Oral evidence: Flooding: Cooperation Across Government inquiry, HC 768Wednesday 27 January 2016
Oral evidence, 27 January 2016.
Witness
Professor Dieter Helm, University of Oxford, gave evidence.
Chair
Professor Helm, welcome to our first session on flood resilience. I think it is the first time you have come in front of this Committee in this Parliament. I am sure it will be the first of several occasions. Basically, we are looking at a cross-departmental response to flooding, at what I would say is a strategic level rather than looking at specific incidents. I will start by asking for your assessment of the effectiveness of Government approaches to flood resilience post the Pitt Review.
Professor Helm
Thank you very much for inviting me. I should stress at the outset that my remarks are personal. The Natural Capital Committee has a chairman—me—but no members yet and so, therefore, I could not reflect the views of the Natural Capital Committee in any event. I hope the Natural Capital Committee will be of enduring interest to your Committee, and I am sure we will look forward to explaining our views when we have a committee in order to express such views. I think Sir Humphrey might have put it like that. The normal way of dealing with flood events is as follows: you have an unexpected disaster; a lot of people are terribly inconvenienced and suffer accordingly; money is thrown at the problem in emergency funds; there is a call for a review; there is a review; the review recommends spending some more money and a lot of other sensible measures; some of these things get implemented and—as I would describe them—many of them are very useful but they are essentially sticking plasters. So you wait until the event happens again and then you go through exactly the same process and then again, because this is the third one in a row, and what I describe is exactly the process we are currently going through. We have had a really horrible event for people. We have had some emergency money thrown at it. We are now going to have a review and so the question is: is this an opportunity, the third time round, to get it right and realise that there are substantial and structural things that ought to be done? Or do we simply say, “Look, it is bad luck. These things should not happen this often. I am sure we could find some more measures to do and a bit more money and it will be fine”?
Chair
What should they be doing differently? As we heard Geraint say earlier, are there too many Departments working in silos? Are there opportunities for better co-ordination working between Departments in the Government and other bodies?
Professor Helm
Typically it helps quite a lot, in these really important public policy issues, to get the question right in the first place. If you don’t have the right question, you are unlikely to get the right answer. If you think about the problem of flooding, if you start by focusing on how you fix the problem in some particular location that has been badly affected, you will miss most of the interesting stuff. Flooding is about what happens to catchment systems. It is not about individual houses and it is not about individual flood defences, although they all have roles to play. To work out how much you should spend and how you should spend it on flood defence, you need to start with a proper catchment view. For example, if you say, “Should some of these houses be put on a flood plain in a particular location?” it is not the right question to then ask, “Will they flood?” It is not just whether they will flood. It is what the impact on everybody else’s houses will be by putting that particular development in a particular location. We need to start with a proper assessment of what is required on a catchment basis and recognise that a lot of money is spent on catchments. It is not just about flood defence money. It is about agricultural subsidies and all kinds of other revenues. Then we have to work out whether a Government run, Comprehensive Spending Review type of financial structure is appropriate for maintaining these assets through time, financing them and charging from them. Then we have to work out: do we have the right institutions in place to sort this out? Broadly, that methodology does not approach what one would want in terms of working out: how much flood defence to have and where. The short-term Treasury framework is not the right way to manage long-term assets in a sustainable framework, and I think the reason why we have the Environment Agency doing this is an accident of the way in which the first attempt at water privatisation was handled. As an aside, it is not just not good to have the Environment Agency doing flood defence but when they are doing it, as one of their senior executives said recently, “All of our people are completely focused at the moment on floods”. Well, then they are not focused on all the other things they ought to do and it tells you spades about what is happening in enforcement, protection and other environmental areas. This is too many functions in one place and the consequence is that we end up, despite the very hard work and efforts of all the people involved, with a very suboptimal outcome.
Chair
There appears to be a disagreement between the Government and the Committee on Climate Change about whether the Government should be doing further catchment management pilot programmes. Who do you side with on that particular view, the Government or the Committee?
