EU politics: report on "reform" policy
Tuesday 11 June 2013
 While there is a considerable amount of press coverage, not least in the BBC and the Independent, for example, this will not necessarily reflect accurately the content and emphases of the report. Therefore, what I am doing is lodging this as a holding post - thus opening up the forum for comment - while I read the documents and associated press coverage, whence I will write during the course of the day one of my online essays, taking account of comments here and on facebook. The first thing to take from this report, though, is that the inquiry – on which the report is based - was (according to the summary on pg 3) "triggered by the Prime Minister's veto of EU Treaty change at the December 2011 meeting of the European Council". The Committee "felt that the episode might mark a defining moment in the UK's EU policy and place in the EU". However, as readers of this blog know, the Prime Minister did not veto any EU Treaty change, and especially not at the 2011 European Council. There was no treaty to veto, and there had been no IGC convened, at which a veto could have been exercised. Although this error is not fatal to the inquiry – the report is intended to inform the public debate on the UK's EU policy in coming years – it does go to the assessment of the knowledge and competence of the Committee, and thus the value of their report. And when the MPs, from the very start, get something so fundamentally wrong, one is entitled to reserve judgement as to the whether their offerings are worth anything at all. Sticking with the summary (pg 3), the immediate reservations are quickly confirmed, when one sees the Committee "commend the Prime Minister for launching an ambitious agenda for EU reform". Unless someone knows different, it is the case that Mr Cameron has been remarkably reticent about providing any detail of his "agenda", in which context it is very difficult – if not impossible – to ascertain whether it is "ambitious". Thus, while the MPs go on to assert that there some support for some of Mr Cameron's reform ideas around the EU, and there is significant scope for further progress on some of them, they seem to contradict their own statement by acknowledging that the Prime Minister "has not spelled out in any detail the content of the 'new settlement' he might seek". Very quickly, therefore, do we get to a – if not "the" – bottom line, where the Committee concludes that it is "impossible to assess" the likelihood of Mr Cameron securing the kind of "new settlement" for the UK in the EU that he might seek. If we stop there, for a moment, and savour the implications of what has been said, we have to accept that the situation is such that we have no knowledge of what settlement Mr Cameron actually wants, and it is impossible to assess whether he can obtain it. Against that, it is pretty reasonable for the MPs to conclude that "proposals for pan-EU reforms are likely to find a more favourable reception than requests for further 'special treatment' for the UK". As a general principle, this either comes from the Janet & John book on negotiating EU treaties – obviously intended for FCO mandarins – or it might come from the "EU for dummies" volume. Having obviously read the accompanying volume ("EU for complete idiots"), the MPs then confess to being "sceptical" that other Member States would renegotiate existing EU law so as to allow the UK alone to reduce its degree of integration, particularly where this could be seen as undermining the integrity of the Single Market". If it was not for the fact that the Prime Minister has asserted otherwise, we would wonder why such a basic point should be included. But, as a counter to prime ministerial propaganda, it is very helpful, especially when the MPs say: The Government must reckon with the fact that the body of existing EU law is a collective product in which 27 countries have invested. Our sense is that other Member States want the UK to remain an EU Member. However, we do not think that a UK Government could successfully demand "any price" from other Member States for promising to try to keep the UK in the Union.With that out of the way, we are then told that any UK decision as to whether the country should remain in the EU would "to a significant extent be a decision about whether it should remain in the Single Market". And here, the Committee goes badly awry. It agrees with the Government that the current arrangements for relations with the Single Market and the EU that are maintained by Norway or Switzerland would not be appropriate for the UK if it were to leave the EU. If it is in the UK's interest to remain in the Single Market, the MPs say, the UK should either remain in the EU, or launch an effort for radical institutional change in Europe to give decision-making rights in the Single Market to all its participating states. The reasons why this is so wrong are partly rehearsed here, in that the MPs, like the Government, are falling onto the trap (as so many do) of believing that decision-making relating to the Single Market is necessarily conducted at EU level. As we are well aware, much of the standards-setting which comprises the Single Market acquis originates at regional or global level, negotiated upstream of the EU. Secondly, the MPs seem to be working on the assumption that the Norwegian and Swiss models are the same – when they are not. There are very significant differences between the two and the arguments against one would not necessarily apply to the other. Thirdly, the MPs do not seem to have considered the merits of either option as an interim solution, renegotiable at a later stage. Nor do they recognise