financial-package negotiations that take place under the terms of the St Andrews Agreement. The Consumer Council recognises that while time is taken to improve the situation, there will be gaps in public services. Last week, the Secretary of State told the House of Commons that there would be a gap of between £200 million and £300 million in investment in the water and sewerage system. The council calculates about £120 million. It has written to the permanent secretary to ask him to explain the discrepancy between what David Cairns told us the gap would be — £130 million — and the Secretary of State’s estimate of at least £200 million, just five months before the establishment of water charges. The Assembly must seek deferment of the Order in Council so that it can be amended, and must urge the Treasury to pick up the cost of the gap in services in the meantime, because the cost of getting it wrong is much greater. The Assembly must, as part of the financial package, seek commitment from the Treasury to pay for the capital backlog — which is about £1·4 billion — or pay a significant percentage if it. The Assembly must take the unique opportunity independently to scrutinise and review the reform of water services in their entirety, so as to decide how best to introduce payments for water and sewerage. That will include consideration of the financial model, as well as ownership issues, the business model, investments, costs, and so on. Those issues must be worked out. However, time must be taken to get them right. We want the new Assembly to be certain of what it is committing to. Northern Ireland’s consumers could face one of the fastest-rising costs of the total household bill. They are already affected by rates, energy costs and all kinds of other pressures. The Government are committing the new Assembly to what is potentially one of the biggest issues with regard to public, business and cross-sector confidence. The Consumer Council has presented a letter to the subgroup that states its belief that the plans are flawed and that they should not be taken forward in their present state. In response to what the Secretary of State said last week, the council wants to assure the subgroup that it is not ducking the issue. It recognises that money is needed in the meantime to keep improving public services. Northern Ireland deserves that; it has been paying for those services for years. More money may need to be paid under a new Assembly. I guarantee that the Consumer Council will support any future Assembly in its need to spend more in order to provide the public services that Northern Ireland deserves. The council understands that hard decisions must be made. For example, it approved a 17% to 20% increase in gas prices because it believed that to be fair under the conditions at the time. The council does not shirk its responsibilities. It does not seek the cheapest option; rather it seeks the fairest, most reasonable and sustainable way of making progress. It seeks parties’ support and, more importantly, their action to advance the issue in the Preparation for Government Committee and in the Programme for Government Committee, and to use that unique opportunity to secure a financial package from the Treasury that will allow the Assembly to get those matters right. Otherwise, they will haunt us for many years to come. The Chairman (Mr McClarty): Thank you, Eleanor and Steve. Before I allow members to ask questions, may I remind members and visitors alike to switch off their mobile phones completely, as they affect the recording system. Mr Neeson: Thank you for your presentation. I have still in my possession a letter from John Spellar MP, written to me when Labour was in opposition, stating that in no way would he tolerate the privatisation of water services in Northern Ireland, even through the back door. Would you agree with me that what is proposed now is, in fact, water privatisation through the back door? You ask us as elected Members of the Assembly to request that the Secretary of State postpone the proposed legislation at least until 24 November, when it is hoped that the Assembly will get up and running again, so that it can deal with the issue. You do not need reminding that a precedent has been established. In 1982, when new consumer legislation was being introduced, I remember that we asked the then Secretary of State to postpone the legislation to allow the Assembly to deal with it. He did so, and that led to the formation of the Consumer Council. Mrs Gill: We believe that the establishment and the gearing of this company will produce an attractive set of circumstances for future privatisation. I attended a conference in the Slieve Donard Hotel a few weeks ago at which the chief executive of Water Service in Northern Ireland gave a presentation. She was asked from the floor whether we were on the road to privatisation. I wrote her response down, almost verbatim. She said that that was a political matter, but what everyone was agreed on was that before they could think about that, they needed to secure a good revenue stream and get investment in place in order to allow that to happen. The Department describes its proposed legislation as “flexible”. We would call it ambiguous. If the Assembly is not in place there is nothing to stop the movement towards that. However, we believe that other pressures might come to bear. If this is an unstable model — and it looks as if in a few years that bills are going to rise; there is possibly no other way but to wrap this debt up and pass it on to customers — the next natural response may well be that this cannot be done in the public sector but must be done in the private sector. Then we are on the road to privatisation. If we examine the business model now and get it right, we can decide what type of ownership we want. How do we guarantee that the wealth stays here while at the same time acknowledging that it has to be paid for and that we need to pay more, because improvements have to be made? We want what you want. We want to ensure that this legislation does not