Professor Helm
I think it is a wider question. I proposed that we ought to have a catchment system operator—like we have National Grid as the operator for the electricity system—not doing all this stuff, but co-ordinating what happens throughout the catchment. This would involve co-ordinating the activities of the water companies, the farmers and the subsidies, the planning, the development and so on within the range. Of course, flood defence has to be thought of in that catchment framework. When the Environment Agency was set up to do this stuff, essentially, the bits of the old water authorities were taken out, after the first privatisation failed, put into the National Rivers Authority, which was supposed to do this on a catchment by catchment basis. That then got cobbled together with the waste and HMIP type functions and we now have anything but clarity about, for example, take my own river, the Thames, what the relationship is between Thames Water, the agricultural subsidies throughout the Thames, indeed many of the things the Trust do, the wildlife programmes, the upper catchment management and so on, and flood defence. These are all in silos and the consequence is that we have a very inefficient outcome. It is very much more expensive to get the same level of protection that we currently get than it needs to be. Or put the other way, we could get a lot more protection for the same amount that is currently spent.
Geraint Davies
On that point, in Wales you probably know that Environment Agency Wales has been merged with Natural Wales and with the Forestry Commission, with a view to providing a holistic approach to land management, flood risk management and environmental regulation. From what you are saying, you think that is completely the wrong approach. You think the Environment Agency should be chopped into little bits that are basically the regulation of pollution, for example, industrial regulation of emissions and all the rest of it quite separately. You seem to be saying that flood risk management should be just pigeonholed somewhere. It seems a bit strange.
Professor Helm
With respect, chopping into little bits is a fairly laden notion. I am simply saying—
Geraint Davies
You seem to be saying these agencies cannot cope with these distractions.
Professor Helm
No. I am saying it should be split in two. That is not lots of bits, but two. I think this country needs a clear, focused environmental protection agency. I have argued that for at least a decade and I have argued that in the triennial review. That environmental protection agency would be very much focused on the very effective, small and extremely professional HMIP, which was cobbled into the NRA to create the current Environment Agency. On the flood defence side, I think that flood defence should be seen as part of the catchment and the institutions of the catchment. That is neither the water company nor the NRA bit, but that is a catchment system operator that tries to bring together the components of the catchment in a coherent, integrated and sustainable way. For example, again, I will just use one particular catchment, the Thames, if you add up the amount of money that is spent on the environment in the Thames, including all the environmental subsidies that go to farmers within the frame, and look at the net effect of that—near where I live there are people ploughing up right to the edge of the Thames in flood plain areas and so on—if you look at what is happening there, there is no attempt to bring together the environmental subsidies to farming, the planning framework and the spend of the water companies. So, another example of—
Geraint Davies
That was my point. In Wales, there is an integration of Natural Wales and there could be with Natural England here. There is an integration of a socially owned water company, and there is a process of bringing people together rather than breaking them up.
Professor Helm
Bringing people together is a good idea but the question is whether what you are doing is bringing together, on top of all that lot as well, the environmental protection functions. I am saying, when you bring all those together to handle the management of catchments, what about all the other environmental stuff? They are excellent people, but I baulk at the idea that you could be chief executive of something effectively that has X thousand manual workers and skilled workers doing production stuff, you have expertise in prosecution, you have expertise in giving policy advice and doing all the other protection functions, all within the scope of one management board. I think that is just a big stretch. I have no expertise about precisely how it is done in Wales. I have great reluctance about the idea that forestry should be brought within the framework of a single body with all these other component parts, but it is pragmatic in the end. Exactly where you draw the line is a matter of costs and benefits and so on. But it did seem to me an extremely striking comment when the chief executive of the Environment Agency said, “All my staff are 100% focused on flood defence”. That just tells you that you cannot have an organisation with multiple responsibilities, and when you have a problem in one area, shove everything into that and neglect the other components. The scale of the challenge in flood defence is enormous and it biases the organisation. I think the environmental protection side of this suffers as a consequence.
Geraint Davies
But that statement was self-evidently false. It was not the case that all the resources of the Environment Agency were in flood risk management. I appreciate that he said it but, clearly, these other functions were carrying on. You are just making a case on the back of a stupid comment.
Professor Helm
No, I don’t think it is a stupid comment. I suspect that the senior management of the Environment Agency were overwhelmingly focused on this problem, as they should be, because they are the Environment Agency, they do have all these other responsibilities, but there are people really suffering in a particular circumstance. There are no optimal organisational designs, but the focus of what I have argued for in my paper on catchment system operators and so on is to bring together the water companies, the flood defence, the agricultural land use side and the planning on a catchment by catchment basis, which is what used to happen in the pre-privatisation world except it was done through public water authorities. The farming was outside, but MAFF looked after that component. That is essentially all I would suggest.
