SEPA's funding problems came into the open two months ago when it revealed that its expenditure plans had been thrown into disarray by opposition from the Treasury to its application to reclaim VAT on its "non-business activities" - those functions which it is required to carry out by law.
SEPA's budget - £28 million for the current year - was based on the assumption that the application would be allowed. Its main predecessor bodies - the river purification boards and local authorities - had been allowed to claim VAT refunds on non-business activities under section 33 of the Value Added Tax Act 1964.
The right to VAT refunds is held by bodies which are entitled to precept on local taxation. What neither the Scottish Office nor SEPA appear to have appreciated is that the Agency would not inherit that right from its predecessors because it is funded wholly by grant-in-aid and charges on industry.
SEPA's position is different from that of the Environment Agency. The latter has wider functions, including flood defence, for which it receives substantial sums from local authorities which made it eligible for section 33 status.
SEPA's attempts to obtain section 33 status have been refused by the Treasury for well over a year, and the change of Government has not brought a change of heart. On 19 June, the Financial Secretary to the Treasury, Dawn Primarolo, said in a parliamentary answer that she had "no plans to allow SEPA to claim VAT refunds in respect of its non-business expenditure. Tax liabilities of publicly funded bodies are taken into account when setting levels of public expenditure in Scotland."
The latter claim has been rejected by SEPA, whose budgetary plans have assumed that section 33 status would be allowed. Because it has not been, its accounts for 1996/97 are in deficit by "well over" £1 million, a spokesman told ENDS. The shortfall, together with VAT payments for the present financial year, will have to be found from the 1997/98 budget. The sum involved is "between £2.5 and £3 million", according to Dr Geoff King, Director of Corporate Services.
Roseanna Cunningham (SNP, Perth) took up the cudgels on SEPA's behalf during the Commons debate on 25 June. The Agency, she said, "needs a commitment to more money or, alternatively, a decision to allow it to reclaim VAT in the same way as its sister body in England and Wales. Scotland will regard anything less as the Government undermining environmental protection. It will show that the Prime Minister's words [at the Earth Summit II meeting] in the United States on the environmental crisis facing the planet were nothing more than empty rhetoric and an attempt to spin a feel-good story for the UK press."
The funding shortfall, Ms Cunningham said, has forced SEPA to put a freeze on recruitment, halt all capital expenditure and slash environmental monitoring "around factories, sewage works, nuclear plants and fish farms."
The Agency's eastern region has suspended monitoring of pollution incidents outside office hours, halved inspections of landfills, and scrapped air sampling around industrial sites. In its western region, plans to clean streams and introduce flood warning systems have been abandoned. Other knock-on effects include a reduction in radioactivity monitoring because of the cost of investigations of radioactive contamination around the Dounreay nuclear facility.
Junior Scottish Office Minister Malcolm Chisholm held out no hope of any help for SEPA. Replying to the charge that it had always been assumed that the Agency would be able to recover VAT, he said that he could not speak for the previous administration, but "understood" that SEPA's budget "was intended to enable it fully to deliver its functions and to meet its obligations." Financial constraints were "a fact of life" for all public sector bodies.
The Minister contested Ms Cunningham's claim that SEPA's cash shortfall amounts to £2.7 million on the grounds that it would be about £1 million in a "normal" year - though 1997/98 will clearly not be normal because of the VAT liability inherited from last year.
Despite his earlier reassurances that SEPA will be able "fully to deliver its functions", Mr Chisholm closed by distinguishing between its "core" and other functions. The core functions are water, waste and air pollution regulation and advising on flood risks.
The core functions include the availability of out-of-hours and emergency cover, according to the Minister. This has been suspended in the eastern region, and, according to Andrew Welsh (SNP, Angus), residents on a housing estate in Arbroath who are living in an "atrocious" environment caused by a long-standing air pollution problem cannot contact anyone at SEPA at weekends. Mr Chisholm replied that this was an "operational matter" for the Agency.
The Government was "committed to providing adequate funding for SEPA's core functions," said Mr Chisholm. But non-core activities, "including assessments of the general state of the environment and appropriate research and development, "are desirable, rather than essential, activities, and progress with them is not allowed to undermine SEPA's core business." In fact, SEPA has a duty under section 37 of the Environment Act 1995 to arrange for "research and related activities" on "matters to which its functions relate."
Moreover, there is considerable doubt whether SEPA will be able to carry out even its core functions this year. The Director of its western region, John Beveridge, told ENDS that the effects of a £600,000 cut in its anticipated £8 million budget for this year would be "very serious". "Surveys, analyses and inspections will take longer, and we may be unable to meet statutory inspection frequencies and consent turn-around times," he said. SEPA has not ruled out increases in its charges on industry to make up part of the shortfall.