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Monday, 11 January 2016 16:24

Government adviser calls for radical rethink on flood defence structure and funding

Professor Dieter Helm of Oxford University, Chair of the Natural Capital Committee and a key government adviser, has called for a radical rethink on the structure and funding of UK flood defence provision.

Speaking on the BBC’s Today news programme, the economist said the latest floods reveal fundamental structural problems which are going to come back again and again which “the sticking plaster of a bit more money and a bit more funds” are not going to solve.

"The much more pressing and long term issue is how the flood defence of this country is financed which is capable of protecting people in general for most of the time from most of these kinds of disasters." he said.

Helm said that when the Environment Agency was first set up and before that the National Rivers Authority it was “very much cobbled together as a consequence of a botching of the water privatisation in the 1980s.”

In his view, the problem for the Agency is that “with the best will in the world and the best management one can conceive of its just got a hotchpotch of things to do.” The combination of flood defence, which is an operational job  with the roles of regulation, enforcement, licencing and protection of the environment means it is a body which is pulled in two different directions.

As  a public agency it is also reliant on grant-in-aid from the Treasury , meaning it cannot have a proper utility balance sheet, borrow to invest and can’t do “the sensible and important things that a normal utility would do.”

Professor Helm, who was reappointed as the chair of the Natural Capital Committee last month, commented:

“So I think that flood defence needs a proper standalone function or to be subsumed within the water sector. To give it that focus and importance and give it access to normal borrowing and normal finance which could put this on a long term basis.”

Most management finds it hard enough to do an operational investment job – which is what flood defence is about , according to Helm. "To have management do that AND concentrate on prosecution AND  concentrate on regulation AND concentrate on all the other normal environment protection activities at the same time" means the Agency is getting pulled from pillar to post.

“My real fear is you go through the cycle – you have a crisis, you call for a review and then there sre two options – sticking plaster and a bit more money or a proper structural setting up of flood defence for the needs of this country.”

He went on to warn that with 10 million more people in the next two decades and a massive expansion of housebuilding the country was facing enormous challenges, commenting:

“ I think it stretches the ability of any one management to tackle those problems as a full time occupation and not just as part of a broader portfolio.”

Conventional approach to flood at best inefficient and sometimes even counterproductive

In a new paper published last week Flood defence: time for a radical rethink Helm described the conventional approach to flood defence carried out by the Environment Agency and financed largely by the Treasury, as “at best inefficient and …sometimes even counterproductive, encouraging the sorts of land use and land management decisions that can actually make flooding worse in the medium term.”

The paper says that faced with an unprecedented expected rise in the population, and a major house building and infrastructure programme, land use is undergoing an historic and profound change which both flood defences and river catchment management will need to adapt to.

Helm says this requires a radical rethink, treating rivers as core natural capital and the recent floods “provide the opportunity to do this. “

“The first step is to sort out what sorts of flood defences we need – what is the optimal level of flood defence. Surprisingly perhaps, the EA does not provide a credible answer, and the answer it does provide leads to a serious misallocation of resources and some perverse incentives for home building and wider land use.” the paper says.

Flood risk insurance can perversely incentivise house building location

Helm also suggests that house building location can be further perversely incentivised by flood risk insurance and emergency funding and that providing insurance below the true costs of the risk insured leads to adverse site selection. The paper describes the FloodRe scheme as the latest example of the deliberate attempt to cross subsidise poor risk locations – on a voluntary basis.               

The paper also flags up agriculture as both a major cause of increased flood risks and a major potential means to alleviate them. However, agricultural policies and the associated subsidies pay little or no attention to the flood risk dimensions – and the farming practices of the upper reaches of river catchments are especially important in determining flood risk.

Flood defence asets register and balance sheet should be created

Helm is also calling for an assets register of flood defence investments and the creation of  a balance sheet, saying: “Unless you know what assets you have got, and the state the assets are in, it is not possible to plan efficiently. “

The utilities can borrow against their assets because they are guaranteed a revenue stream to remunerate them with regulated asset bases. The paper makes the interesting point that “for somewhat obscure reasons" connected with the botched first attempt at water privatisation in the late 1980s, whilst water companies followed this path – and have as a result been able to make substantive investments to improve water infrastructure – flood defence was split from the water authorities and placed in a public sector agency.

The result of this has been that the flood defence costs of a river catchment are – unlike the water and sewerage costs of the river catchments – not socialised into regular utility bills, the paper argues.

The paper goes on to suggest that the balance sheet approach raises the question of where will the money come if flood defence is to be optimally provided with just three possible main answers:

  • taxpayers;
  • a river catchment charge (like water bills);
  • and insurers and developers.

On taxpayer funding, Helm says that while this has many advantages, the disadvantages are well known with governments “widely regarded as incapable of making credible long-term commitments to future funding.”

“It is extremely unlikely that any government will solve this problem which has bedevilled public sector investment for at least half a century.”

The second route suggested in the paper is a flood utility charge, levied largely on a river catchment basis which would follow the definition of the water and sewerage companies. It would probably be most efficient to add this to water bills, although it could be raised as a separate flood levy.

Helm views the third route – insurance – as at best a partial one, saying that insurance contributions are likely to be limited and far below the required revenue.

In his view a levy – either directly or via water bills or Council Tax, with the former likely to be the most efficient – is potentially the best way forward.

“Opposing a levy is in reality a demand for the status quo to be continued, howbeit with a bit more Treasury grant. It simply does not match the need and condemns the system to seriously and permanently sub-optimal flood defences,” he concludes.

Separate flood defence body should be created

The paper also calls for the creation of a separate flood defence body with a balance sheet and borrowing capacity - as contemplated in the discussions leading up to the first National Infrastructure Plan in 2010. A new floods utility would not necessarily be a private company - it could be state-owned, though it might need a company structure so that it could be subject to the normal accounting and legal frameworks, and have a balance sheet separate from that of the Treasury.

“It is also a question of urgency and timing. Whilst the EA may argue that now is not the time to break it up, since investment is urgent, in practice this is spurious. Now is precisely the time, and if it is urgent then the water companies have the capability and scale – as well as access to borrowing and financial markets – which the EA patently does not, and arguably never will.”

“The most important single step to be taken now is an explicit recognition that the status quo is not only unsustainable, but is never likely to be sustainable. The worst reaction to the current floods crisis would be more of the same – a bit more emergency funding, and a bit larger EA budget. “

“Economics, and economic assessment, has unfortunately been largely alien to the EA’s approach to flooding. There has never been a full comparative efficiency audit of its performance, such as those to which the water companies are regularly subjected.”

The paper says flood defence should be split out from the EA, and new flood defence companies created on a catchment basis (within a single overarching structure or replicating the catchment model that the NRA inherited from the water authorities pre-privatisation).

Helm concludes:

“The government now has an opportunity and a choice. It can muddle on with the existing model and add some immediate “sticking plasters. It can increase the funding and try to improve the EA’s modelling and management. Or, it can seize the opportunity to radically rethink and restructure flood defences in the UK. “

Click here to download Flood defence: time for a radical rethink

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