An assortment of facts and examples that you can use to earn credit for knowledge and application, as well as to support evaluative judgements. Your examples have more credibility where you can quote a source, such as OFGEM or the ONS

1. Gas and electricity markets

Gas and energy prices have not been regulated since the early 2000s but price caps are in the process of being reintroduced and OFGEM has suggested these could be in place by Christmas 2018.

The removal of price caps in the early 200s was seen as a sign of the success of deregulation, achieved by taking away statutory entry barriers: A choice of providers for a homogeneous product had allowed competition to drive down prices. Furthermore, the threat of new entry could now also act as a discipline on the pricing of incumbent firms (entry-limit pricing)

However, the government is reintroducing price caps on the basis that the market is failing: It is still to some extent dominated by the “big six” suppliers. British Gas, once a state monopolist, still retained 36% of the market in March 2016, according to OFGEM.

Evidence of market failure includes that over the past few years energy prices to customers have gone up faster than the wholesale cost of energy to firms. Firms have thus widened their profit margins, although firms are still achieving rates of return of less than 5%, so there is considerable doubt about whether they are making supernormal profits.

The plan to reintroduce price capping on standard tariffs has been criticised by Centrica on the grounds that: (i) It will reduce investment (due to lower profits); (ii) It will harm competition, for example by reducing the incentive to enter the industry; (iii) Suppliers may respond by putting up prices on non-standard tariffs such as fixed rate deals. This too could damage competition.

2.5 million households have never switched energy supplier, for reasons including consumer inertia or confusing information about competing tariffs and this could give monopoly power to firms. However, OFGEM data also shows that more than 7.7 million households have switched supplier in 2016, saving an average of £200 per year, perhaps suggesting the market is working well. Furthermore, British Gas lost 110,000 accounts to in the first four months of 2018. Arguably, price capping is being reintroduced at just the moment that natural competition is making it unnecessary!

2. Rail industry

Direct competition between different train operating companies along the same route is rare. In most cases, train operating firms win a franchise from the government to run trains along a particular route, with the minimum length of franchise 10 years. Depending on the route, the operator either pays a fee to the government or receives a payment (subsidy from the government)

The rail industry tends towards natural monopoly and it is very difficult to introduce competition in the way that has occurred in gas and electricity.

Rail fares for routes where demand is likely to be inelastic, such as key commuter routes, are regulated. Price rises take place on January 1st and are capped at an increase equal to the rate of RPI inflation the previous July. In January 2018, average fares rose by 3.4%.

Fares along unregulated routes have tended to rise much more quickly than those for regulated routes.

Government subsidy to the rail industry has fallen by over 50% since 2009 (Office for Rail Regulation)

Rail prices have increased by over 50% since 2007 (RAC data), while motoring costs have risen by only 30% (RAC)

In spite of concerns over price increases, some observers argue that the quality of rail services has improved. Passenger complaints were 115 per 100,000 journeys at the time of privatisation in 1998 but this fell to 26.6 complaints per 1000 journeys in 2015-16 (Office for Rail Regulation). Furthermore, there have big increases in the number of passenger journeys in recent years.

Although many argue that rail fares are too high, only 3% of the price of the average train ticket is train operator profit and 26% is investment (Rail Delivery Group). This would not seem to suggest that train operators are making supernormal profits and exploiting the consumer.

The Labour Party is committed to renationalising the railways.

In May 2018, the government announced that it was taking back control of the East Coast Mainline after its operators Virgin and Stagecoach found that they could not generate enough revenue to meet the payments they had promised to make the government for the franchise. This adds weight to the claims of those who argue that the railways should be renationalised.

3. Water industry

The water industry is a prime example of a natural monopoly.

Thus, water prices are still regulated by OFWAT and a price review takes place every 5 years.

The most recent price review in 2014 enforced an average real terms price cut of 5% (RPI -5%) on water companies by 2019, when the next review will take place.

Historically, OFWAT has allowed water firms to put up prices in real terms in order to finance the huge capital investment needed in the industry (40% real terms increase in water prices between privatisation in 1989 and 2015 and a total investment by water firm of £126bn over the same period - OFWAT). However, today’s low interest rate environment has reduced borrowing costs, giving OFWAT the room to bring about a real price cut.

The water industry in Scotland is nationalised. The Scottish government argues that this allows it to contribute to a “wealthier and fairer” Scotland with high quality public services.

4. Mail and parcel delivery

The Royal Mail was privatised in two stages between 2013 and 2015, raising £3.3bn for the government.

