One of the many big challenges facing the government is the state of our water industry. Over the last few years there has been great public outcry about the poor condition of our rivers and beaches, polluted by inadequate infrastructure, agricultural runoff and illegal discharges of sewage. Only 14% of English rivers are ecologically healthy, and none is chemically healthy.
Since privatisation, most of our water companies have been acquired by foreign-owned companies, which have borrowed heavily and paid large dividends to shareholders. Investment in infrastructure is far less than needed to maintain, let alone improve, water quality. Meanwhile, customers’ bills have continued to rise. The largest company, Thames Water, hovers on the brink of bankruptcy.
The public has been concerned that reporting of pollution incidents is inadequate, and that water companies have been rewarding Chief Executives and Directors despite poor (often very poor) performance. In its 2024 manifesto, the Labour Party argued that water company executives were failing to protect the environment by allowing waterways to be polluted with sewage, and that there were no appropriate penalties when they allowed this to happen.
The government has launched a major Water Commission to review of the water industry as a whole, but they have introduced a new Bill to deal with some of the most urgent issues.
The Bill
The Water (Special Measures) Bill was introduced in the House of Lords in September. It would make major changes to the regulation of the private water companies which provide water and sewerage services in England and Wales. It has five main elements, and if passed by Parliament it would:
- enable the regulator (Ofwat) to block bonuses to chief executives and directors if water companies fail to meet specific standards
- establish new statutory requirements for water companies to publish annual pollution incident reduction plans and provide timely and accessible information on sewage discharges from emergency overflows
- change the maximum sentence available for impeding investigations by regulators to include imprisonment
- enable the introduction of new automatic penalties for offences committed by water companies and give regulators (Ofwat, the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate) new powers to recover costs for their enforcement work
- make changes to the special administration regime for water companies to ensure Ofwat and government ministers are notified ahead of any winding up petitions
The Lords debate
The Bill was introduced in the House of Lords, and completed its final stage there (Report Stage) on Wednesday (20th). Over four hours, they considered 65 amendments, half of them proposed by the government in the light of previous debate. Most were agreed or rejected without a formal vote, but there were votes on four amendments which the government opposed. Two of these were rejected: the first which would have prevented the limits on performance related pay from taking effect in the current year; the second would have required all water companies to take account of the views of environmental groups alongside consumers.
However, the government was defeated on two amendments. The most significant was proposed by Lord Cromwell, one of the Hereditary Peers who will lose his seat under the government’s plans for Lords Reform. It requires companies to report on financial engineering. This is a response to the practice of many companies of borrowing heavily in order to pay dividends and bonuses, rather than investment. The second government defeat was more technical, and would prevent the block on performance related pay applying to anyone below Board level.
Overall, there was little disagreement about the principles of the Bill, but some Peers were clearly sceptical about the extent to which the government is relying on Ofwat to manage and enforce the changes which they want. Labour Lord Sikka expressed this powerfully:
The executives of Ofwat pass through revolving doors and join the water companies with dizzying speed and great regularity, undermining the independence of the regulatory bodies. … At the moment, a director of Ofwat, a former Conservative Minister, is spearheading a campaign that would make it harder for consumers to sue water companies that breach legal sewage limits. …. The same Ofwat director is a paid adviser to the lobbying firm Global Counsel, which works for the industry body that represents all the UK’s big water companies and has carried out work for the anti-class action campaign. Clearly no Ofwat director should be doing this kind of work. Their job is simply to safeguard the consumer interest.
Should we be pleased?
The government sees this Bill only as a first step towards solving the major long-term problems of the water industry, which are to be addressed by the Water Commission. Introducing the Bill in the Lords, the Minister, Baroness Hayman, said:
Many people have been outraged that rich executives and directors are able to exploit their monopoly power to make personal profits, while raising water bills and allowing water quality to deteriorate. Those people will gain some satisfaction that legal powers are in place to punish these individuals, although, it is possible that some will have left before the Act comes into force.
Alongside providing the regulators new powers to take tougher and faster action through the Water (Special Measures) Bill, the Government has also announced a full review of the water system. This will shape further legislation that will fundamentally transform how the current system works and clean up our rivers, lakes and seas for good.
Punishing wrongdoing is well and good, but there is concern about how firmly the regulators will enforce these provisions. As with all regulation, there is a danger that the regulator becomes too close to the regulated. Because they often share a professional culture, and technical expertise, they may be unduly sympathetic to the technical and financial difficulties.
And this Bill will not solve the massive financial problems facing the system, some of which derive from the problems of privatising a natural monopoly in an essential service. Whoever is running the service, government cannot allow the water supply to stop. But Ofwat estimates the cost of restoring a clean water system as £88bn. Private investors have little appetite for such large investments with small returns. Ofwat estimates that charging the public would add £19 a year to the average water bills, but the companies think it would be much higher.
One popular solution would be to renationalise one or more of the companies (as is happening with railways). Some have argued that, since the companies are technically insolvent, the costs of compensation to shareholders might not be large, but the government thinks it could be as high as £99bn. And even if that was affordable it is difficult to see how the state could then undertake the necessary work to restore the system.
One piece of the jigsaw
The Bill has now left the House of Lords, and will go to the Commons for consideration. Given the level of public concern and the size of the government majority, it is unlikely to be seriously amended, although some of the issues raised by the Lords seem likely to resurface there.
One piece of the picture is being reformed, for which we should be grateful. But the big picture remains a problem.
