Water and Sewage Companies: Directors’ Remuneration
(10 months ago)
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Lord Sikka
To ask His Majesty’s Government what plans they have for reforming remuneration of the directors of water and sewage companies operating in England.
Lord Sikka (Lab)
My Lords, it is a pleasure to open this debate. Privatisation of water in England has not yielded the promised benefits to the people, but directors of these companies are highly rewarded for inflicting at least five major harms to customers, the environment, taxpayers and society generally. First, in pursuit of private profits, more than 1 trillion litres of water are lost to leaks from crumbling infrastructure each year. Secondly, tons of sewage are dumped in rivers and seas, threatening human health, marine life and biodiversity; only 14% of rivers in England have a good ecological status, and no rivers have a good chemical status. Thirdly, customer bills in England have risen in real terms without commensurate increase in quality of service. Fourthly, investment in infrastructure has been very low. Fifthly, companies are habitual tax avoiders. In the words of a man called Michael Gove, who gave a speech on 1 March 2018:
“Last year Anglian, Southern and Thames paid no corporation tax. Indeed Thames has paid no corporation tax for a decade. Ten years of shareholders getting millions, the chief executive getting hundreds of thousands, and the public purse getting nothing”.
Little has changed since 2018. It is more of the same. England’s nine major water and sewage companies are more than 90% owned by overseas investors scattered across China, Hong Kong, Singapore, the Caymans, Qatar, the UAE and elsewhere. They have little or no physical contact with polluted rivers and crumbling infrastructure and have done absolutely nothing to curb undeserved executive pay. Their main concerns are returns and dividends. Since privatisation, around £75 billion has been paid in dividends, funded by debt and squeezes on investment.
Puny fines have not curbed the lust for bigger profits, pay packets and bonuses. Since 2010, Anglian Water has been sanctioned 74 times and fined £6.2 million. Thames Water has been sanctioned 98 times and fined £175 million. Yorkshire Water has been sanctioned 94 times and fined £109 million. Severn Trent has been sanctioned 82 times and fined £8 million. United Utilities has been sanctioned 215 times and fined £6.6 million. Despite these offences, the directors are rewarded and their pay packets keep getting bigger. According to data published by the Liberal Democrats—I must give credit where it is due—in 2021, 2022 and 2023 executives of water companies in England collected remuneration of £70 million, including nearly £41 million in bonuses. Why are these bonuses paid? Is it not the duty of directors to provide clean water, plug leaks, ensure water security and the proper disposal of wastewater, and renew infrastructure? If it is, there is no case whatever for giving them bonuses.
People are concerned about undeserved rewards at water companies, so the Government periodically soothe public anxieties with promised reforms. For example, on 1 March 2018 the then Environment Secretary, Michael Gove, lamented excessive executive pay at water companies, but absolutely nothing changed. On 3 July 2018, in a paper titled Consultation on Revised Board Leadership, Transparency and Governance Principles, Ofwat promised greater transparency over executive pay, but it remains elusive. In June 2023, Ofwat said that it would review bonus payments, and it repeated that on 8 November, but nothing changed.
On 11 February 2024, the Government announced they are considering banning bonuses for directors
“if a company has committed serious criminal breaches … That could include successful prosecution for a Category 1 or 2 pollution incident—such as causing significant pollution at a bathing site or conservation area—or where a company has been found guilty of serious management failings”.
Those words are quite interesting. Words such as “could” are vague—not “will” or “must”—and the emphasis is on multiple breaches and failings. How many do there need to be before the Government think that something needs to be done? Ripping off customers and taxpayers is simply not considered a failing in the Government’s thinking, although most people absolutely are concerned about it. I am sure the Minister will tell us more about it.
What if pollution is deadly but not criminal as defined by law? After all, the Government have authorised these companies to continue polluting rivers until 2050. I hope the Minister will tell us why, after 14 years of doing nothing, the Government are now making some vague gestures in the year of a general election.
