Water Industry: Financial Resilience

Wednesday 28th June 2023 Commons Chamber

12:34

[Jim McMahon (Oldham West and Royton) (Lab/Co-op)]

(Urgent Question): To ask the Secretary of State for Environment, Food and Rural Affairs if she will make a statement on the financial resilience of the water industry.

[The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)]

Water is what makes life possible on our planet, and it is essential for our health and wellbeing, as well as for our economy, including the production of food and clean energy. The Government are taking significant steps to ensure that the water industry is delivering the outcomes that bill payers expect and deserve. Water companies have invested £190 billion since privatisation in 1989. In April, the Government published the plan for water, bringing together more investment, stronger regulation and tougher enforcement capacity for regulators in relation to those who pollute.

Ofwat and the Government take the financial resilience of the water sector very seriously. Ofwat is the independent economic regulator for the water sector and has responsibility for its financial resilience. The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and waste water companies. Ofwat reports annually on the sector’s financial resilience, and Ofwat’s latest annual monitoring financial resilience report shows that the water sector is financially resilient.

Market confidence in the sector is demonstrated by new acquisitions, such as Pennon’s purchase of Bristol Water, and by shareholders being willing to inject new capital. Ofwat has taken steps in recent years to strengthen the sector’s position. That includes action to update the ringfencing provisions in water company licences to better safeguard the interests of customers, and barring water companies from making payouts to shareholders and removing money or assets from the business if they lose their investment grade credit rating. Ofwat has outlined that water companies must be transparent about how executive pay and dividends align to the delivery of services to customers, including environmental performance. Since privatisation, total capital investment has outstripped dividends by 250%.

On 20 March 2023, Ofwat announced new powers that will enable it to take enforcement action against water companies that do not link dividend payments to performance for both customers and the environment. In December 2022, Ofwat strengthened its powers on executive pay awards by setting out that shareholders, and not customers, will fund pay awards where companies do not demonstrate that their decisions or pay awards reflect overall performance. We support Ofwat’s work, and we urge all water companies to take this opportunity to review their policies.

The scale of Government commitment to the water industry is highlighted by the integrated plan for water, and by our commitment to the financial resilience of the sector in delivering for customers and the environment.

[Jim McMahon]

Thank you, Mr Speaker, for granting the urgent question, but it is a concern that the Secretary of State did not proactively make a statement to the House on an issue of such importance. Indeed, where is the Secretary of State? One of the largest water companies in Britain is potentially going to go to the wall, and the Secretary of State is missing in action.

It was clear to anyone looking on that a culture that allowed vital investment in ending the sewage scandal and tackling water leaks to be sacrificed in favour of a goldrush for shareholders was never sustainable. Just last year, as raw human sewage was being pumped out across the country, £1.4 billion was paid out to shareholders. Now, all that was warned about is coming to pass: leaks are leading to water shortages; sewage dumping pollutes our rivers, lakes and seas; and the only thing on the up is debt, at £60 billion. The Conservative party’s cycle of privatising profit, usually for multibillion-pound foreign sovereign wealth funds, and nationalising risk is not sustainable, and neither is it a fair deal for working people.

The news we are seeing is the result of the Conservative party’s failed “profit above public interest” experiment, in which it handed over the water industry at a knock-down price to private enterprise, together with the entire infrastructure serving the nation. That was almost unique to water. For instance, when rail was privatised, the tracks were not sold off. With water, however, the lot was handed over, with few safeguards for our national interest, our national security or bill payers.

When was the Minister’s Department first made aware of the financial situation at Thames Water? Has her Department had any reason to believe that those responsible at Thames Water would not be able to meet their licence conditions or legal obligations? If this means a taxpayer-funded bail-out, how much will that cost and how will it be paid for? What assessment has she made of the liability of UK pension funds that are invested in Thames Water, and in other water companies considered to be at risk? Given where we are, will she confirm her confidence in the financial regulator? Finally, given what we see with Thames Water today, does she have concerns about any other water companies, or does she consider this to be an isolated case?

[Rebecca Pow]

In the Department for Environment, Food and Rural Affairs, we have our individual portfolios, and I am the water Minister. The Secretary of State has full confidence in her Ministers when sending them to the Dispatch Box.

