My Lords, I shall begin by thanking my noble friend Lord Jenkin for raising this matter in the House. As we know, infrastructure investment is a key element of the Government’s economic plan. I agree with the noble Lord, Lord Davies, that it is key to improving our long-term productivity and that delivering it effectively is a part of the Government’s responsibility in working with the industries involved. Of course, we must ensure that it is delivered in a way
that is affordable for consumers and taxpayers. That is a crucial and quite complicated issue. The way that we finance and deliver infrastructure in each sector differs. The road sector, which the noble Lord, Lord Berkeley, referred to, is of course financed exclusively through taxpayer funding, so the question of passing the price on does not exist, whereas the energy and water sectors, for example, are predominantly financed in the private sector.
I am pleased to have this opportunity to set out personally the Government’s position on this important issue. If we look at the future pipeline of infrastructure expenditure, it works out that about 60% of it is expected to be privately funded—water, energy and telecommunications are the sectors where that is the case. To ensure that such privately funded investment is affordable for consumers now and in the future has to be central to the Government’s approach, and independent economic regulation is at the heart of that. At the core of the argument I am going to make is that it is actually in our long-term interest to have the regulators primarily focused on this. That is where the expertise is. The fact that they operate independently of the short-term changes that may come from government policy is a very healthy thing in terms of both protecting the consumer and creating an environment that encourages investors to put their money into our infrastructure for the longer term.
In that respect, protecting the consumer is central to the work of our regulators—particularly in the case of Ofwat and Ofgem—and is enshrined in their statutory duties. They are able to take a long-term view free from political involvement, as I said. This is a tried and tested system. Indeed, the ability of regulators to undertake their work independently of government interference is a cornerstone of our regulatory system’s success. Our regulatory system, which has its challenges, is the envy of the world. We need to keep on improving it, but it is a strong competitive advantage for this country.
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The regulators have the expert knowledge which allows them to scrutinise companies’ proposed infrastructure investment plans to ensure that they are necessary, are delivered efficiently and are in the interests of the consumers we are serving. One of the concerns that I had about the amendment was that I did not think it was in the interests of getting this right to have the Government take over some of those roles. We need to focus the regulators on what is important, encourage them and ensure that they deliver on this mandate so that the impact of the investment programme is appropriately managed in terms of its impact on consumer prices.
The relationship between infrastructure investment and bills is a very complicated one. Infrastructure investment is one of many inputs into the ultimate price, and the price itself is driven by many other factors. The price of our utility bills is one component in the overall cost of living equation, so you have to look at not only the detail but the macroeconomic situation. A whole range of factors come into play in the final price paid by the consumer. Those can include commodity prices, the cost of debt and capital expenditure
and also, of course, operating expenditure. There is quite a focus now on looking at what one might refer to as total expenditure as a way of determining price settlements.
We should not forget that infrastructure investment, if it is done well, ultimately reduces the future costs of supply, maintenance and renewal. That will drive down prices as well as giving us other improved outcomes. Telecoms is the best example in recent history where the improvements in broadband and mobile data speed and coverage brought about by huge infrastructure investment have come alongside falling prices for consumers. So you have to be able to see both sides of the equation here. Similarly, not investing in energy generation now could be expected to increase prices further down the line if demand started to outstrip supply. Given all those complexities—this takes me back to my noble friend Lord Jenkin and his focus on this—I very much welcome the fact that, as part of its first annual work programme, the UK Regulators Network is already looking at improving the understanding of affordability pressures across the sectors and, indeed, the part that infrastructure investment plays in this.
The noble Lord, Lord Berkeley, said that it was important to achieve consistency across regulators. One of the key objectives of the Regulators Network is to transfer best practice and to look at the differences, ask whether they are justified and examine how we can improve overall performance. I think that there will be significant focus on this area of infrastructure investment and affordability. This work will include looking at patterns of household spending across sectors, characteristics of an essential service and how these influence household spending decisions and can be drivers of customer decisions. I am happy to reiterate that the Government have made clear that they are committed to supporting the UKRN in taking this work forward. In fact, we are currently consulting on how we can best support and encourage the UKRN to help to embed this co-operation more widely between the regulators.
Of course, this is not the only way that the Government can take targeted action to help with the cost of living. Sometimes it is appropriate to intervene in other ways to reduce the cost of living, through more targeted action on bills. For example, in the Autumn Statement alone, we announced a series of steps that are saving the average household around £50 on its energy bills. Only recently, we announced an extension to the freeze on rail fares; with last year’s freeze, this will save season ticket holders around £75 over 2014 and 2015. There are other ways of intervening to manage the impact of what is effectively amortising the investment spend through the pricing variable. There have also been other measures—such as increasing the tax-free personal allowance, freezing fuel duty, and helping local authorities to freeze council tax—all of which reduce the cost of living burden on our citizens.
More specifically on infrastructure, a unit of the Treasury, Infrastructure UK, is also taking forward a considerable amount of work with industry to reduce the costs of infrastructure projects in both the public and the private sector.
In conclusion, I can reassure my noble friend that the Government fully recognise the importance of ensuring that vital infrastructure investment is cost-effective and affordable. That is why we have a system of independent regulation that has the consumer at its heart. The regulators are the ones with the expertise in weighing up these complex issues, and it is better that we should look to them to do so. I very much welcome the fact that they are working together through the UK Regulators Network to further our understanding of these issues. Indeed, I can give the assurance that the Government are committed to doing everything we can to support them in this important work, at the same time as taking action to help with cost of living more broadly.
I thank my noble friend for giving me the opportunity to discuss these issues today. I hope that what I have set out reassures him, and that he will feel comfortable in withdrawing his amendment.