Ofwat, which has presided over degradation, is somehow now expected to enforce curbs on bonuses. Ofwat is a failed and conflicted regulator. Two-thirds of England’s biggest water companies employ key executives who previously worked at Ofwat. In a letter to the Ofwat CEO, dated 21 February 2024, the Environment, Food and Rural Affairs Committee expressed strong concerns that Ofwat cannot exercise its full range of powers as they are now, because that might affect the stability of the sector and upset water companies. How do the Government expect it to deal with bonuses and executive pay? I hope the Minister will expand on that.
The Government have done nothing to create pressure points for honest, ethical practices by addressing the shortcomings of the shareholder-centric model of corporate governance, enhancing democracy or empowering long-suffering stakeholders in water companies. I will sketch out what I think needs to be done.
Whether water is owned privately or through a not-for-profit company, we need durable reforms grounded in democracy and public accountability. First, remuneration contracts of water company directors should be publicly available so that everyone has a clear idea of what they are getting. The sanitised snippets in the annual accounts—which I have read—are very economical with information and rarely mention that chauffeur-driven cars and private school and medical fees also form part of executive pay packages. There is complete silence on these things. I have this from an insider, by the way.
Secondly, all customers should be empowered to vote on executive remuneration policy and amounts. A 51% vote should be needed to approve directors’ basic pay. If directors have polluted rivers, did not plug leaks, did not invest adequately or exploited customers, it is extremely unlikely that they will get their pay. Customers will simply not reward them for it. This is a powerful pressure point for securing socially responsible practices.
In addition, if bonuses are to be awarded for what I call extraordinary performance, there needs to be extraordinary approval for those bonuses. That would mean that at least 90% of customers must approve the bonus. This is a fairly common standard for approving bonuses in places such as Sweden. They are not simply handed out willy-nilly because somebody thinks they deserve it.
I am sure the Minister will oppose my suggestions—I am quite prepared for that—but for the last 35 years, Ofwat and Governments have failed to tackle the scandal of excessive pay for the poor performance of water companies. We need to empower and trust the people. If the Minister disagrees with empowering people, I hope he will tell the House why people cannot be trusted but some administrator at Ofwat can be, even though it has failed ever since privatisation.
Baroness McIntosh of Pickering (Con)
My Lords, I start with my declaration of interests, as on the register. I am co-chair of the All-Party Parliamentary Water Group. Last year, I undertook to chair a study organised by CIWEM, the Chartered Institution of Water and Environmental Management, into bioresources strategy. For a number of years, I worked with the water regulator for Scotland, the Water Industry Commission.
At the outset, I congratulate the noble Lord, Lord Sikka, on securing this debate, and on his forensic examination of the subject. I, for one, think that privatisation has been a success. We can always improve upon it, and that is the purpose of today’s debate. It has delivered benefits, but there is always cause to look at the regulation.
I applaud the Government for the action they have taken on holding directors to account, particularly the instruction they have given to Ofwat and the work Ofwat has done on executive pay. It has been very clear that companies need to demonstrate that performance-related executive renumeration is linked to performance for customers and the environment. In June last year, Ofwat confirmed that, where companies do not so demonstrate that executive pay is linked to performance, it will stop companies recovering the cost of bonuses from customers. So, one of the points the noble Lord raised has already been addressed by both the Government and Ofwat. I look forward to hearing from my noble friend the Minister about what further action is envisaged.
Water companies have a public role to play in other areas, such as flood defences, particularly by working with farmers and others. I will spend some time outlining how that work could be done. If we are to follow through the thrust of the title of this debate and link renumeration to performance, I hope that my noble friend the Minister and his department will look at the corollary of that: giving water companies the tools to do the job. The Government promised in this place and the other place that Schedule 3 to the Flood and Water Management Act 2010 will be implemented, as it has been implemented in Wales. Will my noble friend tell us today, or in writing after the debate, what the programme is for that?
It is extremely important that we stop the automatic right to connect, whereby water companies are expected to connect pipes from three, four or five-bedroom homes to antiquated Victorian pipes that simply cannot take the amount of wastewater and sewage coming out of new-build houses. The Government must insist on mandatory SUDS—sustainable drainage systems—for all new builds, and I hope they will also commit to an ambitious programme of retrofitting sustainable drains to existing developments. Obviously, that raises the difficult question of who will maintain the SUDS, and I can well imagine that that might be the cause of the delay we are suffering in implementing Schedule 3. If my noble friend could report back on that, that would be immensely helpful.