The shadow Minister raised the issue of debt. For information, debt to equity fell last year by 4% in the water industry, actually making it more resilient. Since privatisation, capital investment in the water industry has been 84% higher than it was pre-privatisation—we need to get that out there and on the table.

In terms of Thames Water, it is not for me to comment on the individual financial position of a water company. We have an independent regulator that is doing that; indeed, that is what the regulator, Ofwat, is for. Water companies are commercial entities, and it is for the company and its investors to resolve any issues. The Government, of course, are confident that Ofwat, as the economic regulator of the water industry, is working closely with any company that is facing financial stress.

[Mr Speaker]

I call the Chair of the Select Committee.

[Sir Robert Goodwill (Scarborough and Whitby) (Con)]

Sewage treatment plants are all too often overwhelmed at times of heavy rain. As well as installing stormwater tanks, such as the new 4 million litre stormwater tank in Scarborough, does the Minister agree that we should do more to encourage homeowners to harvest grey water, which can buffer the effects of heavy rain, and use that for such things as flushing the toilet?

[Rebecca Pow]

I thank my right hon. Friend for broadening the scope of the debate. We are in discussions with the Department for Levelling Up, Housing and Communities—many of these issues involve working with other Departments—on grey water harvesting and better using the rain that does fall. A farmer in Devon whom I visited was collecting all the water from his farm buildings roofs to supply his animals.

[Sir Stephen Timms (East Ham) (Lab)]

In assessing, as the Minister has explained, the resilience of the water industry, what assessment is she making of the impact on UK pension funds if a major company such as Thames Water fails, as is being widely suggested in the press?

[Rebecca Pow]

There is a structure and a process for working through this matter. It is up to the individual water companies and the regulator working with them to ensure that they are resilient. That is why Ofwat reports annually on how resilient each water company is. If that flags any issues, Ofwat works closely with them, because we need our water companies to be fully functioning. We need to attract investment—a huge sum of money has been invested since privatisation, as I mentioned earlier—in infrastructure to give our customers the kind of service they deserve. We should also be mindful that it is not all piled on to customers; we have to share the load.

[Robbie Moore (Keighley) (Con)]

It is worth making the House realise that it was the Opposition who voted against the Environment Act 2021, which gave Ofwat more powers. Can my hon. Friend assure me that the water regulator Ofwat will be able to clamp down on excessive cash payouts and ensure that water companies put their customers first?

[Rebecca Pow]

I thank my hon. Friend for pointing that out. He is absolutely right: whatever the Opposition say today, one of the measures they did not vote for in the Environment Act 2021 was to enable Ofwat to hold water companies to account where they do not demonstrate a link between dividends and performance. They must have sound performance and be performing for their customers, otherwise they cannot pay out their dividends.

[Ms Karen Buck (Westminster North) (Lab)]

The staggering complacency we are hearing from the Minister will come as no comfort to my constituents who were flooded out three years ago in the west London floods, which were the second 100-year event in less than a decade. If Ofwat has been doing such a good job in holding the water companies to account, as she is now apparently telling us, why are we in this situation? What exactly has Ofwat been doing?

[Rebecca Pow]

It has to be remembered that privatisation occurred in 1989. We have had a succession of different Governments during that time, and it has been this Government who have accelerated clamping down on water companies and opening up transparency. The hon. Lady asks what Ofwat has done, and I will name just a few things. Since 2020, Ofwat has updated the licences so that if a water company loses its investment credit rating, it is barred from making payouts to shareholders. In July 2022, it set out additional proposals to increase financial resilience, including companies having a stronger credit rating. In March, it announced that it would take enforcement actions against water companies that do not link dividend payments to performance. We have done more than any Government before to ensure that we have a fully functioning, strong regulator.

[Philip Dunne (Ludlow) (Con)]

On financial resilience, has the Minister taken the opportunity to consider the hotchpotch of policies coming from Opposition Front Benchers on the subject? Under their prescription, they would seek to take all the profit of water companies to invest in capital expenditure. That would undermine the financial resilience of those companies that rely on private capital for investment in tackling this problem. In the one part of the country where Labour does have responsibility—Wales—has she noticed that the sewerage overflows are almost double the rate per overflow pipe as in England?