arrive in the form of an Order in Council, not just because of the draft legislation in isolation, but because of the imperative to look at the other elements that make up the whole. Finally, we are thankful for the precedent that set up the Consumer Council. Ms Stanton: Thank you for a great presentation. You told us that the number of people threatened with legal action for non-payment of water bills in England and Wales rose by 43% in one year. Do you have an estimate of the cost of that action to Government? Mrs Gill: The figures are contained in the Office of Water Services (OFWAT) report. I am sorry that I do not have them with me, but I will forward them to members. Ms Stanton: It would be helpful to have them. Mr Poots: Thank you for your presentation. It was a devastating report on the current proposals for water charges and the establishment of the Go-co. The unsatisfactory nature of what is proposed is something that we could get cross-party agreement on, because it would have a devastating impact on Northern Ireland. As a consequence of that, there will be general agreement that we all want to do something about it. When we speak to the Chancellor, we can win the battle over retaining the land values in the event of any sales of assets. However, we need to think about what we might propose as an alternative. Have you given any thought to any other ways in which water reform might be achieved that would avoid European Union infraction proceedings and address the underlying investment issues in a way that will not be detrimental to ratepayers? Mrs Gill: What we have tried to provide today is two steps towards answering your question. Our first step will be to ensure that we negotiate a deferment, and then we will respectfully work with the Assembly and the parties to review the position and to look at what is the best business model to put forward. The Consumer Council believes that as well as securing the land as part of the Chancellor’s package, Northern Ireland should also get a commitment that we will be given the full capital backlog, or at least a significant part of it. That would result in an immediate reduction in charges and make the price fairer and more palatable for everybody. We must ensure that people see the charges as being fair, and not too expensive or unaffordable. The Consumer Council will suggest that everyone has a voice on this issue, and the letter from our partners adds an important consensual voice. I suggest that the Assembly initiates studies and an independent scrutiny of how things stand so that we can establish what the preferred model would be. If, for instance, the dividend were suspended, we would get a better impression of whether a Go-co was really necessary. Just as people must breathe, a Go-co must produce a dividend. If a Go-co was not, therefore, necessary, we could learn — as we did from previous evidence — from the Welsh model, Welsh Water, which is a not-for-profit model, or the Scottish model, Scottish Water, which is in public ownership. There are many ways in which we can incentivise everybody to make this a more efficient way of going forward. The Consumer Council has already done a lot of work on this issue, and in 2003 and 2004 we asked for the business rationale on why the Go-co model was chosen. We were frustrated not to receive that information. We need to respectfully tell the Chancellor that we are not trying to get out of paying for water and sewerage services, but we want commitments and time to work with the Assembly on introducing the best way forward. Various elements of the draft Order must be examined. For instance, is it correct that a household’s water charges should be based on the capital value of the property? Should it be incorporated into the rates — as it has been already? Should it be linked to income tax? Or, should meters be installed to ensure that, in future, people are more efficient with water? There is an array of questions to be asked, but the decisions made now may prevent the opportunity for those questions to be asked in the future. There is a viable argument for the economic subgroup’s asking those questions forcefully, and the Consumer Council will be behind you and agree that the questions have to be asked. Ultimately, some difficult decisions must be made. However, if the discussions are carried out in a democratic manner, everyone will be heard, and we will support the decision reached and move on. At this stage, we do not believe that we have been granted that opportunity. With regard to the retaining of the land value, I was pleased to hear that the land disposals would stay in Northern Ireland — and you had given me some steer on that. Someone needs to tell that to the draftspeople and the people who develop licences for the Water Service, because those are not being written with that in mind, and the Consumer Council cannot get access to relevant information. The Consumer Council will not be at any table where decisions are being made between the Department of Finance and Personnel (DFP) and the shareholder. The Consumer Council has alternatives in mind, but we would not be so bold as to say that they are the only things that you should consider. However, we are far enough along the road to be able to point you to areas that need to be looked at quickly. We will forward a summary to members for information. Mr Costello: We have information on the Scottish model. Scottish Water is in public ownership, and the long-term water prices in Scotland will be about 20% cheaper than those in Northern Ireland. That indicates the potential inefficiency that our model has created. Mrs Gill: Scottish Water is owned by the Scottish Parliament on behalf of the people. It was able to drive in 40% efficiencies in only four years because of the public ethos and the move behind protecting and making efficient its water service. That is one powerful type of model, among others. The figures are predicated on the English and Welsh average water price, which is 20% more expensive than the Scottish price. Why did we get the English and Welsh price, and not the Scottish one? Perhaps the answer is clear. Mr Cree: I thank the Consumer Council for all the work that it has done over the past three or four years. It has certainly not been easy, nor has it been made any easier by the changing figures, about which I want to ask. I do not know who coined the expression about confusion and constructive ambiguity, but they all seem to have been present from the beginning. In the early days, there was no confirmation that those balance-sheet figures were accurate; they were historic figures. To the best of the council’s knowledge, have those figures been revised in the light of reality? For example, I guess that the larger portion of the capital assets would be underground; they may, in fact, simply be holes in the ground. That is an important starting point. Are the balance-sheet figures accurate? 