The Government also need to attack the vexatious problem of building on inappropriate places such as flood plains. Building on flood plains is increasingly having the undesirable effect of mixing sewage with floodwater in combined sewers, which then pollutes existing developments. That has very negative public health consequences, causing people living there to leave. Will the Government also look carefully at making national highway authorities, not local authorities, responsible for water run-off from the major highways, which mixes with the combined sewers and is an additional source of flooding?
Will the Government also look favourably on rewarding farmers for storing water on flood land? According to the NFU, over half the best, most fertile farmland in Britain is flood plains. The farming community and landowners are performing a public good by preventing communities downstream flooding. However, there is great uncertainty as to how farmers can benefit from public funds. The NFU is seeking urgent clarification from Defra as to who will be eligible to apply for both the flood recovery framework and the farming recovery fund, and what level of damages can be recovered. Equally, there should be a simple recognition of the public good that farmers deliver in that regard.
I am very keen on and excited by the prospect of introducing more private sector funding from both farmers and water companies. Will my noble friend the Minister and his department look at that? That could include a whole-catchment area approach, and more Slowing the Flow schemes such as those successfully implemented in Pickering, protecting downstream communities from flooding.
I welcome the level of investment announced in the five-year business plan that Ofwat has yet to approve. It will factor in £96 billion in the next investment period, 2025-30, of which £11 billion will be allocated to reduce overflow spills. That is very welcome indeed.
Lord Brooke of Alverthorpe (Lab)
My Lords, I thank my noble friend Lord Sikka for securing this debate and for his powerful speech, the majority of which I support. Like him, I will make a suggestion, and will add to his contribution—although I suspect that it will not find any great favour with the government spokesperson.
The background to this is that about three weeks ago, our shadow Minister for Defra, Mr Steve Reed MP, came to speak at the Labour Peers group weekly meeting about his Defra brief. As your Lordships might have expected, he talked about the long-standing problems so fully catalogued by my noble friend Lord Sikka: the difficulties faced by not just the Labour Party or other individual parties but the country, due to the water industry’s performance failure. He described issues on which he felt that Labour will have to take firm action. Contrary to the view of the noble Baroness, Lady McIntosh, there is now a feeling within the country that we need to move away from such privatisations, which are not delivering in the way people thought they would.
I suggested to our shadow Minister that if he was looking to get better performance from the water companies—indeed, there has also been a failing on the part of the regulator—we might look to make changes. A novel way might be for the Labour Party to dust down the programme it ran when it first came to power: public/private partnerships. I speak with some experience in this area; I was appointed government director of the public/private partnership that was established for the National Air Traffic Services. As I saw it, the failing there was too much emphasis on the public side, with government representatives, and not enough involvement of the wider interests that constitute the public interest.
I suggested to the shadow Minister that we explore revamping the public/private partnership concept, and that we look in particular at the public side. Yes, the Government would have a part to play, but we should also involve local authorities and charities. Indeed, we might even contemplate floating shares, so that members of the public with a particular interest, especially those in rural areas, could buy into the public element. We would then end up with 51% owned by the public, constituted in the way I have just described, and a minority shareholding remaining with the existing private owners.
If a privatised company is not performing particularly well—there is certainly one such in this area—it should be told that unless it can improve, meet the legal requirements and act in a much more socially responsible way, it will be faced with a public/private partnership takeover. In this way, we would get better performance from that company, push up overall performance and, in turn, have an impact on the other privatised water companies. However, if they do not respond, we should, in turn, extend PPPs throughout the industry. Indeed, the concept could be applied way beyond just the water industry. Other industries have been privatised, and the performance of some of the companies is pretty abysmal and way below what the public would expect.
The Minister’s response will not, I expect, be of great favour. I am not sure what my Front Bench will say, but I have already run it by our shadow Treasury Minister. I hope that when we write our manifestos, there is a very firm view expressed by the prospective Labour Government about what we need to do within the water industry and that some of it is very much along the lines of what was said by the noble Lord, Lord Sikka.