Caroline Lucas
First, thank you very much for the “Time for a Radical Rethink” paper. That is really helpful, the one that was circulated in January. I wondered if you had any indication that the Government is thinking in the terms that you were describing. We have heard about the review that Oliver Letwin was overseeing a couple of years back, and that committee only met three times and it never even published a report. Oliver Letwin is now in charge of another process and I think Liz Truss is in charge of another one. In the discussions you have had so far, do have any confidence that this broader approach you are advocating is being supported?
Professor Helm
In a very serious sense I have no idea, by which I mean they have announced a review—
Caroline Lucas
They have not asked you to go and talk to them about it?
Professor Helm
I suspect the review has only just been set up, so I would be surprised if they had come round to asking people along yet. It is as I described at the outset. We are following the normal pattern. There is a disaster. There is some short-term money and then there is a review. The question is—and I think it is just an open question—is this going to be a serious thing? That is why I wrote the paper.
Caroline Lucas
I just wondered if you had any feedback. You wrote it about three weeks ago, or at least it was circulated about three weeks ago, and wondered if you have had any indication yet of a hopeful nature.
Professor Helm
No indication either way.
Caroline Lucas
Pending, okay.
Professor Helm
There was a statement in the Secretary of State’s speech to the Oxford farming conference that advice from the Natural Capital Committee would be sought in due course in these areas, although I think it referred to me personally. I suspect in this world it is pretty hard not to have an input into that process, but whether people listen and use this structural opportunity, I don’t know. All I can say on the negative side is that there was an opportunity, in the quinquennial review of Natural England and the Environment Agency, to look at the structures and this was not taken. I think that is a mistake. Hopefully some further progress can be made this time, but I just don’t know how this will play out.
Caroline Lucas
Thank you. I want to go back to the NPPF and the issue that the Government is at the minute standing by it, basically saying, “It provides strict tests to protect people and property from flooding and, therefore, we do not need to revisit it or any other assessment of planning”. What would your response be to that?
Professor Helm
Do you mean in terms of the planning regime or the way the risk assessments are done?
Caroline Lucas
I mean in terms of the planning regime.
Professor Helm
My take on this is that there are lots of areas where people fully appreciate that there is flood risk. There is an issue about building houses on flood plains and they want people to contribute and influence the decisions that are made, taking those things into account. But it seems to me that that is what you might call a necessary condition. It is not sufficient because it depends on what you think flood risk is and what you think is relevant to a particular development. If, for example, we have a new housing estate in my village, it has lots of impacts. The houses themselves in my village probably will flood, but that is an aside. Supposing they would not, then they are going to displace a lot of water. It is going to affect the other flood risk down the road from where the estate is and so on. Is this taken into account? I think a very narrow notion is taken of thinking about what planning and other considerations should be, on the basis of the risk to those properties, as opposed to the risk to the catchment and to others. Where I live in the upper Thames, we absorb a lot of water in the fields. The Wildlife Trust, which I am a vice-president of, bought a farm that deliberately floods every winter. This reduces the costs and the impacts of building hard flood defence infrastructure in Oxford to prevent it. That is what it is for; it is a flood meadow. If you build houses where we are, they may or may not flood, but they will certainly have an impact on Oxford. The question is: is the assessment taking this into account? My answer would be: no, not really, because it is focusing on those properties at risk, not the risk to the catchment and all the components of that catchment.
Caroline Lucas
I think you have answered my second question but to clarify it, essentially, when the Government was saying that it had data indicating that planning policy is being applied effectively, and the criteria it was using for saying that planning policy is being applied effectively was precisely that only 7% of new homes were being built in areas of high flood risk, would your response be essentially that that is the wrong question, that we are fixated on those 7%?
Professor Helm
It is one of the questions. It is deeply interesting to the people whose houses they may be, but it is not the most interesting question. That comes back to where is there a genuine, for example, Thames catchment plan, which includes the flood components of that, but also obstruction, droughts and all sorts of other components, river-flow pollutants? There is a whole chunk of things here that fits into an integrated framework. Just the final point, which is very important—it might sound slightly technical—almost all project appraisal, including the Green Book, looks at the risk of a particular project, and it is amenable to what we in economics think of as cost benefit analysis. Cost benefit analysis is a marginal technique about a marginal project, given the rest of the system. This is a system question, and the planning and so on ought to address the system consequences of what is being done. That is why I chose the notion of a system operator over this system; in the way that everyone understands that National Grid is a system of electricity supply and not individual components on their own. It is a slightly techie and academic point, but it is fantastically important as to how you apply the methodology, and in part that is also the problem with the Environment Agency’s assessment of risk.