11.00 am If the shareholder decides to sell on those figures, there is not really much we can do about it under the current regime. The council made that point that those figures have to be changed, but we have to have a reality check on that. They have to be written down. The difficulty for Government is that, if those figures are quite different — for example, if they end up as £1·5 billion instead of £5·6 billion — suddenly we will have an entirely different picture of the business model. People have quoted many different figures throughout this process. Mrs Gill mentioned the cost of deferring the application of water charges for a year. I have heard figures ranging from £130 million to as high as £300 million. All those figures are in the mix, and that is deliberately confusing. They cannot all be right. Mr Costello: We have asked for a definitive figure for how much it would cost to defer the application of charges for one year. The Department says that it will reply to us under the Freedom of Information Act 2000, which I assume will delay the reply for 21 days. We have asked for the definitive figure because the figures given range from £130 million to £300 million. Mr Cree: It does strike me that, if it is not directly dishonest, it is certainly deceitful. That is unfortunate. I remind the subgroup that the Government used to tell us that we do not pay water charges. However, they reluctantly came to agree that we had in fact been paying them all along into whatever pot and that that pot was not ring-fenced. The consumers can hardly be blamed for that. I also want to know whether the Consumer Council has actually seen the business model. Mrs Gill: I will answer a few of those questions. Turning to the strategic business plan, UBS was brought in last year to carry out the strategic financial review, which is in the public domain. It was based on Water Service figures in November 2005. Now that the figures are beginning to change, we are being told that those figures were not right. We do not know whether they were right, and yet big decisions were made based on that strategic financial review. That is just not good enough. Even at that point, it was clear that we are not ready to make this move. We need more certainty. We have, under privilege, seen the strategic business plan for September 2006. What the Water Service is telling the shareholder about its inability to do this makes for shocking reading. It is all predicated on the agreement between the Secretary of State and the Treasury on dividends and returns. The Department disputes that there will be a problem; indeed, in a press statement on 25 September 2006, the day of the Long Gallery event — as it is now famously called, Minister Cairns said that the Consumer Council was “scaremongering” and “playing to the gallery” and that we were “utterly without substance”. The business plan was produced only in September, and it leaves us in no doubt that our points have real substance. We have given the subgroup as much information as we can at this point, under privilege, to assert that we do know what we are talking about. We also know that the Water Service is not clear about its Northern Ireland Asset Management Plan (NIAMP). It has two NIAMPs and is now working on its third iteration. At this point, it does not have a full asset register, yet decisions are being made on it. Those discussions are all happening in closed, dark rooms. They are not happening in the public domain, but it is the public that will be expected to buy this. The Consumer Council is hamstrung and is not able to put out there the information that it should. Perhaps under the Freedom of Information Act 2000, someone should ask for the independent review that the council commissioned, of which we have been able to give the subgroup only partial sight. It shows that the council and the Assembly need to take control of this issue to ensure that the model is right. Five months away from introducing a reform of this scale, there should not be a range of variance in the figures; they should be pretty precise by now. Neither the Consumer Council nor its partners want any delay in the public investment — the Confederation of British Industry (CBI), for example, emphasises the importance of proceeding. The Consumer Council is not being unguarded, unruly or foolhardy; nor are we asking for the process to be cancelled. We are asking for a deferment and a commitment to cover the cost for next year. Let us subject the plan to independent scrutiny to make sure that we decide on the model that we want, as opposed to being forced to buy something that is not going to work. Mr Costello: On the point about the cost of delaying the process, water charges will be phased in: a third in year one, two-thirds in year two. If the phasing were done away with, year one deferred and the full charge levied in year two, the same amount of money would still be forthcoming. Mr Dallat: Thank you for the presentation. During the lifetime of the last Assembly, the Public Accounts Committee looked in detail at the Water Service and discovered that 35% of water leaks before it gets anywhere. The service was pumping out sewage onto our beaches, buying property to be