The first raft of shares were sold at 330p each and were 24 times over-subscribed. They closed at 455p on their first day of trading on the Stock Exchange. The National Audit Office estimated that the below equilibrium price of the initial sale cost the UK taxpayer around £1bn.

Postage prices have increased well ahead of RPI inflation since 2008 (real terms price increase). First class post prices have not been regulated since 2012. The withdrawal of regulation saw a huge increase in price from 45p to 60p that year; the price reached 65p in March 2017.

The withdrawal of regulation is seen as appropriate given the declining market for letters (decline of 6.3% per year between 2008 and 2013) and the increasing challenge provided by e-mail and courier services. The UK’s postal market was deregulated (liberalised) in 2006, allowing firms to compete with the Royal Mail to deliver letters under the value of £1.

The Royal Mail, despite privatisation, is still legally restricted by a universal service regulation (it must deliver to every household in the country every day) and a condition that 93% of first class mail must reach its destination the following day.

5. Healthcare

While the government pays for NHS treatments, it does not necessarily follow that the treatments have to be produced by the government.

Contracts to provide NHS treatments are put out to tender and organisations within the NHS can bid to provide them, competing with private firms to win the contract. In the three years to April 2016, £5.5bn worth of contracts were won by private firms (around one third of all contracts put out to tender) – data from the NHS Support Federation

While private involvement in the NHS reflects the belief that the private sector may use resources more efficiently than the government, there have been some key failures of private sector involvement. Perhaps the prime example is private sector firm Circle walking away from its contract to run Hinchingbrooke hospital in Cambridgshire in 2015, just three years into the contract.

The example above highlights that there are potential problems involved in private-public partnerships. Contracting out to the private sector also occurs in areas such as school and hospital catering and cleaning and the running of council leisure centres. Concerns centre around quality (given that private firms may focus on cost reduction to improve profit) and the administrative costs associated with drawing up and enforcing contracts between government and private firms.

Similar difficulties to those above have occurred in the Private Finance Initiative whereby private firms pay for and build major investment projects such as new schools and hospitals and then lease the facility to the government on a long-term basis.

6. Supermarkets

The UK Supermarket industry has been in the grip of a price war for several years, highlighting interdependence and reactive behaviour.

Factors prompting the price was include (i) the recession of 2008-2009, which saw consumers become more sensitive to price (ii) the rapid expansion of Aldi and Lidl, partly in response to the first factor. Aldi now has a market share of 6.9%, having recently overtaken Waitrose and the Co-op to become the UK’s 5th largest grocer. It has 700 stores and a target of 1000 stores by 2022 (Source: Kantar). (iii) aggressive price cutting by Aldi and Lidl, using a model of carrying a limited range of brands to achieve greater economies of scale than the established incumbents. Matthew Barnes, UK Chief Executive of Aldi, promised in 2015 that the chain would keep cutting prices “even if losses are an inevitable consequence”, suggestive of a penetration pricing policy.

In January 2017, mysupermarket.com reported that the price of a typical basket of shopping was marginally cheaper than 12 months earlier, despite the upward pressure on prices from the depreciation of Sterling in the wake of the Brexit decision.

The upward pressure on prices from the weakening of the £ threatened to help to bring price wars to an end – May 2017 “Unexpected price rise in the baggage area – supermarket own brands increase by up to 160% in a year” (The Sun!). However, the consumer has become accustomed to ultra-low prices making it difficult for any supermarket to break out of the price war.

The price war has reduced profit margins (profit on each good sold) in supermarkets, in turn damaging overall profits. In September 2017, Asda reported that its profits had fallen by a fifth.

The price war has highlighted the monopsony (buying) power of supermarkets in relation to their suppliers. For example, the price of milk has fallen as low as £1 for 4 pints, and supermarkets have reduced the price they pay to farmers for milk. While the falling price of milk is also associated with increasing yields from larger scale, more technologically advanced farms (economies of scale), the future of many farms is under threat as they find they are unable to supply milk profitably.

Larger supermarkets have competed particularly vigorously on the price of petrol, possibly using it as a ‘loss-leader’ to attract customers to their stores.

In May 2018, Sainsbury and Asda announced plans to merge, saying that it would enable them to make sufficient cost savings to deliver price cuts of 10% to consumers. The merger will be investigated by the CMA and could potentially be blocked if it fails to meet the “public interest criterion” or may only be allowed to go ahead with conditions such as Sainsbury and Asda selling some stores to rivals.