Caroline Lucas
That is helpful. Thank you.
Caroline Ansell
You touched a little earlier on agricultural subsidies and how some could be considered inconsistent with flood defence and should be redirected. How would you see this process taking place?
Professor Helm
There are lots of dimensions of agricultural subsidies that could be better run for sustainable economic growth and for a sustainable environment. We pay X amount—either indirectly or directly—to farmers to do things that, presumably, they otherwise would not have done. Since it is public money for public purpose, we want to get the best environmental catchment and other bucks for that outcome. A radical idea would be to ask farmers, who want to receive these subsidies, to bid for them, not for money but for the environmental improvements; to auction and say, “What can you offer, so that we give you subsidies rather than someone else?” If you have a catchment plan and you say, for example, “In the Upper Thames we want the land close to the river to flood or to be able to absorb floodwater. We do not want it ploughed up”. That is a fairly obvious thing to do. When I see a field, such as one up the river quite near Lechlade, where it is ploughed to the river bank, you can see the soil flowing off into the river and you can see the effects. We saw the effect of the maize crops in the upper reaches of the Somerset Levels, putting the silt in, which we have now been paid to clear out and remove. I would try to structure a system approach asking, “Who should get subsidies for what?” so that we, as a piece of public policy, decide what those billions are spent on. In this case it is pretty clear in lots of circumstances what you would want to do.
Caroline Ansell
An auction sounds very innovative.
Professor Helm
But it is not for a price. It is an auction to ask people who want to receive public money, “How much can you do for it? What are the benefits?” Then we work out the environmental best bucks for society that come from that. It is net to the farmers because it is the same level of subsidies. The only difference is some farmers might get more of these subsidies, some might get less and some farmers might have to do a lot more for their money. They might have to deliver the stuff, as opposed to some of the things that are in the environmental schemes, which are, frankly, more cosmetic.
Caroline Ansell
Sure, but do you think this would be a more dynamic approach?
Professor Helm
The scope for improvement is enormous. It is not asking for more money to be spent or something, it is just asking for the money to be spent in a constructive way to address the set of problems we want addressed, as opposed to an income support scheme, which is an alternative and, in an agricultural case, a perfectly understandable regime that might be put in place.
Caroline Ansell
That might be one way to involve farmers because the criticism was that they were not fully engaged. Are there others? Can you see any other ways in which they might—
Professor Helm
It is incredibly important to involve farmers. They manage the huge quantity of land.
Caroline Ansell
How might you do that?
Professor Helm
You might think economists say this sort of thing but most people respond to incentives. If you think about: what are the incentive structures that confront most farmers? If you pay them in a particular way, they will rip out hedges. If you pay them to put them back, they will put them back. Like any other business, they will think about the most profitable outcomes for spending their resources that are available. This is not an industry like the car industry. This is an industry whose entire structure depends on public support. The idea that there are markets determining outcomes—the Common Agricultural Policy does not do that. Land prices are much higher than they otherwise would have been because of the nature of the support regime; there are environmental subsidies and so on. We have an economic output of about £9 billion, we have about £3 billion of direct subsidies and then there are all the externalities. If you are a car maker and you fiddle the diesel, you have consequences because you are causing pollution. You must pay for it. But if you are a farmer and you apply fertilizer, you don’t pay for the consequences of what flows from that. There are all sorts of distortions in this world. You don’t want to attack farmers’ incomes; you don’t want to attack farmers’ activities and what they do. They are all thoroughly supported, but we could do it in a much more incentivised way that is good for farmers, good for the environment and good for flood protection. It seems to me that it is not rocket science to realise that there is a win/win/win solution in that frame. For a bucket of money, you can produce a much better outcome for all the players. I put it to you the other way round, could it be worse? Can you design a system of agricultural support that produces a worse outcome, in terms of the net outcome for the economy as a whole for economic growth and prosperity? I sometimes struggle with that, to try to think what that would look like.
Caroline Ansell
My best answer.
