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Select Committee on Environment, Food and Rural Affairs Fifth Report

4 Government flood risk management expenditure

COMPREHENSIVE SPENDING REVIEW 07 SETTLEMENT

52. On 2 July 2007—after the first floods—the Secretary of State for Environment, Food and Rural Affairs, the Rt Hon Hilary Benn MP, announced an increase in total funds for flood risk management from £600m in 2007-08 to £800m by 2010-11.[98] The full funding package for each year of the next Comprehensive Spending Review period (2008-2011) is set out in Table 1 below.

Table 1: Government expenditure on flood risk management in 2007-08 and the CSR 07 period

Year 2007-08

(current) 2008-09 2009-10 2010-11

Expenditure
(£ million)
600 650 700 800

Source: Written Ministerial Statement [Hilary Benn], HC Deb, 10 October 2007, col 39WS

53. The Association of British Insurers (ABI) was initially publicly critical of the level of expenditure increase, saying in a press release that millions of homeowners and businesses had been "let down" by the "Government's failure to commit sufficient money to new and improved flood defences".[99]There was a mixed reaction from other witnesses to our inquiry, with some broadly supportive (including some individual insurance companies)[100] and others believing the allocation was inadequate.[101]

54. Since June 2007, ministers have repeatedly used the £800 million figure as evidence of the Government's serious response to the summer's flooding events, despite not providing a more detailed breakdown of the CSR 07 settlement.[102] Such a breakdown was released by the Government in February 2008, which divided the CSR settlement money into the Agency's resource and capital spend and local authorities' estimated spend (Table 2). The Government also announced it was making "an initial provision of £34.5 million which may be needed to implement Sir Michael Pitt's recommendations".[103]

Table 2: Breakdown of Government expenditure on flood risk management in the CSR 07 period

£ million

Local Authority Own Spend (estimated) Retained in Defra EA Resource (maintenance & operational costs) Capital Programme
(new & improved defences & projects) Total

2007-08 Baseline 86 0 247 259 602

2008-09 87 4 251 308 650

2009-10 87 20.5 258 334.5 700

2010-11 87 38 279 400 804

CSR 3 year total 261 62.5 788 1,042.5 2,154

Source: Written Ministerial Statement [Hilary Benn], HC Deb, 4 February 2008, cols 49-50WS

We questioned both the Agency—who will receive the majority of the funding—and the Defra Minister for Flooding about the funding allocations. Our discussions confirmed that the settlement was not as favourable as the Government initially suggested, for a number of reasons:

the Agency's capital funding increases over the CSR07 period, but its "Resource (maintenance & operational) costs" either decrease or remain level in real terms for the first two years of the CSR 07 period, despite the National Audit Office (NAO) identifying, in June 2007, that the Agency estimated it needed "an extra £150 million a year" over the next ten years to bring all its existing systems up to their target condition.[104] The Agency said in reply that about £64 million from the CSR07 capital programme would contribute towards asset maintenance, and that the £150 million per annum figure quoted by the NAO included "some capital money";[105]
the estimated expenditure for local authorities declines in real terms over the whole three-year period and is not ring-fenced so may not all be spent, depending on the priorities of local authorities;[106]
construction inflation costs are rising ahead of general inflation, and could be as high as 6.5%;[107]
an "initial provision" of only £34.5 million from within the existing settlement is made "which may be needed" to implement all of the Pitt Review's final recommendations (Sir Michael Pitt's interim report was not costed but he says his final report will be).[108] Defra said the £34.5 million had not been calculated in any detailed way because it did not yet know what it would be spent on.[109] The Agency has described the funding and resource requirements of future measures to tackle surface water flood risk (including the development of Surface Water Management Plans) as a "hurdle".[110]

55. Defra's Director of Water also told us that the Foresight Report (2004)—which recommended about £1 billion per annum be spent on flood risk management by 2015 in real terms—had been "heavily influential" in the outcome of the zero-based review that took place for the CSR 07 settlement.[111] However, we note that the oft-quoted £1 billion figure only applies to river and coastal flooding, and not surface water flooding.[112] Furthermore, Professor Penning-Rowsell of the Flood Hazard Research Centre—who had been involved with Foresight—said the £1 billion figure was "not calculated in any sophisticated way", with a "relatively small amount of investigation".[113]

Our views

56. The Government seems to have made some progress on surface water flooding issues—but the money has not caught up with the facts. The much-trumpeted CSR 07 settlement is still aiming towards a trajectory based solely on river and coastal flooding. The initial provision "which may be needed" to implement the Pitt Review is also a small amount of money for a potentially expensive programme.[114] The exact basis of the figure of £34.5 has not been publicly revealed, although the precision of the number suggests the Government does have some idea about the Pitt Review's implementation costs.