[Rebecca Pow]

I thank my right hon. Friend for pointing that out; I cannot support more strongly what he said. We have a private system, and Ofwat says that it is financially resilient. We need investment in these companies to make them function properly. Obviously, we need to hold the companies to account, but we need to see enormous investment. Everything in the Government’s plan for water, including the storm overflow discharge reduction plan, is fully costed. We are not pulling the wool over people's eyes; we are telling them clearly what this will mean and how it will deliver the water services that we need.

[John Cryer (Leyton and Wanstead) (Lab)]

Thames Water, which is on the verge of going under, provides a quarter of the population with their water supply. When was the Minister told about its financial plight? What is the plan if the worst comes to the worst and it does go under?

[Rebecca Pow]

The hon. Member is right that Thames Water supplies an enormous part of our population. Ofwat has been working closely with Thames Water, as it does all water companies, and the Government work with Ofwat, giving it our strategic policy statement on what its priorities will be. Overall, the water companies are considered resilient, and much work is going on behind the scenes with Thames Water to ensure that customers will not be affected. If necessary, there is a process in place to move us to the next stage.

[Sir Robert Buckland (South Swindon) (Con)]

Swindon residents will be concerned about the future of Thames Water, so I ask my hon. Friend please to keep me and colleagues updated on any issues relating to that. Underlying this issue, Labour’s model will clearly never work—we must understand that only the private sector will be able to invest. [Interruption.] Labour Members bleat now, but they did nothing about it when they were in government. Is the point not that where we have in effect a private monopoly, the regulator must be as effective as possible? Will my hon. Friend do everything possible to ensure that Ofwat is working in the full interests of customers? Aspects of its operation do not seem to pass that test.

[Rebecca Pow]

I thank my right hon. and learned Friend. Thames Water is a big water company that delivers on a wide scale. Ofwat is working very closely with the company on its plans, which will be looked over and submitted, and accounts will be submitted in due course, so that we have a resilient pathway. Customers, including his constituents, should rest assured that both their water and wastewater supplies will be protected.

[Clive Efford (Eltham) (Lab)]

This privatised industry knows that, at the end of the day, the banker of last resort is the British taxpayer. That is exactly where we are with Thames Water, which has been taking profits for the last 35 years and not investing for the future. Regardless of what went on before, we must have investment in what is in front of the industry, but Thames Water has failed to plan ahead. It has taken money but not done the job expected of it while being in charge of such an essential public service. What will the Government do to protect consumers and ensure that we plan ahead for the industry?

[Rebecca Pow]

Ofwat is the independent regulator and, as the hon. Member will know, the Government direct it through the strategic policy statement. It is Ofwat’s job to ensure that in the price review, when the water companies submit their plans—they are going over the draft plans now—they demonstrate that they will deliver on the Government’s targets on storm overflows, leakage and demand reduction. It is for Ofwat to ensure that companies will be resilient in delivering that infrastructure. There is a firm structure in place. Ofwat also constantly monitors companies’ gearing—debt-to-equity—levels, and the Government are confident that the regulator is taking reasonable measures to challenge companies to reduce those gearing levels where appropriate.

[Richard Fuller (North East Bedfordshire) (Con)]

About a quarter of the country’s economic output is in sectors under regulators, including the water industry. With Ofwat and in other sectors with Ofgem and the Financial Conduct Authority, we have seen regulators not performing to the standards that the public, or indeed industry, would expect. If we are honest, we in this House and in Parliament do not have the toolkit to assess regulators’ performance on a systemic basis year in, year out. Will my hon. Friend work with ministerial colleagues to see whether we can improve the regular oversight of regulators such as Ofwat so that we can take a more rounded view on such issues, rather than have them come through urgent questions as brought by the Opposition?

[Rebecca Pow]

I thank my hon. Friend for that. It is essential that we have fully functioning regulators. Since the Government came to power, Ofwat has done an enormous amount to streamline what it does, improve transparency, change licences and make changes so that dividends are not paid if any environmental damage is being caused. The Government have directed that through the strategic policy statement. Indeed, our targets will ensure that the regulator enables the water companies to put the right measures in place. He is right, however, that one should never be complacent, and if things need to be improved through the regulators, they should happen. But I assure him that a big effort is being made.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

Many of my constituents are hugely worried about reports of Thames Water being on the brink and what that could mean for their bills. Thames Water has been managed appallingly: leaks have not been dealt with, sewage has been continually dumped and the former chief executive officer Sarah Bentley needed to be asked to forgo her bonus. All the while, the Government have been missing in action. Why are the Government yet again running to catch up—nothing in the Minister’s statement gives confidence that they have a grip—with our constituents paying the price?