Geraint Davies
What you have been suggesting is the Environment Agency has a more marginal cost-benefit analysis approach, rather than a system analysis, although—
Professor Helm
I can describe the methodology, I did the peer review for the 2011 document and very good hard work is done by people who really think about these problems. It is not criticism of the individuals or the team. But the starting point is—the objective at that stage was—to reduce the number of properties at risk and to assess how to do that. You might think, “Find out who is most at risk and let’s spend most money on them” but if you stand back from that problem it is not anything like obvious that that is the optimal thing to do. There is a house right next to the Thames near me, it always floods and it is at risk. Should it have lots of money put at it? If it did its house price would go up quite substantially. It is all capitalised in prices.
Geraint Davies
Do you agree that the Environment Agency should be able to trump local authorities and, rather than just advise, stop them? Secondly, you suggested that properties in flood-risk areas should not receive any insurance and I was wondering what you thought of this flood recently?
Professor Helm
It is the same question; it is about the incentive structure. If society socialises flood risk away from individuals and away from property owners, you will get sub-optimal location of houses and more flood risk than you otherwise would have done. If I want to buy a house in my village, which was flooded in the 2007, the house price is substantially different from the house price of those that were not flooded. If you look at the Environment Agency’s map, you can correlate the blue bits are the flood bits, you can correlate them with the house prices. If you say to me, “You buy that house that floods, we will make sure you are subsidised so you don’t suffer the consequence of doing that” and you will have less flood protection, I am not going to pay the full cost of it. It comes back to the central point of insurance: insurance is about randomised risk. The thing about flood insurance is that it is very predictable which houses are most likely to flood. It is like saying, “Should you pay the same car insurance if you have had 15 accidents in the last year, caused serious injury to people?” In other words, you are a much higher risk. If you then give that person car insurance, they go on driving their car. That is the point about misconceiving what the problem is, you do not want to give people the wrong set of incentives, so they should face the true costs of the risk that they face in making the choices that they make.
Geraint Davies
You mentioned system management and you have alluded to use of flood plains and others to absorb flooding, rather than building on them. Do you think there is a lot of scope in addition to that, from engineering solutions that might consist of re-diverting rivers upstream, when there was extreme weather conditions, into makeshift reservoirs or possibly even tunnels and things like that, or don’t you favour that?
Professor Helm
In some circumstances that might be a good idea, but let me give you the sorts of trade-offs and choices that ought to be in this flood assessment. You could build a hard concrete bypass around Oxford to get the water past Oxford as fast as possible or you could support the Otmoor and Upper Thames projects to increase—through the application of the way agricultural subsidies work, through environmental trusts and so on—the ability of the Upper Thames, where I live, to absorb the water. They both have costs and benefits. It is not always the case that what you might call the more natural catchment approach is the better one, but at least you ought to take that into account. Who monetarises this? Who pays, for example—in our case the Wildlife Trust—to make sure that we run our land so that it floods, to run off more in that way? There is no obvious monetary payment but there is a monetary payment required in respect of the hard landscape and what water companies do. All I am saying is that, from a catchment point of view, you want to weigh these alternatives up before you reach decisions. In some circumstances, it would be nonsense not to have hard-flood defences for London. It would be nonsense not to have a Thames barrier. Of course you need those components.
Geraint Davies
As far as you are concerned, your proposals for incentives for land use management that you have mentioned, as a technical point, are they allowable under EU rules for farm subsidies and taxation or—
Professor Helm
I am not a legal expert.
Geraint Davies
I am not trying to be difficult; I just want to know if we could do what you are proposing.
Professor Helm
If you look at the pillars, in my mind there is considerable scope for how the environmental monies are spent and the framework. Provided one does it in a co-operative fashion, if you have farmers and your catchment system operator and water companies and others all in favour of pursuing a particular route, that is quite powerful. If it is illegal, and my experience of environmental regulation in Europe is that they are never precisely prescriptive, so there is a lot of scope for manoeuvre, that is exactly the kind of thing that the Government ought to be thinking about trying to persuade the European Union to do differently, or even trying to persuade them in their negotiations at the moment to give them more flexibility but I cannot see that that is going to be an obstacle. Remember, in the circumstance you are faced with the alternative, which is a crisis, a flood, almost anything turns out to be reasonable to do to mitigate a disaster, and I suspect it would be very hard to argue against but I am not a legal expert.