7. Bus industry

Local bus services were once a statutory monopoly with only local council services provided (such as NCT in Nottingham). The market was deregulated in 1985, with the aim of making it both more contestable and more competitive.

The contestability of the industry is increased by a thriving second hand market for buses (reduced cost) but decreased by factors such as remaining loyalty to local authority providers (reinforced by season tickets) and the sizable technical economies of scale that are still available (spreading fixed costs of capital over more output). Along many routes, the MES may be a large percentage of the market and it may be difficult for more than one provider to operate profitably. The risk of a predatory response from incumbent firms may also constitute a significant barrier to entry.

Competition has not always taken healthy forms. On profitable routes, there is “clustering” of buses as each firm tries to steal business by arriving at the bus stop just before its rivals, since customers are likely to board the first bus available. There has also been evidence of “overbussing” by dominant firms and price wars, both of which may have predatory intent:

2010: Premiere began to undercut incumbent Trent Barton on the Nottingham to Cotgrave route. “New” company ‘99p bus’ entered, but was later shown to be a subsidiary of Trent Barton, probably trying literally to drive Premiere out of the market.

The bus industry was investigated by the Competition and Markets Authority in 2011 and found “not to be working well”. The report found that most routes had only a single provider and that where competition was present it often took undesirable forms (see above). The PED for any given bus service was found to be below 0.5 in every case, suggesting that providers could increase revenue by raising prices and potentially exploiting the consumer. Competition between bus and rail was not a significant constraint on price making power of bus firms. Bus companies enjoyed high rates of return on capital employed, typically 13.5%, this suggesting supernormal profit. Some “remedies” were proposed such as measures to prevent “overbussing” as a predatory strategy.

8. Intellectual property

Intellectual property represents a trade-off: If it’s too generous to the creators, good ideas will take too long to copy, adapt and spread; if it’s too stingy, then maybe we won’t see the good ideas at all (Tim Harford, 50 Things that made the modern economy, BBC May 2017)

The economists Boldrin and Levine argue that patents should be scrapped: there are other advantages to innovating besides gaining statutory monopoly power. First-mover advantage is one example. Meanwhile, patents are too freely granted by governments as a result of political pressure from those who gain hugely from the patent, while the costs are spread out widely over each customer who buys the product. Boldrin and Levine thus argue that patents are a source of government failure.

Other economists, disagree, pointing towards examples such as the Medical drugs industry, where the cost of developing new medicines is enormous, but the cost of copying trivial. In 2016, global pharmaceutical R & D spend was $153.8bn (Raconteur.net), supported by the availability of patents for new drugs.

Harford suggests there may be a case for governments granting fewer patents and or shorter duration than at present.

9. Creative destruction

The rise of Uber, taking away the monopoly power of licensed taxi cab providers, can be seen as an example of creative destruction.

The failure of Kodak, which was once dominant in the UK market for camera film, is another example – the rise of digital photography is creative destruction in action.

10. Costs

Industries which have high capital and infrastructure costs offer large technical economies of scale as these essentially fixed costs can be spread over more output. The MES may be a large percentage of market output. Some industries (eg water, rail) may even be natural monopolies that can only efficiently support one firm.

Apologies that I could not find more recent data than the below:

Industry MES (% UK output) MES (% EU output) % Rise in costs at one-third MES

Integrated steel 72 9.8 10

Cement 10 1 26

Refrigerators 85 11 6.5

Bricks 1 0.2 25*

* At one-half MES.

Source: Pratten (1989) The cost of Non-Europe

The sunk costs of market entry can be reduced by the existence of a thriving second hand market for capital, as is the case in the bus industry.

Economies of scale in R & D are also huge. Since 2005, Toyota, Peugeot and Citroen have collaborated in research and development on a number of cars. For example, the Citroen C1, Toyota Aygo and Peugeot 108 have the same chassis and share many parts. This could also offer technical economies of scale in production. Each of these three cars is slightly differentiated by the manufacturer and collusion on price remains illegal.

11. Competition policy

Proctor and Gamble and Unilever fined £280m for fixing the price of washing powder in the EU market (2011).

Tobacco firms fined £225m for price fixing by Office for Fair Trading (2010)

BT fined £42m for delay in installing high speed broadband lines (2017)

Merger allowed: BT and EE (2016). Competition and Markets Authority – “Competition unlikely to be harmed as BT is a small player in the mobile market and EE a small player in broadband”

Merger allowed with conditions: 3’s takeover of O2 only allowed on condition of sale of part of the new company’s mobile spectrum (2015)

Merger blocked: The above merger was later blocked by EU competition authorities (May 2016) over concerns about competition.