developed where there was no facility for treatment works. Is it the view of the Consumer Council that this should be a part of an economic package, given that there was 35 years of neglect, during which money was diverted to security and other things? I recall that the Consumer Council recently did terrific research on credit cards and revealed the differences in the treatment of customers. From your presentation this morning, it seems that this new company is planning something similar, by which it will crucify people who are not signed up to direct debits and credit transfers. It is going to punish those least able to pay. Is that something that the Assembly should take seriously, given that our primary function is to iron out the inequalities in society? Mrs Gill: I shall start with the economic package. The Consumer Council calls explicitly for cross-party agreement to secure the financial commitments required to defer this process and allow it to be corrected. We know that the Secretary of State and the Minister have stated clearly that they will not delay, that they intend to proceed with it. However, we ask the subgroup to please think about that. If the process is not right, the implications will be far-reaching. If at the end of the process, the council finds that its fears were groundless, at least it will have investigated them. We believe fervently that we are not scaremongering. As to water leakage, we might find that the Treasury still has to be paid. The Water Service says that it cannot meet its efficiency targets; that it can only do so much; that it cannot meet all its targets with the money it has. The standards of water quality that we have been promised for all this money — £3 billion — might go down, and the amount of investment in capital works carried out might go down. That is all to make it fit the formula. We are concerned that the frantic work that is ongoing at the moment between shareholders and the Water Service is to try to make it all fit within the Treasury deal. That needs to be carefully examined. With respect to leakage, £3 billion is being invested. Members of the subgroup should realise that the level of leakage will be reduced only to 24% as a result of all that expenditure. Other European countries and even ascending countries, such as Hungary and Poland, are achieving 5%, 9%, and 10%. In spite of all this money, we are going to achieve only 24%, yet consumers will have to carry the risks. In a recent interview the Water Service maintained that people would not waste water because, if they did, their bills would rise. If this is all about sustainability, that is a fairly perverse incentive. People here are ahead of the Water Service. If this process is to go ahead, they want meters. They do not want to pay on the basis of the capital value of their houses, because they have no control over that. The system of debt recovery is so ferocious because the money is needed to secure the revenue stream. My daddy, in his house, is actually classified as “rock bottom” on that map. I have a problem with that. People are being classified in a particular way and having values attributed to them without those values even being questioned. Should we change the name of that banner “rock bottom” to something else? This process is being run from a business point of view as opposed to a people point of view. There has been no consultation. We asked the Water Service when it will consult about that, and it said that it has no intention of doing so. We are told that one of the clinchers for the deal with Crystal Alliance was its smart-debt system. The Consumer Council believes that is a terrible state of affairs. It is rock bottom. Mr McNarry: You are very welcome. I am glad that Hansard is recording this because I have just run out of ink trying to keep up with the pair of you. You are not scaremongering but you are scaring the hell out of the Government and, in doing so, you have scared the hell out of me this morning. If Northern Ireland is to inherit water charges — and I mean “inherit” — before anything can be done we, as elected representatives, are in serious trouble. We will be on the spot and the Consumer Council will give us a hard time, as it has every right to do. What you said was encouraging, but I hope that it can be acted upon. Chairman, I am concerned that badly needed information is not being supplied, and I wonder whether the Committee can do anything about that by writing to the Secretary of State. Is information being deliberately withheld? The Freedom of Information Act 2000 is meant to provide transparency. I understand the timescale involved, but questions have been raised here today. Had Eleanor and Steve received answers to those questions, they might have provided us with them. Perhaps we should consider exploring whether we can get the answers that relate to our report. It is important, and I hope that members will support me on that point. Unless somebody else has asked the question, in which case it will be recorded in Hansard, what is the current status of metering and what is its future? What impact will the deferment being sought by the Consumer Council have on other services; will they suffer in order to pay for that deferment? If you have not already done so, would you consider taking up the issue of septic tanks for rural areas? I listened intently to what you said about the Go-co, and I understand that from next year there will be a charge to clean septic tanks. That will create immense hardship in rural areas where people do not receive the services but they pay rates. Until now, there has been no charge. There are thousands of septic tanks throughout the country, and the planners now insist that high-cost models of septic tanks be introduced. The new economically friendly septic tanks will cost £2,400 rather than £600. I understand that the charge to clean the tanks is likely to be in the region of £250 each time. The chief executive of the Water Service told me, in writing, that that is in preparation for the establishment of the Go-co. The people