that, if the UK joined EFTA, this would change the dynamics and balance of the organisation, facilitating precisely the "radical institutional change" that the Committee argues is desirable. Once you go wrong, however, there is a tendency to stay wrong. "Inside the EU, in the face of more far-reaching Eurozone integration", the Committee says, "it could be difficult for the UK and other non-Eurozone Member States to preserve their capacity to shape decisions affecting the Single Market". The point here, of course, is that, since so much of the standards setting occurs outside the EU, the UK might be better placed to shape decisions outside the EU, better indeed than if it remained a member. And if that is the case, then – contrary to the Committee's assertions. the Government has not correctly identified risks, and its strategy of seeking to mitigate it by protecting the rights of non-Eurozone states is ultimately flawed. In concluding its summary, though, the Committee tells us that arguments about the extent of UK influence in the EU, and how it might best be maintained and strengthened, "ran throughout our inquiry". Indeed that is the case, and we have so far read some, but not all of the evidence. As is so often the case with Select Committees, though, the list of witnesses too narrowly cast, and to a very great extent partisan, or limited in scope. The Committee thus came to it conclusions manifestly through having a limited grasp of the fundamentals of EU politics and procedures, and by selecting witnesses (especially those who gave oral evidence) who would give them the answers they wanted to hear, or which would not be challenging to them. This then allows a conclusion that the Government's tone, language and overall approach can have a major impact in sustaining UK influence in the EU – a not untoward finding. But it then tells the Government that it should "frame its approach and language in pan-EU rather than UK only terms, and should remain constructive, positive and engaged". With the former part of that sentence, we would most profoundly disagree. It is no part of the national interest that we should subsume the British interest for the sake of facilitating EU "reforms" that are agreeable to all the other member states. If the UK cannot by any means negotiate a position which the UK would argue is necessary – which is the conclusion of the committee - then the real option is to negotiate our complete withdrawal, and to develop an entirely new relationship. That concludes the essay for now. I will return to the themes raised, in a new post, when I have had a chance to look more deeply at the evidence. COMMENT THREAD Richard North 11/06/2013 |
Water: "moral questions" on profits
Tuesday 11 June 2013
 Cox is an interesting man. Former chief executive of Yorkshire Water and Anglian Water, he is now poacher turned gamekeeper, having been appointed last October as chairman of the Water Services Regulation Authority (Ofwat). And now he is now accusing Ofwat of having turned a blind eye to excessive profits from the water companies utilities, which, according to critics, translates into customers' bills being too high. Some water utilities are taking out annual dividends of up to 24 percent of their regulatory equity. It has also been alleged that some companies use shareholder loans to avoid UK taxation. At the same time, hard-pressed customers have seen annual bills rise by 13.5 percent since 2010-11, while their incomes have fallen. These are normally regarded as business questions but Cox is arguing that they also raise regulatory and moral questions. Not least, the structure of the water industry, he writes, has changed markedly over the past six years, with private ownership largely replacing the listed companies created at privatisation, and thus requiring a review of how they are regulated. What's been happening at the Ofwat end, though, is that the regulator has been giving the water companies a free pass on loan costs. Since 2009, it has allowed then to charge 3.6 percent when, in practice, debt now costs no more than 1.25 percent. High RPI levels – to which revenues and the assets are indexed – have added unexpected gains. On top of this, a good number use high-coupon shareholder loans to improve their equity returns beyond the currently exceptional returns from the regulated entity. It appears that this reduces tax liability for the benefit of shareholders which, although legal and common in private equity companies, are sometimes morally questionable in vital public services. Cox seems to view this in terms of perception, arguing that companies need to maintain trust in the industry, a duty "we all owe to government and customers". Customers, he says, look at companies’ behaviour, management reward, trust, service and price. That shapes their attitude towards them and whether or not they trust them. To provide today's service and to build resilience, Ofwat must protect customers' willingness to pay for the under-investment of the past. Here, he refers to the damage inflicted on trusted consumer brands in recent months by alleged tax-avoidance structures. Water company licences require proper regard for the UK Corporate Governance Code, he adds, then revealing that there is not a single company that fully complies or satisfactorily explains why not. And while some investors have responded in an open manner, other have hidden behind "investment banker-speak", complaining that the "new" Ofwat is "piercing the corporate veil". But, says Cox, if a veil hides practices that do not stand the test of public interest, then it is our duty to lift that veil. It is regrettable if directors have not done so already.