Price regulation – Payday loan and mobile phone roaming charges have been capped in recent years (see also industry case studies earlier in this document)

The Asda-Sainsbury merger announced in May 2018 will be investigated by the CMA and could potentially be blocked if it fails to meet the “public interest criterion” or may only be allowed to go ahead with conditions such as Sainsbury and Asda selling some stores to rivals. In 2017, the CMA cleared the Just Eat and Hungryhouse merger after it passed the public interest criterion.

12. Objectives of firms

The objectives of limited companies may be affected by a divorce of ownership and control, such that managers have significant freedom to follow their own objectives. Ways in which shareholders can exercise discipline on the management of firms (for example to encourage them to maximise profits) include voting at the AGM or selling shares, making the company vulnerable to take-over. It may be difficult for shareholders to achieve sufficient co-ordination to achieve such discipline, however. Bertrand and Mullainathan found that companies with a large single shareholder (in excess of 5% of the shares) achieve more shareholder value than other firms.

13. Wages and pay

Median gross weekly earnings for full-time employees in UK in 2017 were £550 and median (ASHE – Annual Survey of Hours and Earnings, ONS)

Top and bottom five occupations - ASHE

Top Full timemean pay 2016

Bottom Full timemean pay 2016

Chief executives £114, 486 Sales assistants £11,372Pilots £91,678 Hairdressers £11,240Marketing directors £82,211 Retail cashiers £9,375Air traffic controllers £77,682 Care escorts £8,362Legal professionals £75,994 Playworkers £6719

FTSE 100 Chief Executives receive 147 times the average pay of their employees (High Pay Centre)

Based on median hourly pay, the gender pay gap narrowed from 16.3% in 2000 to 9.1% in 2017 (ASHE). The gender pay gap is greatest amongst 50-59 year olds (approx. 17.5% in 2014), but is now slightly in favour of females in the 22-29 and 30-39 categories. The overall gender pay gap should continue to narrow as retiring workers are replaced by new entrants to the labour market who have been educated in the era where female educational attainment has been greater than that of males at every level.

Union density for females overtook that of males in 2003. 2015 union density = 21.7% for males, 27.7% for females (ONS)

By 2015, there were 279 female directors of FTSE 100 companies, up from 163 in 2012. All companies in the FTSE 100 had at least one female director by 2015 (Cranfield University School of Management)

Between 2012 and 2016 gross hourly pay was 36% higher in Inner London than the UK average and 18% higher in the South East as a whole. Pay was 11% lower than the UK average in the North East (Spatial Economics Research Council – SERC)

14. Trade unions

Union density in 2016 = 23.5% for all employees, down from 32.4% in 1995 (ONS)

Union density = 54.8% in public sector, 13.9% in private sector in 2015 (ONS)

Trade union mark-up = 14.1% in 2015 (ONS)

788,000 working days were lost to industrial action in 2014, compared with 29.5m in 1979 (ONS)

15. Distribution of income and wealth; poverty

UK income Gini co-efficient = 0.34 (2014) compared with 0.26 in 1979. (IFS)

Measured between July 2012 and June 2014, total UK wealth was £11.1 trillion (Wealth and Assets Survey, ONS), up by 18% compared with 2 years previously.

The wealthiest 10% owned 45% of total wealth and had enjoyed a 21% increase in wealth compared with two years previously (Wealth and Assets Survey, ONS, July 2012 to June 2014)

The least wealthy 50% owned 9% of total wealth, and had enjoyed a 7% increase in wealth compared with two years previously (Wealth and Assets Survey, ONS, July 2012 to June 2014)

40% of all UK wealth is property wealth, 14% financial wealth, 10% physical wealth and 40% private pension wealth (Wealth and Assets Survey, ONS, July 2012 to June 2014)

Property (housing) wealth, especially in London, is being driven by super-rich foreign buyers, for example from Russia and China. Savills Research: 55% of all property sales in London are to international buyers.

Wealth has been boosted by QE (QE has been carried out by buying of bonds, making bond holders more wealthy; the corresponding reduction in bond yields and other market interest rates has caused investors to turn to stocks and housing, causing increases in these asset values too).

