We must consider the total cost of infrastructure spending and its consumer impact

Last month the National Audit Office (NAO) suggested that government needs to look more closely at how its policies on investing in the UK’s infrastructure affect customers’ pockets.

The key points of the NAO’s report[1] were that the cost of infrastructure will rise; this will affect utility bills, and these generally rise faster than income; and rising bills are a particular concern for those in the lowest 10% of income distribution.

For some years, the Consumer Council for Water (CCWater) has been making the same broad points to both the UK Government and the European Commission. Since privatisation in 1989, over £116bn has been invested in water and sewerage infrastructure – but that has come at a cost. Water and sewerage charges have risen by more than 50% in real terms over the same period.

In the water sector customer indebtedness is growing. Almost 100,000 customers are receiving financial assistance from the WaterSure scheme or via other company-led social tariffs. This is a five-fold rise since 2007.  Meanwhile, CCWater’s annual tracking survey reveals that 1 in 8 customers say their water and sewerage bills are unaffordable, and just 7 in 10 consider the services they receive to be value for money.

Clearly, the current economic downturn is having an effect on customers’ willingness to accept year-on-year price rises at a time when their incomes are falling in real terms.

Customers have repeatedly told us that, while they accept the need to upgrade water and sewerage networks and to put right decades of environmental neglect, they do not want this to be reflected in sudden spikes in bills.  We have, therefore, argued for investment in the water industry to be carefully paced to lessen the impact on customers’ bills and for there to be transparent communications with customers about why the investment is necessary.  We have also argued for the industry to look more towards more innovative solutions even if it means outcomes are delivered later than might otherwise be the case.

Without customer acceptance of the rationale for investment in infrastructure, and the nature and timing of its delivery, the on-going legitimacy of those that regulate water – EU, UK Government, Ofwat, Environment Agency and the Drinking Water Inspectorate – will be called into question.  This may be happening already in the energy sector with energy companies and Ofgem under increasing fire about how the operation of the market favours the companies at the expense of customers.

Yet, until recently, there had been little acknowledgement at governmental level of the cumulative effects of rising water bills, increased energy prices, and increased transport costs on customers. As the NAO comments, “…each department could set policies, and regulator set prices, believing them to be affordable, but consumers could still find the combined impact of all their bills rising simultaneously to be unaffordable”.

We agree with the NAO’s view that there needs to be better consideration by government about the impact of current and future policies and infrastructure plans on bills faced by households and businesses.  Government needs to set the relative priorities within the policy area and how they interact with other policies across government, and how investment could be phased to lessen the overall impact on bills.

Illustrative of this point is the Treasury’s recently published National Infrastructure Plan 2013. Although there is a chapter devoted to the challenges of raising the capital to finance £377bn of infrastructure projects to 2020, and how Government is helping to smooth the process, there is no discussion on how delivery of the plan will impact consumers’ bills. This is estimated by Which? to represent a minimum £740 per household per annum[1].

In an earlier report, NAO had commented, “…funding of infrastructure via bills is more regressive than taxation: it requires proportionately greater expenditure from those on low incomes. This makes it particularly important to understand the effect of infrastructure investment on the bills of different groups of consumers[2].”

The Consumer Council for Water also supports this view wholeheartedly. We believe that there needs to be greater focus on the likely acceptability and affordability of utility and other infrastructure related bills by Government.

This is not meant to stifle or delay investment in infrastructure, but rather to ensure that the policy options at departments’ and regulators’ disposal are considered in the round and not in isolation.

Deryck Hall, head of policy and research, Consumer Council for Water

[1] Which? Response to Government’s National Infrastructure Plan, 4 December 2014

[2] National Audit Office, HM Treasury: Planning for economic infrastructure, March 2013

This Perspective was published in the January issue of New Power.  For more information and a sample copy contact [email protected]