[Rebecca Pow]

Where water companies underperform and do not meet their targets, a process is in place whereby basically they have to credit the money back to their customers. Last year, £143 million was credited back in that respect. So the regulator does have the tools to do that. It has tightened up so many of its measures, all of which will affect all the water companies.

[Robert Courts (Witney) (Con)]

The Minister will not be able to comment on Thames Water’s finances in detail, but can she assure my constituents, who will be really worried, that, whatever happens, their day-to-day services will be protected and the much-needed upgrades will still be delivered?

[Rebecca Pow]

I thank my hon. Friend for that. He is right that customers come first, and Thames Water customers will be assured their water supplies and wastewater services. I am happy to meet him to discuss that.

[Munira Wilson (Twickenham) (LD)]

Residents in Twickenham, Teddington and the Hamptons will be extremely worried to hear that Thames Water is on the brink of collapse, but they are also fed up to the back teeth with this company. Not only does it pump sewage into our precious River Thames, but recently we have seen sewage flooding our streets at times of flooding from rainfall, and there are now plans to pump treated sewage into the Thames at times of drought. That is indicative of the company’s underinvestment in fixing leaks and being stripped to the bare bones while lining executives’ pockets. All the while, the Government have been missing in action and the regulator has failed. Will the Minister back the Liberal Democrats’ proposals to reform water companies into public good companies, transforming their boards and priorities in the interests of the environment and consumers?

[Rebecca Pow]

I will highlight the Thames super-sewer—it will be ready to open in the not-too-distant future—which is a tremendous project for the people of London, including many of her constituents. We have a privatised system, whose financial resilience, as I have reported, has increased rather than decreased in the last year. These companies attract money from investors so that we can get what we need. The Government have costed plans. The Liberal Democrats have no costed plans for what they suggest they might do with the water companies, nor plans for where the money will come from.

[Duncan Baker (North Norfolk) (Con)]

It is worth pointing out to Opposition parties that 93% of all UK coastal bathing waters meet good or excellent conditions. In North Norfolk we have lost three blue flag beaches, which went from excellent to good. But guess what? There is not a single reason why they lost that flag. Under the Environment Agency’s marking, it looks like it is down to not combined sewage overflows but entirely natural phenomena. Could the Minister help me get my blue flags back and hold the Environment Agency to task, to ensure that it has a proper testing regime that transparently shows that we have excellent bathing water quality all over North Norfolk?

[Rebecca Pow]

I thank my hon. Friend for raising the issue of bathing water quality. Since privatisation we have virtually the best quality water coming out of our taps of almost anywhere in the world. We also have phenomenal results for our bathing water areas—93% are classed as good or excellent. He has concerns about his area, but I hope those beaches will soon be back up to blue flag status. The Environment Agency works closely on individual cases where concerns have been highlighted. I am happy to put him in touch with the Environment Agency or work with him to find out what those individual cases were, so that we can get those beaches back up to the fantastic standard that they deserve.

[Andy Slaughter (Hammersmith) (Lab)]

Today, not for the first time, most of my constituents have little or no water supply. Two years ago, not for the first time, hundreds of my constituents had their homes flooded with raw sewage. Year after year, Thames Water has failed its customers while obscenely rewarding its management and shareholders. No one will miss the asset strippers at Thames Water if it goes under. All we want is working infrastructure and good customer service at a reasonable cost. Is that too much to ask?

[Rebecca Pow]

That is what we want for all our customers. That is why we have launched our plan for water to pull everything together to ensure that we deal with any pollution incidents, water supply issues and the future of the water industry. It is why we have set our targets and produced our storm sewage overflow plan, and why the water companies will have to spend £56 billion on capital investment by 2050 to address that. Every water company, including Thames Water, has to make an action plan for each of its storm sewage overflows. Thames Water will do that.