Viscount Stansgate (Lab)
My Lords, I am very pleased to make a brief contribution to this debate. I congratulate my noble friend on securing it and on how he introduced it. It is very well timed. This is an election year and this is an issue that is not going away. The problems have not yet been solved and a change of government is likely to bring a welcome and overdue change of policy. To go to the heart of what I want to say, the country has reached the end of its patience with the current situation. Sewage continues to pollute our rivers and coastlines, and those in charge—the directors of water and sewage companies, mentioned in the title of today’s debate—continue to be paid handsomely and, in too many cases, continue to receive bonus payments which seem absurdly large and utterly unjustified in view of the failures over which they preside. Since 2019, about £26 million has been spent in bonuses.
I have two straightforward observations. First, water is essential to life and access to clean and safe water is a basic human right. Therefore, those engaged in companies that provide water and sewage services are engaged in a business unlike any other. I personally do not support a privatised water system, but that is not the subject of today’s debate. Secondly, not a single member of this House on any side wants sewage to be spilt, but it is still happening. We know that sewage discharges mostly occur during heavy rain, when sewer capacity is overwhelmed. Sewage releases are often the result of geography and water company infrastructure, but have the water companies been doing enough about it? In my view, they have not.
I am sure that the Minister will reply referring to the improvements being made, the role of Ofwat being beefed up, that there is consultation going on and so on, which is all very well, but that is not enough, When William Blake wrote his poem about England’s green and pleasant land, even his vivid imagination could not comprehend the capacity of modern water companies to degrade our landscape. What we are talking about here is neither green nor pleasant.
Shortly after I arrived in the House, having been elected, I found myself listening to debates on the Environment Bill. I remember in particular the amendment tabled by the noble Duke, the Duke of Wellington, which sought
“progressive reductions in the harm caused by discharges of untreated sewage”.
I thought to myself, “What a modest amendment”, but I remember the outcry because of the Government’s opposition to it. As the House will recall, fearful of being defeated, the Government introduced their own amendment, which they claimed would satisfy public opinion and the noble Duke’s original intentions. However, the Government’s version was weaker. First, it was confined to storm overflows and not the sewerage system as a whole. Secondly, there was no specific duty on Ofwat or the Environment Agency to ensure compliance. Thirdly, it referred to adverse impacts rather than reductions in harm, which gives water companies plenty of wiggle room to keep polluting, which is exactly what has happened.
I can give an example too; I hope that the House will not mind. I found this on the website of a Government Back-Bencher whom I have never met. She says that
“a number of constituents have raised the issue of sewage being dumped in our waters. Along with others, I am horrified by the images from across Teignbridge showing this taking place and I believe we are all in agreement that steps need to be taken to resolve this troubling issue”.
Well, your Lordships may have read in the Times on Monday that nearly 39,000 sewage spills have been recorded in marginal constituencies held by the Conservative Party in 2022—more than the marginal constituencies of MPs from any other political party. That will concentrate the mind. The Times concluded that 56% of people would consider raw sewage discharges when they vote in the next election. No wonder this is likely to be an election issue. There are plenty of examples.
In 2020, I believe there were more than 400,000 raw sewage dumps into England’s rivers and seas or more than 3 million hours of spillages. In one incident, in June 2022, raw sewage spilled into Windermere lake for three hours. In 2020, Severn Trent was fined £2 million by Cannock magistrates for illegally spilling more than 260 million litres of raw sewage into the River Trent. Finally—I think I am right about this—in the High Weald of Sussex, Surrey and Kent, almost 27 hours of sewage releases took place in a single year. If we cannot protect the vital ecosystems of our areas of outstanding natural beauty, we are failing badly. I could go on, but I will not. The bad news is that they still continue.
Who is responsible for not having a proper system of planning—who, if not the directors of water companies? People increasingly feel that there is something really wrong in a system that does not apportion any meaningful responsibility for what is happening on those who are legally most responsible. In short, is it not time to get tougher with the role of directors of water and sewage companies? I think the answer is yes, and this debate is well-timed to put the directors of water companies on notice.
The next Labour Government should, and I think will, take decisive action to expand the regulatory powers of Ofwat to ensure that directors of water companies that fail to meet high environmental standards on sewage pollution will not profit from breaking the law. How can anyone seriously argue that they should benefit by doing so?