Mr Peter Lilley
Could I begin by asking—which is a follow-up to both Caroline’s and Geraint’s questions—do you know whether there is discretion under EU law as to how agricultural subsidies are used, so that they could be used in the very imaginative way you suggest? I was under the impression that they were rather more specific, they have had to go in certain ways for certain uses to certain kinds of farmers of certain size and so on.
Professor Helm
There are constraints and there are directions for these things, but we have a whole series of schemes, stewardship schemes, and high-level schemes and so on. As far as I understand it, there is a great deal of discretion in what goes into those particular schemes and how they are agreed and negotiated. In my area, the nearby farm has a wildflower meadow as part of their Higher Level Stewardship scheme. Along the Thames, just down the road from me, there is an agreement not to cut the grass by the river until the curlews have gone and the end of the breeding season is over. The practice is very pragmatic. If someone wants to resort to lawyers to defend particular lines, that is another matter. I don’t see it as a powerful obstacle. If it is, the obvious answer is get it changed, but you are lawmakers and I am not.
Mr Peter Lilley
In that area we are not lawmakers. Could I move on to your idea about having catchment or river system operators taking this more holistic view on flood defences and water management and funded by a levy on water bills? Could you flesh out a bit more how this would operate? For a start, how many such water basins are there—catchment areas or catchment basins, whatever you call them—in the UK roughly?
Professor Helm
I was thinking more of England than Wales or Scotland to check for catchment, but they follow roughly the river catchments that were the basis of the design of the water companies and the water authorities we have and the environmental areas that were set up. The Thames is roughly the Thames, though there is a little bit about overlaps and other component parts, Severn and Trent cover Severn and Trent. Some of them are a bit more complicated, like the Wessex area and so on but, broadly, it is a relatively small number, a dozen or so. You can argue exactly where it is the margin, and you don’t have to do it all in one particular go. What do you do? Just like the system operator in the electricity system, the system operator has the framework—call it a plan, call it whatever you like—in the way National Grid has a plan for the system as a whole. It is responsible for that. Then—this is the bit that some people miss—it becomes extremely competitive because, having decided what it is that you want, the system operator does not do it. The water companies can do some of this stuff, new competitors to water companies have come in to do some of these bits, and farmers can bid for some of these components, and a host of other players. Anyone can come into this framework to offer to carry out these functions, in the same way as National Grid owns wires but, of course, it does not own any power stations or any of those component parts. This goes with the grain of what Ofwat is trying to do in trying to effectively open up water supplies, abstraction, all those kinds of things in its framework. It goes with the grain of trying to integrate the flood defence into the catchment, and it goes with the grain of trying to make the agricultural subsidies part and parcel of the package. I see it as a very much more open, much more fluid set of suppliers—not just monolithic water companies and so on—within the framework of delivering these outputs—the outputs that are sorted out at the catchment level. That is a small organisation, probably smaller than the NRA’s/Environment Agency’s current component of catchments. The thing with the Environment Agency was it inherited 6,000 people from the water companies and built itself into a large productive organisation doing industrial stuff, bigger than the ScottishPower group, to give you a comparison. That is a million miles from a system operator that decides what is done but does not do it.
Mr Peter Lilley
But does fund it—
Professor Helm
The funding question is substantive and it can go in one or two directions. It can go directly to the people doing the stuff or it can come to the central point and then be bundled out. In electricity, it goes to the generators, the suppliers and to the grid but if you want to centralise it, you could. The point is that the people who are paying are going to go on paying. If you think about it, flood defence is paid for, there is money that goes into it, and there are revenues. The question is: can those revenues be better deployed? Whether those revenues come from the taxpayer or from a levy on households or from insurance, these are our choices. As I have tried to point out, flooding is largely not an insurance problem. It is very important trying to fix it by a cross-subsidy in insurance to people who are at high risk. It is like having an insurance system that goes and finds very high-risk young drivers and gives them low-risk, low-price insurance for driving their car. Insurance is about randomisation, it is not about predictable outcomes, so that is not a good one. The taxpayer one has the consequence, first, that it is short term, and we have seen the hand-to-mouth way that it flows, but, secondly, it rules out using the normal way in which you would finance fundamental infrastructure. You would have a balance sheet in a normal organisation and you would have pay-when-delivered, so you borrow the money to finance the investment and then the customers pay when it turns up. Government is pay-as-you-go; it is cash in, cash out. When the question was raised earlier about the capital maintenance: if you have a proper asset base for a flood company or flood organisation, that asset base needs to be maintained. That is the capital maintenance charge in a current cost-counting framework. That is a first claim on revenue and that should come out of cash probably. There is an additional investment programme and that should be pay-when-delivered. That should have a balance sheet and normal borrowing against the assets. You cannot do that, as we have tried with PFIs and all sorts of things for a long time, in the public sector as part of the Comprehensive Spending Review. My framework enables you to take this out. It does not necessarily privatise them. They can be trusts. They can be all sorts of organisational forms, but they are free of the short-term financial framework. But you do need a system operator on top of them to make that function and to test them to competitive options. For example, some water companies say they can do this better than the Environment Agency. Let them try. Let’s see what their bids are. Let’s see what their prices are. Let them try to compete in this space and vice versa. I cannot speak for them, but I am sure my Wildlife Trust would like to offer a flooding solution for the land we manage in the Upper Thames, compared with our flood defence offer in Oxford. Someone has got to adjudicate that; you cannot just say that is a market process. Someone has to decide and that, in my model, is the system operator.