[Dame Angela Eagle (Wallasey) (Lab)]

When they were privatised, water companies had all the debt written off, so they started with zero. Since then, they have borrowed £53 billion, much of which has been used to help pay £72 billion in dividends. The investment has been made by borrowing and putting it on to customers’ bills. Now, the ratings agency S&P has negative outlooks for two thirds of the UK water companies it rates, because they are over-leveraged and took out too much debt in an era of low interest, which they now have to pay back. This is not a triumph but a huge problem for the resilience of our water industry. What will the Minister do when water companies start falling over?

[Rebecca Pow]

For information, Thames Water itself has not paid any dividends for the last six years. Ofwat will rightly hold companies to account when they do not clearly demonstrate the link between dividends and performance. We made that possible through the landmark Environment Act.

[Caroline Lucas (Brighton, Pavilion) (Green)]

I want to bring the Minister back to the figures we have just heard. Water companies had no debt when they were privatised. Since then, they have borrowed £53 billion, and much of that has been used to help pay £72 billion in dividends. Meanwhile, we have an appalling sewage scandal, particularly in the south-east of England. The failing company Southern Water, which my constituents have no choice but to rely on, is considering raising bills by £279 per year by 2030, largely to pay for the investment that it should have been making in previous years. Does that not show that the privatisation of water was a serious mistake that needs to be permanently rectified?

[Rebecca Pow]

Privatisation has enabled clean and plentiful water to come out of our taps. It has unlocked £190 billion of funding to invest in the industry. That is the equivalent of £5 billion annually, and is double what we had pre-privatisation. I am not saying that there is not still a lot of scope for improvement. I have stood at this Dispatch Box many times, as has the Secretary of State, to say that some actions of water companies are completely unacceptable. That is why we have introduced the storm overflow plan and our plan for water.

[Mr Khalid Mahmood (Birmingham, Perry Barr) (Lab)]

As two Members have said, funding and loans to the water companies are a huge issue, as that is where they have paid their dividends from. On shareholders, we have foreign investors taking huge amounts of money away from this country, and we need better fund managers who are able to assess where they put their money. They should be held accountable, too.

Ofwat has not been doing what it is supposed to do. I believe that the chief executive of Ofwat applied for a job at Thames Water. That shows what the companies are doing and how Ofwat works with them—rather than scrutinising them, people are looking for the next job. We have to stop that and stop my constituents paying more for water. They need decent water in their homes and in the environment around them. That is what we want the Government to ensure. This Tory policy has failed for years.

[Rebecca Pow]

I am not sure what the question was. We want the same things: value for customers, and clean and plentiful water. We want to hold the water companies to account. We want them to invest the money needed to deliver the right services. That is why we have a plan for water, our targets and the measures in the Environment Act. It is why the regulator Ofwat has taken all the actions I mentioned to increase the transparency of water companies and to ensure that money is not being paid out if there is any environmental impact or performance negativity.

[Mr Clive Betts (Sheffield South East) (Lab)]

In the last year, a number of my constituents on the Westfield estate have had their homes and gardens flooded with raw sewage. Yorkshire Water accepts that it is its sewage, but does not accept responsibility to help with the clean-up. Will the Minister look at the legal position to ensure that water companies are held accountable? In the meantime, we should put pressure on Yorkshire Water and others to pay for the clean-up that my constituents are having to fund themselves.

[Rebecca Pow]

The hon. Gentleman will know that we have put huge pressure on the water companies, which now have to invest £56 billion in infrastructure to deal with sewage issues. If he wants to meet me to talk about that issue, I will be happy to.

[Dan Jarvis (Barnsley Central) (Lab)]

Back in January I asked the water Minister whether she thought that the current system of regulation was fit for purpose, and she said yes. I ask her again: does she still think that it is?

[Rebecca Pow]

Yes.

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

Water companies were sold with no debt when they were privatised in 1989. In fact, they were given a £1.5 billion green dowry by the Government. Since then, they have taken on borrowing of £60.6 billion, diverting income from customer bills to paying dividends and interest payments. As a result, water bills have increased by upwards of 40% in real terms. Does the Minister honestly think that consumers hail privatisation as a success?