I am sure that the Minister will tell the House about the action being taken and improvements being made. The House of Lords Library briefing helpfully tells us a bit more about that, but I would like the Minister to confirm that the proposed bonus ban will cover directors and board members. Finally, can he say when the proposed changes will come into effect? I am sure that the Government are as aware as anyone of the political sensitivity of the issue; the Government have been behind public opinion on this, and we will know soon enough whether the electorate decides to place its faith in a future Labour Government to tackle these issues.
Baroness Warwick of Undercliffe (Lab)
My Lords, I am glad to be able to make a brief contribution in the gap. All the contributions have confirmed the relevance and timeliness of my noble friend’s debate, and I congratulate him. I want to reiterate the urgent need for action. Our sewage crisis has become a scandal: negligence, complacency and paying dividends to shareholders, rather than investing in infrastructure, have allowed our rivers, lakes and the seas around our coastal areas to become open sewers. My party is determined that evidence of continued sewage pollution should lead to a criminal offence.
Tuesday’s Channel 4 documentary on the subject alerted the whole country to the repugnant truth that deliberate discharging of raw sewage has been allowed to continue, and has even been encouraged, while 10 water bosses last year received bonuses totalling £2.5 million. I welcome the recent announcement in the other place that water bosses are set to be banned from receiving bonuses if the company has committed serious criminal breaches. As my party has said, it is high time that we made the polluter, not the public, pay.
Instead of asking customers to pay more for their water during a cost of living crisis, we should compel water bosses to count the cost. Senior executives should face personal criminal liability for extreme and persistent law-breaking. Furthermore, my party wants to introduce automatic fines for illegal discharges of a size that water bosses cannot ignore. I would like to see Ofwat have the power to force all companies to monitor every single water outlet.
After years of appalling spills—although I take issue with the word, as it somehow implies accidental leakages—firmer action is desperately overdue. Ofwat announced measures to ban future bonuses for bosses of companies that were found to have harmed the environment last year. Given that Ofwat is still to consult on whether the plan would actually go ahead, can the Minister assure us that the Government’s recently announced proposals will be enough to clean up our polluted waters? What steps will they be taking to reduce reliance on water companies’ self-monitoring?
Baroness Bakewell of Hardington Mandeville (LD)
My Lords, I congratulate the noble Lord, Lord Sikka, on his excellent introduction to this extremely important subject. England’s water system is at breaking point. Water companies are responsible for one of the worst environmental crises in the UK: the illegal dumping of sewage into rivers, lakes and coastlines through storm overflows.
The scale of the sewage crisis afflicting our rivers and coastal waters is staggering to comprehend. In 2021, the water companies were responsible for 368,966 spills, during which raw sewage and untreated wastewater were pumped into aquatic environments for a total of 2,650,290 hours. The noble Viscount, Lord Stansgate, has given some excellent statistics on this.
England is home to 85% of the earth’s chalk streams—rare and precious habitats that the Government and water companies should recognise that they have a particular duty to protect, instead of allowing them to be devastated by raw sewage overflows. If my colleague Lord Chidgey were still with us, he would have something to say about this.
The Conservatives have done nothing to stop water companies polluting our rivers with sewage. They have consistently voted against tougher action to stop illegal sewage overflows, while the water regulator, Ofwat, has said that only six of the 11 sewerage companies met their sewage overflow targets. This is unacceptable.
Of the 827 illegal dumps of sewage in 2021 and 2022, only 16 resulted in prosecution. This means that this Government have effectively decriminalised the dumping of sewage in our rivers, lakes and coastal waterways. It is sadly now true that it is cheaper for water companies to pay the fine for this illegal activity than for them to invest in the infrastructure to future-proof and clean up our waterways. The cost of fines is written into their business plans.
Since privatisation, £65.9 billion has been paid out in water company dividends. There was a 20% increase in executive pay last year, and Britain’s privatised water and sewerage companies paid £1.4 billion in dividends in 2022, up from £540 million the previous year. This was despite rising household bills and a wave of public outcry over sewage leaks.
