City: Cost deluge

IN December 1988, Nicholas Ridley, then Environment Secretary, came out with the following piece of misleading nonsense. Meeting tougher clean water standards, he said, would require only pounds 2.4bn of additional expenditure by water companies until the end of the century.

Water charges would as a consequence be no more than 7.5 per cent to 12.5 per cent higher than they would otherwise have been. Warnings by the industry that charges needed to double in real terms were alarmist claptrap, he insisted. Michael Howard, the minister responsible for pushing through water privatisation, was a little more cautious in his comments but scarcely any less disingenuous. He repeatedly refused to spell out the full cost implications of meeting clean water standards.

Nor did the prospectus at the time of privatisation. There was an estimate of costs, which was admittedly way, way above Mr Ridley's initial stab at the problem. But again it seems to have considerably understated the size of the task. Ian Byatt, director-general of Ofwat, the water industry watchdog, has taken a fresh look at the issue. In a discussion document published last week, The Cost of Quality, he estimates expenditure on clean-up programmes in the 10 years to 2005 at between pounds 28bn and pounds 43bn. Even this is probably on the low side, the industry believes. Once everything is taken into account, it will be more like pounds 60bn, according to executives. Whichever figure you take, the implications for charges are horrendous; far, far worse than ministers led us to believe.

From an environmental point of view, this may be a good thing. In the bad old days, when water companies were owned by the Government, any increase in charges tended to go straight to the Exchequer, which would use the money for some worthless political indulgence such as propping up the car industry. Necessary environmental spending went by the board. By chance or design, water privatisation has had the effect of spawning an environmental tax. Whether you like it or not, through enhanced water charges you are now being forced to pay for cleaner beaches, rivers and better-quality drinking water. Much of this spending is entirely necessary and justifiable. But a great deal of it is of questionable value. There comes a point when the law of diminishing returns sets in; it costs more and more to produce ever smaller environmental benefits. Can it really be an efficient use of national resources to chuck so much money at the water industry? Or are there not better and more efficient ways of spending it.