[Rebecca Pow]

Ultimately, the customers pay for investment in the industry, but over a very long period, as the hon. Lady will know. If a company did not pay out dividends it would struggle to get access to finance to fund future investment. That would limit the level of investment and have an impact on future customers. Companies have to pay up front for a lot of that investment, because they need to secure a large amount of funding to pay for it. To avoid customer bills increasing drastically to pay for that, companies have to secure the money by raising debt or equity. She knows how it works. The regulator has to ensure that that system is fully functioning, the water companies are resilient and we have all the resilient water supply that we require.

[Kerry McCarthy (Bristol East) (Lab)]

It has been reported that the companies are drawing up their business plans for 2025 to 2030 and that, on average, they are looking at a 25% increase in bills. Given what we have heard today, would billpayers in my constituency not think that rather than paying extra to water companies, they may as well just flush their money down the drain for all the good it will do to improve water quality, services and investment in infrastructure?

[Rebecca Pow]

All those plans are being assessed right now. The draft plans go to Ofwat, where they are analysed with a fine-toothed comb. All the things I have mentioned today will be scrutinised, so that we can deliver the infrastructure that is needed and have the clean and plentiful water supplies we require as well as a clean and healthy environment, with no undue impact on customer bills. All those things have to be taken into account to deliver the water supplies that the people we meet and the people we serve deserve.

[Mick Whitley (Birkenhead) (Lab)]

The British public should not be asked to cover the cost of failures by the water monopolies and their shareholders. They have borrowed extensively to pay dividends while failing to make necessary investments in infrastructure and resilience. Does the Minister agree that if the Government are compelled to take Thames Water into public ownership, it should stay in public hands?

[Rebecca Pow]

I am not aware of the situation the hon. Gentleman is referring to. Ofwat is working very closely with Thames Water to ensure that the business is viable, that customers are not impacted, and that water supply and waste water services are delivered. As I mentioned, Ofwat has strengthened many measures so that we have a much more resilient industry in the future. Indeed, those changes and the fall in the debt to equity ratio demonstrate that we do have a more resilient industry.

[Richard Foord (Tiverton and Honiton) (LD)]

We have seen bonuses and dividends put ahead of investment in infrastructure or maintaining sufficient reserves. Our area of Devon and Somerset is covered by South West Water; the company has paid out £112 million in dividends this year, despite having just £144 million in reserves, which is £2.5 billion less than it had two years ago. This week, a water firm chief executive officer has resigned, but no Conservative Minister has ever taken responsibility. When will a Conservative Minister finally take responsibility and get a grip, or step aside?

[Rebecca Pow]

As the hon. Gentleman knows, Ofwat has announced new measures to enable it to take action against water companies that do not link dividend payments to performance. That is just not happening. I think he needs to look again at some of the stats he has just quoted, because I think they might relate to the wider Pennon Group. I have just visited South West Water to have a really forensic look at its systems and how it delivers water. That is what we do with our water companies. It is Ofwat’s job to hold water companies to account, and it has just got measures through the Treasury so that it has another £11.3 million to tackle enforcement.

[Jim Shannon (Strangford) (DUP)]

I thank the Minister for her answers. We are ever mindful that house building is important, and development opportunities are critical to the future as well, so with developers being charged more and more to connect to the network but facing delays in those connections being installed, what plans does the Minister have to make the connection system for new developments more affordable?

[Rebecca Pow]

The hon. Gentleman raises an important issue. We always have be mindful of costs, not just to customers through their bills but to developers building houses. We are working closely with the Department for Levelling Up, Housing and Communities on a range of measures and on its planning guidance, so that we can tackle a range of issues connected to water, working with developers on things like rainwater harvesting and sustainable urban drainage systems, which will really help the whole of our water infrastructure.

[John Cryer]

On a point of order, Mr Speaker. I think the Minister may have inadvertently misled the House. She said clearly that Thames Water has not been paying out dividends. The reality is that Thames Water has not been paying out dividends in the usual way, but it did pay dividends last year to the parent company, so it has been paying out dividends.

[Mr Speaker]

Does the Minister wish to respond?

[Rebecca Pow]

Yes, Mr Speaker. I will check the wording, because I would hate to mislead the House. If I have inadvertently said something incorrect, I will happily put it straight on the record.

[Mr Speaker]

Right.