This has gone on long enough. Water companies must be brought to account for their actions. The Government must ensure that water companies invest their profits now, not by 2050. That is too far away. We need to ensure that the water in our lakes, rivers and seas is not filled with sewage. Discharging raw sewage is a risk to environmental health, public health, animal welfare and our economy. It should not continue.
British people are fed up with their beaches being closed due to sewage while water company executives are making millions and holidaying abroad. The Liberal Democrats continue to call for the Government to instigate a sewage tax. This would be a 16% tax on pre-tax profits, providing a £340 million fund to clear up the rivers that have been damaged and to fix the sewerage system. This would be in addition to the current 19% rate of corporation tax.
With only 14% of English rivers in a good ecological state, reforming water and sewerage companies is essential. We on these Benches support a public benefit company model for water companies, so that particular economic and environmental policy objectives must be considered explicitly in the running of the companies. While sewage is pumped into our waterways and our water infrastructure is leaky and outdated, water firms are handing out large profits to overseas investors and bonuses to their CEOs. The British taxpayer deserves better.
It is time for water company reform. Ofwat and the water companies should set minimum criteria for the value, scope and eligibility criteria for social tariff schemes across the country. Water companies should put a share of their own profits into social tariffs. They should be encouraged to work more collaboratively to raise awareness of priority services, as well as being more proactive in identifying customers in need of temporary support.
This is an emotive subject, but one that has to be tackled. I look forward to the Minister’s positive response.
Baroness Hayman of Ullock (Lab)
My Lords, I start by thanking my noble friend Lord Sikka for bringing this important debate to your Lordships’ House today.
I wanted first to comment on the figures he gave on the sheer number of times that water companies have been sanctioned, because those figures are simply appalling. They also clearly demonstrate that, to date, fines have not been acting as a deterrent or changing the behaviour of the water companies in the way that sewage has been dumped into our waterways. As my noble friend Lady Warwick said, we need to have fines and penalties that cannot be ignored in the way they have been to date.
As my noble friend Lord Sikka rightly asks, what have the bonuses been paid for? I hope we will hear some clarification from the Minister around recent government announcements on bonus payments and also how the remit of powers that Ofwat has will be able to curb these excesses. I know the noble Baroness, Lady McIntosh of Pickering, mentioned the directive that has been given to Ofwat regarding this. While we clearly welcome that, it is also important to understand how this will practically operate within the existing priorities that the regulator has. For example, the noble Baroness, Lady Bakewell, talked about the amounts being paid in dividends; how will this actually work in practice, and are the Government intending to review it after a certain amount of time to make sure it is actually making a difference?
The noble Baroness, Lady McIntosh of Pickering, also asked some important questions around the environment, flooding and the impacts of our continued planning policies on long-term flooding. This is not just about now; it is also about the future. I would be interested in the Minister’s response to that.
My noble friend Lord Brooke of Alverthorpe talked about the meeting that Labour Peers had with a shadow Secretary of State from the other place and why strong action needs to be taken regarding the water industry and its regulations. I listened very carefully to my noble friend—and I am sure that our shadow Minister in the other place listened very carefully when he spoke to him at that meeting—to the suggestions that he has and how we can improve the current situation.
Let us have a look at what we actually proposed, and also at why our proposals are so urgently needed. For a start, as my noble friend Lord Stansgate said, the country has simply run out of patience on this matter. As he also said, a Labour Government will take decisive action on this matter. To briefly look at our proposals, we have carried out some analysis that shows that water company bosses have awarded themselves over £25 million in bonuses and incentives since the last election, despite repeatedly breaking the law with illegal sewage discharges. The analysis also found that nine water chief executives were paid a staggering £10 million in bonuses, £14 million in incentives—we have had a lot of talk about bonuses; we must not forget about incentives—and over £600,000 in further benefits since 2019, at the same time as customer bills were planned to go up by an extra £156 a year to plug the financial gap. As other noble Lords have said, it is not the customer who should be paying for this failure.
We believe that the water regulator should be given new powers to ban the payment of bonuses. Again, we welcome the Government finally deciding to adopt our plan on this. By expanding Ofwat’s regulatory powers, water companies that fail to meet environmental standards on sewage pollution will face tough sanctions to ensure that they cannot profit from this. When I met with the head of Ofwat some time ago, there was some concern about responsibility between Ofwat and the Environment Agency; it is really important that everyone is clear about who has responsibility for enforcing these things.