who are affected receive an immediate service and accept it, but it is an important aspect of the overall scene. Mrs Gill: Before answering your questions, I have a general point: rather than allowing the draft Order to be passed and then trying to do something about it, the Consumer Council calls on you to get it deferred. We can then ensure that everything is satisfactory and not have to chase up those matters. The metering strategy falls well short of what is required. The Consumer Council does not agree that a charging system based on a home’s capital value is the best way to pay for the water that is used. It is unfair, takes no account of the ability to pay and does not encourage people to use water in a sustainable way. The Go-co will implement its metering strategy next year. With regret, I must inform the Committee that despite our legislative responsibility, we were not consulted on the Water Service’s plans for the implementation of those meters. Solely through our diligence and pushing for meters did we discover that the Water Service has only now brought in someone to examine what its metering strategy will be — but how to apply for a meter from 1 April 2007, if you qualify, nobody knows. We had to be forceful to ensure that the individual who will produce the metering strategy listened to us and engaged respectfully with the statutory voice. That metering strategy causes us great concern. Given that we do not even know how the tariff for it will be arrived at, those people who think that it will be a better way forward may be greatly confused. 11.15 am The Consumer Council has been advised that deferment will have an impact. The public services aspect of the issue has been built on freeing up the money that is currently spent on water services and making customers pay for their water. The idea is that that freed-up money would then be used to pay for other public services. As part of the financial deal we therefore want that commitment covered for next year to give the Assembly time to agree the best way forward. Under the deal, the Treasury, and not us, should pick up that cost. Where rural areas are concerned, under this draft legislation, there is no duty on the Go-co to consult with the Consumer Council. The council is closely involved in consultations on what we pay for our gas and electricity, but there is no legislative remit for the Go-co to consult with us on water prices. We met with the chairman of the Go-co, and his view was that we would get on with dealing with complaints and it would get on with delivery. We had to remind him that it would not work that way because anything that has an impact on consumers should be talked through. We should not wait until things go wrong; instead, we should give advice about what would work best. The council should have a positive, trustful input into those policies, as opposed to doing something that is similar to waiting to mark homework. That would not help anyone in the long run. Therefore agreeing all of a sudden to collect money for water services, even though it has not been collected for years, is, in our view, securing another income stream for an unsustainable and unviable Go-co. The Chairman (Mr McClarty): Thank you very much. I am sorry, Mitchel; you had not indicated that you wished to speak. Mr McLaughlin: I had, but I thought that you had not seen me. The Chairman (Mr McClarty): I thought that you were winking at me. Mr McLaughlin: I usually thank people who give evidence to the subgroup. However, that may not be the appropriate response to your evidence, which you gave with such rigour and discipline. One member has already described it as a devastating critique of the situation that we face. Affordability, the legacy of underinvestment and price pegging are all issues that the parties will focus on when they attempt to develop a common position in the upcoming meeting with Treasury representatives. It is essential to set out the Assembly parties’ position on this issue — it has to be faced —if we are to win the argument on deferment. The evidence poses two obvious options: either we resolve these issues and the Government respond to the cost implications in advance and allow the Assembly to develop its own approach to it, or we are set up for failure. That is the stark reality of what has been presented, and it is incumbent on the parties to take heed of the evidence. I am not attempting to speak for any other party, but the evidence makes clear that there is an absolute duty to oppose the present proposals on the basis that the parties are equally determined to face the issue and get the best result. A clear demand is emerging for the Government to put their money where their mouth is and create a level playing field for us, the upcoming Assembly, and a future Executive. They should give us a chance to deliver a Programme for Government and not destroy us before we start. Mrs Gill: We have been told continuously that water reform needed to be put through now because the local parties wanted the Government to get it sorted out before the Assembly was restored so that local politicians would not have to make any hard decisions. I thank you all for taking the time to listen to us. The proposed legislation is counter-intuitive to what people are saying. We believe that if this legacy is allowed to go through it will haunt us for a long time. It seems unreasonable that, in asking for the different things that are connected to affordability, and so on, the Minister has stridently said that he does not want to commit a future Northern Ireland Assembly to this. However, he is committing it to a Go-co, a £3 billion capital investment, unpredictability in debt, and infraction costs. Everything will all be wrapped up and passed on, and the proceeds will go out. That is a much bigger problem. Therefore we thank you for giving us your time. The Chairman (Mr McClarty): Thank you. That was a very interesting and thought-provoking presentation. The subgroup met in private session from 11.20 am to 1.00 pm. Adjourned at 1.00 pm. < previous / next > |