57. Ministers have repeatedly used the £800 million allocation in 2010-11 in an attempt to convey the impression that this large amount of money will enable Government, and others, to respond effectively to the challenges posed by the summer's floods. When broken down, however, the Comprehensive Spending Review 2007 (CSR07) settlement is far less impressive, and looks inadequate to cope with both the traditional and new risks the country faces. In light of the upcoming final Pitt report, and the resources that both local authorities and the Agency will inevitably require to address surface water flood risk, we recommend that the Government reappraise the adequacy of its CSR 07 settlement to combat all types of flood risk.

58. Sir Michael Pitt should publish the full costs of his final recommendations as soon as possible. The Department should make clear in its response how it intends to fund the Pitt Review if the cost of its final recommendations exceeds £34.5 million. It should also say what options it is exploring as to how local authorities will be funded to carry out their responsibilities as a result of the Pitt Review.

A LONG-TERM INVESTMENT STRATEGY

59. Our inquiry showed there is a general uncertainty about what level of protection the public should expect from flood risk, and consequently what was the 'right' amount to spend on flood risk management. Current investment in flood risk management is constrained by the short-term nature of the three-year CSR cycles. Sir Michael Pitt pointed out in his interim report that adaptation to flood risk will take a generation, and proposed that the Government "commit to a strategic long-term approach to its investment in flood risk management, planning up to 25 years ahead".[115] The Government's National Security Strategy also identified coastal flooding as the second highest civil emergency risk to the UK in the coming decades.[116]

60. Witnesses highlighted the need for a longer-term approach to managing flood risk. The Chairs of the Regional Flood Defence Committees said the impact of climate change required planning for "decades and not for three years".[117] Yorkshire Water said it was important to determine what exactly the country was planning for and what level of protection was required by society—because "protection costs".[118]

61. The Agency and Defra are currently involved in developing a 20-year investment strategy for flood risk management.[119] In evidence, the Agency said it recognised the importance of determining the level of flood protection that should be determined by the public purse, and told us the strategy should provide a "realistic view about what the level of funding might be over the next 20 years and how best we could spend it".[120]

Our views

62. Increasing expenditure incrementally towards a £1 billion target figure that was not formulated in any detailed way is not the best approach to manage investment into flood risk. We welcome the Government and the Agency's work to develop a long-term investment strategy for flood risk management. This strategy should provide some answers about the level of flood risk protection that the public should expect, the research and organisation involved (particularly for surface water flooding), the number of flood prevention and alleviation schemes required nationally, and how much this would cost. The strategy should also take account of the effect of climate change on the frequency and intensity of rainfall and storm surges. The strategy should be subject to a public consultation process, and published. Traditionally, such a strategy would be difficult because of the short-term nature of CSR cycles, but we note the precedent of the Government's 2004-05 "Building Schools for the Future" programme which aimed to rebuild or renew every secondary school within a minimum of 12 years.[121]

98 HC Deb, 2 July 2007, cols 689-690 Back

99 "ABI: Government has failed on flood defence spending", Association of British Insurers press release 2007/97, 9 October 2007. Back

100 For example, Chairs of Regional Flood Defence Committees [Ev 251], Norwich Union [Ev 125], Royal & Sun Alliance [Ev 128]. Back

101 For example, the Alde and Ore Association [Ev 552]. Back

102 HC Deb, 9 October 2007, col 449W; HC Deb, 10 October 2007, col 293; HC Deb, 31 January 2008, cols 460-461. Back

103 HC Deb, 4 February 2008, cols 49-50WS Back

104 The HM Treasury GDP deflator has been used to assess whether there has been an increase in real terms. For each of the financial years covered by the CSR 07 period the GDP deflator is forecast to increase by 2.75% on the previous financial year. Based on the table above, the Agency's resource increases by only 1.61% for 2008-09 and 2.79% for 2009-10. Report by the Comptroller and Auditor General, Session 2006-07: Building and maintaining river and coastal flood defences in England, HC (2006-07) 528, p 19. Back

105 Qq 946, Q 955. Back

106 The HM Treasury GDP deflator has been used to assess whether there has been an increase in real terms. For each of the financial years covered by the CSR 07 period the GDP deflator is forecast to increase by 2.75% on the previous financial year. Local authority spend remains level in cash terms across the CSR 07 period, implying a real decrease year-on-year. Q 1065 [Defra]. Back

107 Q 944 [Environment Agency]. We have used the forecast HM Treasury GDP deflator when determining whether there has been a real increase or decrease in expenditure. The GDP deflator is forecast to increase by 2.75% for each of the years covered by the CSR 07 period, which is lower than the potential level of inflation in the construction industry of 6.5% per year. The construction materials price index from BERR includes an index for repairs and maintenance expenditure. The figures published in February 2008 indicate that the annual average increased from 123.6 in 2006 to 133.8 in 2007; inflation of 8.3%. This means inflation could be higher than the figure given by the Agency. Back

108 HC Deb, 4 February 2008, cols 49-50WS; Qq 700-704. Back

109 Q 1003 Back