Mr Peter Lilley
The system operator has some funds—either coming from the taxpayer or a levy on households in the area—and the operator specifies what it judges needs to be done and then asks for bids or who does it but would it be redeploying some of the agricultural subsidies? Would it have control over some of them?
Professor Helm
Here is an important distinction. Someone can bid to do something. The water companies currently bid for capital programmes in their periodic review to the regulator. The regulator says, “Okay, you can build this sewerage works and you can charge your customers, who must pay, the amount of money that I allow to do that”. The system operator can do exactly the same thing. It can say, “You can bid to do this particular activity and then you can charge your customer base”. Then you have to ask: what are the customer bases for charging? There is the water customer base, there is the Council Tax base—these are options—and there is the agricultural subsidy base. If you do the following things you offer to do this, you can have this part of agricultural subsidies from the Higher Level Stewardship or whatever the scheme might be. The money does not all have to come into some huge bucket and which people pile it out, that is the Treasury model for public expenditure. This can be the right to charge customers for the system component that you are offering. As I said in my paper, there is a terrible reluctance—and I understand it politically—to have any user charge for flooding because it looks like another tax and so on. But there are two options here, one is we can say, “It is a political obstacle, cannot do anything about it, so we will stick with taxpayers paying anyway”. It is a tax that you pay in order to do flood defence, and we will have the same hand-to-mouth Comprehensive Spending Review structure that we have and some all the time will tell you it is incredibly long term, it is not or you can genuinely get this done more efficiently and properly, but then you have to have some charging base and then you have to confront the consequences. But I genuinely believe you could get more flood defence for the same amount of money that is currently being spent, so we don’t avoid the costs of flood defence by saying it is paid by taxpayers, rather than by a utility base and the utility base is pretty comprehensive.
Mr Peter Lilley
But where there is a conflict between, say, flood defences or flood-avoidance measures and environmental objectives, as allegedly there have been in various parts of the country, should we dredge more and know that that might help get rid of bottlenecks so we have flow of water over the basin but it might also change the biodiversity if you dredge or something? If you separated off the environmental side from the flooding side, who is going to make those trade-offs?
Professor Helm
First, let’s be rather clear about what the so-called trade-offs are here. There were repeated interviews during the flood events in which people were asked, including the Environment Agency, what comes first, people or the environment? It is a fundamentally misconceived answer to say people. If you don’t have a properly managed catchment you will not have well-defended people. It was particularly odd for the Environment Agency to think it was black or white in this framework. If you ask, “We would like to dredge this bit of the river but it is going to take out some species and so on”, there is a prior question that is: why do you want to dredge it in the first place? What is the problem that dredging is the answer to? The answer usually is that the upper part of the river is pulling the water too quickly into a particular location with this consequence. Then you ask: does your proposed short-term solution solve the catchment problem? First of all, I am not sure this trade-off is quite how people imagine it but the second point that you ask is: who makes that decision? If you have a catchment operator they will operate within the framework and environmental law, like everybody else does. You can imagine that if I had my way and there was an Environment Protection Agency, they would be a consultee. Whether they would have a right to veto or whether they would have a right to being consulted, they would be the experts on that piece of advice but not the people making the decision about that, which is the catchment system operator deciding what should be done in the light of the environmental constraints.