UK poverty line – 60% of median full time weekly earnings = 0.6 x £550 = £330 (April 2017)

After housing costs, 22% of the UK population had below 60% of median income in 2015-16, and were therefore living in relative poverty (Source: Department for Work and Pensions – DWP)

16. Government intervention to affect distribution of income and/or wealth and to alleviate poverty

National living wage = £7.83 for aged 25+ from April 2018. Lower rates for younger ages, down to £4.20 for 16-17 year olds and a £3.70 apprentice rate. Adult rate due to rise to £9 an hour by 2020. This will give the UK the highest minimum wage in the world relative to average earnings (Low Pay Commission)

The Office for Budget Responsibility (OBR) estimated that the introduction of the national living wage would cause there to be between 20,000 and 110,000 fewer jobs by 2020 than there would otherwise have been, although the OBR does expect overall employment growth of more than 1 million by this date.

The Low Pay Commission says sustainable increases in the National living wage depend on growth in GDP, employment, pay and productivity. Thus, planned increases may not be desirable if economic performance is weak, for example due to the uncertainty surrounding Brexit. If economic performance were weak, there would be too higher a price in terms of unemployment and damage to UK competitiveness if the national living wage were to be raised as planned at the moment.

Income tax: The tax free allowance is £11,850 for 2018-19. Philip Hammond: “Increases to tax free allowance since 2010 have lifted 4 million people out of paying tax altogether.”

The top rate of income tax was cut from 50p to 45p in the £ for each additional £ of income over £150,000. In 2013-14 HMRC figures showed that this group contributed £8bn more to taxation revenue in the year after the tax cut than they had the year before. This could be because the cut improved incentives to work as it (i) encouraged high income earners to locate in the UK and (ii) encouraged high income earners to work more hours. The cut may also have reduced tax evasion. However, the increase in tax revenue from top earners may be explained either fully or in part by the fact that the economy grew during that tax year, resulting in higher incomes and higher tax revenues.

Child benefit (a family with two children can claim almost £1800 per year) was a universal benefit until 2013. It is now means-tested such that payments begin to be reduced when one parent earns over £50,000 and is not paid at all when one parent earns over £60,000. As a result of these changes there is a high effective marginal tax rate between £50,000 and £60,000, potentially damaging incentives to work. However, the benefit is now better targeted and the change reduces government spending, thus improving the budget position.

All 3-4 year olds in England are entitled to 570 hours of free childcare or nursery education a year. This can help to encourage parents to work, as well as supporting the early learning of

children regardless of the income or wealth of the family, potentially leading to better educational outcomes later in childhood and higher future earnings potential. This could help to break the poverty cycle.

In November 2016, the total amount that a household outside of London could receive in benefit payments was capped at £20,000. The Institute for Fiscal Studies (IFS) estimates that this will save the government £100m a year. The Department for Work and Pensions (DWP) argues that “the cap provides a clear incentive to move into a job, even if it is part time” while some argue that the cap is equitable as it ensures that those who don’t work cannot receive more in benefits than the average working family. However, many question whether the cap is equitable and argue that it will lead to more poverty and disadvantage children raised in poorer households.

Inheritance tax is an example of a tax on wealth. The tax free allowance is currently £325,000 with an additional allowance of £175,000 for those who pass their homes to their children of grandchildren. This gives couples a combined allowance of £1m. Each £ of wealth beyond the allowance is taxed at 40%. Wealth taxes are criticised by some as a disincentive to save and accumulate wealth; however, they are supported by others on grounds of equity as inherited wealth may be argued to give the beneficiaries an unearned advantage relative to others.

Both the Lib Dems and Labour proposed a “mansion tax” to be paid by those owning properties worth over £2m in their 2015 election manifestos. This was widely criticised as hitting the “asset rich but cash poor” such as pensioners living in valuable homes but with low incomes, who would struggle to pay the tax.

17. Environmental market failures and government intervention

Air passenger duty (APD) is a pollution tax charged on seats sold on outbound flights from UK airports. Its lowest rate is £13 per seat, flying in the lowest class available and less than 2000 miles. The highest rate is £450 per seat, flying over 2000 miles on an aircraft with fewer than 20 seats. While helping to account for the negative external costs of flights, APD is criticised by some because(i) It is implemented in the UK but not in other countries – so may be ineffective in protecting the environment (ii) it is implemented in the UK but not in other countries so could damage UK competitiveness – could even have the unintended consequence of encouraging firms to do business in countries with weaker environmental regulations.(iii) It can be seen as inequitable, on the ground that there is no link between the amount paid and income.