However, Cox is not well-placed to complain. Ofwat's charging methodology is shrouded by its own veils of corporate-speak, rendering its "charges schemes" masters of complexity and obfuscation. No more is it possible to get a straightforward view of the basis for charging, that it is to discover precisely how water companies structure their charges.
On the other hand, information from the so-called "consumer watchdog", the Consumer Council for Water, is patronising, superficial and entirely unenlightening. The new Ofwat chairman says his highest priority is to deliver a forthcoming five-year price review in a way that benefits customers, while ensuring that the sector can efficiently raise funds. In this, he says he is committed to incentivising and rewarding capital fairly while firmly protecting customers and the industry's legitimacy. Cox, however, is being too optimistic about the industry's legitimacy, and his own capability to bring the industry to heel. Small things speak volumes to the public when they assess what are increasingly being regarded as the new generation of "fat cats". Thus does a commenter remark that the CEO of Yorkshire Water more than trebled his salary when Yorkshire Water Authority became Yorkshire Water PLC - Mr Cox himself being a beneficiary. And if Cox thinks the water companies are going to roll over and suddenly become consumer friendly, he looks set to be disappointed. Coming out fighting is Thames Water. Its finance director, Stuart Siddall, has declared its conscience "absolutely clear", parading a fall in pre-tax profits of nine percent to £550m, on a turnover of £1.8 billion. By contrast, the Cooperative Retail Group made £7.4 billion in food revenue for the year ending 5 January 2013, and an operating profit of £288.4 million. Thames puts this "downturn" - a profit level that any supermarket group would kill for - to bad weather, rising energy costs and, significantly, unpaid customer bills. As a result, the company booked a £5.1 million tax credit, paying no corporation tax at all, but hitting customers with a 6.7 percent increase. In an attempt at damage limitation, it says it has paid business rates and other taxes, such as the income tax on behalf of its employees, which amounted to about £150 million. This, though, is a company with a serious image problem. In 2001, it was bought by the German company RWE, who own nPower, which then sold it to Kemble Water Holdings in 2006, "following several years of criticism and failed leakage targets". Kemble is a consortium run by an investment fund managed by Macquarie Bank, an Australian bank which was founded in 1969 in Sydney as Hill Samuel Australia, a subsidiary of Hill Samuel, UK. That company, in turn, is owned by Lloyds TSB. With this labyrinthine ownership structure, the public is only too well aware that it is not so much paying for water services, as funding a segment of the financial services industry. Thames Water accounts show it paid £231.4 million in dividends to its parent company, with £279.5 million having gone that way the previous year.  The accounts also show it paid £328.2 million interest on "intercompany loans", paid via a Cayman Islands funding vehicle to its external bondholders such as pension funds. Since 2006 it has reported post-tax profits of £1.8 billion and handed £957 million to its shareholders. And with such much money being diverted offshore, the public have been "sold down the river", as the Independent puts it on its front page.Such is the corporate arrogance, though, that Siddall seems unaware of Cox admitting that Ofwat has been too lax in allowing the water companies excessive profits, defending the current profits on the basis that the 4.31 percent return was "below what was determined by Ofwat". By such means, Ofwat becomes the apologist for the industry rather than its regulator. Thames chief executive Martin Baggs, meanwhile, has been awarded a pay rise of 5.9 percent, taking his basic salary to £450,000. He has also scooped a bonus of £274,000 as part of a scheme to "reward significant improvement in the group's financial and corporate performance". Next month, he will pick up a further £366,000 in shares under the company's long-term incentive plan. Even then, this is relatively modest compared with Yorkshire Water, whose CEO Richard Flint takes home nearly £1 million in salary and bonuses. He has presided over a six percent rise in operating profits, up to £331.5 million last year, compared with £303.3 million in the previous period. Without adding to its customer base, the company managed to increase its turnover by four per cent to £936.2 million (up from £893.6 million), achieved almost entirely from increased charges and a fall in capital expenditure of four percent, to £385.7 million. This year, the average bill rose by 5.1 percent, well above the current inflation rate of 2.6 percent. Chairman Kevin Whiteman thinks this a "good overall business performance", as well be might for a company that is free to sting its customers with inflation-busting charges, irrespective of customers' willingness to pay. It is quite fitting, in a way, that these are companies which also own the sewers which transport domestic sewage. Dealing with the products of this enterprise, they must be so used to the stench that they no longer notice their own. COMMENT THREAD Richard North 11/06/2013 |
Tuesday, 11 June 2013
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