Mr Peter Lilley
Where else out of household levy would that be related to the flood risk of the household, or would it just be a per capita thing or based on the rateable base of the house or something?
Professor Helm
Now there are two parts here. First of all, I have said the risk of flooding is a catchment-wide issue.
Mr Peter Lilley
I live on the top of the hill, we have never been flooded.
Professor Helm
Okay, but the chances of a particular house—you—being affected, that comes down to whether it is an insurable risk or not. I am contributing to the Thames super sewer, I live in the Upper Thames, it is socialised. Some of the sewage going down the river to the Thames comes ultimately from where I live but not much. But suddenly they are contributing for some of the things we are doing in the upper catchment. There is an inevitable public-good system property that means a degree of uniformity of charge. But then there is a particular additional point, you don’t have a flood risk to your house, so presumably you don’t want to take flood risk out for insurance, probably you don’t. But if you lived right near the river and you have bought that house and you face the risk of being flooded, your particular property, you can either say, “I paid a much lower price for the house because by buying it I knew I was taking this risk, and it has lowered the capital value and then I spend some money on preserving my house” or you can go along to an insurer and say, “This is quite a high-risk flood but it might not flood, so there still is some randomisation, we might not get a deluge, will you give me a much higher premium for doing that?” Think about my car example too. If you are a high-risk young driver you may pay a lot of money for the insurance that you get for the high risk and you may not have an accident. But also a lot of money is spent on the road system, and all the support systems that we socialise to pick up the mess that is caused when that person has an accident, so it is both bits. What is the right balance? Not perfect.
Mary Creagh
On water bills, you have talked about the different routes and then obviously the National Rivers Authority does not exist. It is now the Canal and River Trust, which is a charitable body, so obviously your complexity model has extra complexity because some are public sector, you have the private-sector farmers and you have a charity in the mix as well. Are you aware that there is a £50 reduction on water bills in the South-west that the Government is funding?
Professor Helm
Yes.
Mary Creagh
What do you think about that? You are talking about a levy on households. We have just heard about a flood levy that is going on all our contents and buildings insurance policies, do you think a levy on water bills is a better model than the Flood Re model? Is that essentially what you are saying?
Professor Helm
Absolutely, absolutely. It is the right answer to a system question, as opposed to Flood Re, which is not.
Mary Creagh
It is only going to be for 25 years when Flood Re ends because this is a 25-year Government programme.
Professor Helm
Flood Re is a cross-subsidy programme to cross-subsidise houses at risk—
Mary Creagh
No, I understand what it is. But, in practical terms, you are positing a solution when there is already a subsidy going in through one way. What do you think public tolerance is of having another potential flood levy on their water bills?
Professor Helm
If you are in a hole, in general you try to think about stopping digging. If you cannot get out of the hole, the hole does not solve the flood risk problem, does it? All it does is deal with the consequences to the people who get flooded. That is what the Flood Re system is about. It does not do anything about the catchment issues about what you should do on this front or the amount of money that Treasury have to spend to run the system going forward. First, I would not do Flood Re and, secondly, I have no great confidence in Flood Re working very well. I have no idea what people will do in 25 years’ time. It is an extremely inefficient system and it will not solve the flooding problem. The flooding problem is about catchments. We will still have to spend the money and the question is: do you want a balance sheet with debt for the investment and a proper funding framework integrated within the water framework system, or do you want to carry on with what we have or pretend that Flood Re solves the problem? The problem will not go away because one does not like people having to pay fix. The £50 in the South-west has got nothing whatsoever to do with flooding or water, it is a social subsidy and that is—
Mary Creagh
Do you think that could be better spent? Would it be better spent?
Professor Helm
The problem in the subsidies for South-west is a generalised one. In the nationalised industries, we socialised all our infrastructure networks across the entire population. When we privatised and regionalised, we made each region face the full cost. If you are in the South-west you paid the full cost of distributing electricity. You paid the full cost of the water system and 30% of Britain’s bathing beaches. For an area that had relatively poor incomes, the utility-bill hit came one after another after another. My view is that the right answer was not to try to face people with subsidised prices but to address the social security system that privatisation brought into focus, because it undid the massive cross-subsidies that were part of the nationalised system.
Chair
Very many thanks for that. We could have gone on much longer but there is a Division. Thank you very much, Professor Helm. That was invaluable. Thank you. Oral evidence: Flooding: Cooperation Across Government inquiry, HC 768 12