The UK introduced a plastic bag charge of 5p in 2015 in order to protect the environment. Over the first six months use of plastic bags dropped by 85% (Department for Environment, Food and Rural Affairs – DEFRA)

In May 2018, the EU proposed a ban on single-use plastics.

In 2010, a typical solar panel system for an average sized house was priced at £15,000. This has fallen over time to around £6000, due to increased economies of scale in production as take-up has increased. In 2010, the government introduced guaranteed payments to those who installed solar panels and fed spare electricity back into the national grid (the feed-in tariffs – FIT – scheme). The payments were designed to give homeowners a return of £30,000 over 25 years on their £15,000 investment. The FIT rate was reduced significantly in 2016 as the government also looked towards cutting subsidies to solar farms, amid a glut of solar power in the South East.

In April 2017, the government announced that it was considering a diesel car scrappage scheme, which would subsidise owners of older diesel cars to purchase a new greener car when scrapping their existing vehicle.

The EU’s European Emissions Trading Scheme (ETS) is a “cap and trade” (pollution permits) scheme for carbon introduced in 2006. The scheme initially seemed to work well and was praised for tackling a missing market, internalising the externality and its alignment with the polluter pays principle. However, in the wake of the crisis of 2008 onwards the price of carbon permits fell dramatically. It was argued by many that too many permits had been issued (lack of government information about the social optimum) and there was concern that the price of emitting carbon was both low and volatile – only sustained high prices of carbon would encourage firms to invest in greener technologies. In 2017, reforms to the scheme were agreed, which will cut the number of permits in circulation each year until 2024.

18. Demerit goods and government intervention

From May 2017, the UK has banned sale of cigarettes in branded packages. When Australia did the same in 2012, the number of daily smokers fell by 3% points from 13% to 10%.

The UK had previously banned smoking in enclosed public places (2007). Opponents feared the unintended consequence of encouraging smoking at home, resulting in children breathing in more smoke. However, a Glasgow university study found a 15% reduction in hospital admissions for children suffering from asthma in the 3 years after Scotland banned smoking in enclosed public places. The UK banned displays of cigarettes in shops (2012).

The total tax on a packet of 20 cigarettes priced £8.50 if £6.98 according to the Tobacco Manufacturers’ Association.

Alcohol duty: The average duty on a bottle of wine is £2.08 and 55% of the price of an average bottle is duty and VAT. This compares with a duty of just 3p on a bottle of still wine in France (Wine and Spirit Trade Association)

Sugar tax: In April 2018, the UK introduced a tax on sugary drinks, of 18p or 24p per litre depending on the sugar content of the drink. In advance of the introduction of the tax, many companies such as AG Barr, the makers of Iron Bru, changed their recipes to avoid paying the tax. This is evidence of the potential effectiveness of the tax. The introduction of a similar tax in Mexico was followed by a 5.5% drop in the consumption of sugary drinks in the first year and a 9.7% decline in the second year, averaging 7.6% over the two-year period.

In May 2018, the UK government announced that the maximum stake on fixed-odds betting terminals will be reduced to £2. Currently, people can bet up to £100 every 20 seconds on electronic casino games such as roulette.

19. Public goods and government intervention

Flood defences can be considered a public good. Environmental Audit Committee Report 2016:

Floods in December 2015 caused losses of £1.3bn

The report criticised the government for its ‘stop start’ approach to flood defence funding, noting that expenditure on flood defences had initially been cut by the coalition government which came to power in 2010 but was increased in reaction to floods of 2013-14.

Maintenance of flood defences had declined in recent years, with a drop in the number of defences meeting the standards required by the Environment Agency.

The committee also noted that much of any new spending was allocated “on the basis of political calculation” rather than where it would be most effective – potential government failure through conflict of political and economic objectives? The committee also commented on the potentially unfair allocation of funding between regions.

The Environment Agency and local councils have already committed to spending at least £3.7bn on a variety of flood defence projects up to 2012, including £1.8bn in the Thames Estuary Area.

“The committee is concerned that the government does not know how prepared local authorities are for mitigating future flood events or whether their flood plans (if they have them) are fit for purpose”

Alternatives to spending on defences such as flood barriers include:

(i) subsidies to home owners to improve the “flood resilience” of their own homes; (ii) tightened regulation to prevent building of new homes on flood plains;(iii) government paying to dredge rivers to remove the build-up of silt and thus increase

the depth of rivers (the Environment Agency spent £47m on dredging in 2013, but there is considerable debate about its effectiveness).