Other things we want to plan are to end self-monitoring—this has been mentioned—and to force all companies to monitor every single water outlet, so that sewage dumping can longer be covered up. It is important that all those monitoring stations are actually working, because that has also been a problem in the past.
We also feel that water bosses should face personal criminal liability if this persistent law-breaking is extreme and continues time and again, and if the fines and other sanctions are not making any difference. A BBC “Panorama” investigation found evidence of a water company covering up illegal sewage discharges, making sewage pollution disappear from its official figures. This is really not acceptable. It is important that we bring in more sanctions than the Government are currently proposing. It is time for the polluter to pay, not the public. Will the Minister encourage his Government to go further and back Labour’s whole plan to clean up our rivers and ensure that executives responsible for repeated illegal sewage dumping face criminal charges?
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Douglas-Miller) (Con)
My Lords, I congratulate the noble Lord, Lord Sikka, on securing this important debate and sharing his extensive views on the subject, and thank other noble Lords for their thoughtful contributions to today’s discussion. I welcome the opportunity to speak about the progress we have made to improve the water environment and our reforms to the remuneration of company executives.
This Government have been leading the way on delivering clean water for customers and the environment. Our plan for water sets us on a holistic path to deliver more investment, stronger regulation and tougher enforcement of our water system. Through this, we will transform our management of the water system, delivering cleaner water for nature and people and securing a plentiful water supply for the future. We have set out significant funding to support this work. Our plan for water committed £2.2 billion of new, accelerated investment directed into vital infrastructure to improve water quality and secure future supplies, including £1.7 billion funding to tackle storm overflows. In September 2023 we also published our expanded storm overflows plan, which set stringent targets to reduce the use of storm overflows. This plan will lead to the toughest-ever crackdown on sewage spills. In answer to the question asked by the noble Baroness, Lady Bakewell, the Government have increased the number of storm overflows monitored to 100% since the end of last year. Furthermore, this plan will also drive the largest infrastructure programme in water company history: £60 billion of capital investment over the next 25 years.
It is important to put this investment into context. Since privatisation, we have unlocked more than £215 billion of investment in the water sector in England alone to deliver services for customers and the environment. Privatisation has delivered a range of benefits, including high-quality drinking water, leakage being reduced by around a third and 90% of our bathing waters in England currently being classed as good or excellent. In addition, since 2010 water bills have fallen by 1% on average per year while companies have been investing around £5 billion annually over the same period. Looking forward to the future, the next water company investment cycle will include the biggest environmental improvement programme since privatisation. Water companies’ business plans show a planned £96 billion of investment between 2025 and 2030.
The noble Baroness, Lady Hayman, raised customers funding investment. The Government have been very clear that customers will not be paying for water companies’ mistakes. However, new infrastructure will need to be paid for, and while water companies can attract private investment, this will also need to come from customers’ bills. Ofwat assesses any increase in customers’ bills to ensure that they are fair and proportionate. We recognise that a balance must be struck here between ensuring that we prioritise spending on infrastructure to reduce environmental harm and securing supplies for the future without unduly hitting customers with bill increases.
I turn now to address the main point made by the noble Lord, Lord Sikka. We are taking clear and decisive action to ensure that no one profits from illegal behaviour and that water company executives take personal responsibility for serious breaches and damaging the environment. On 12 February my right honourable friend the Environment Secretary announced that the independent regulator, Ofwat, will consult on preventing the executives of water companies receiving bonuses if their company has committed a serious criminal breach. That could include, as the noble Lord said, successful prosecution for a category 1 or 2 pollution incident, such as causing significant pollution at a bathing site or conservation area, or where a company has been found guilty of a serious management failing.
Subject to consultation, we expect the ban to apply to all executive board members and chief executives. In answer to the question from the noble Viscount, Lord Stansgate, it will come into effect later this year. This builds on Ofwat’s announcement last year that it will tighten restrictions on bonuses using new powers given to the regulator through the Environment Act. It is important to make clear that this new announcement sits among a strong and ambitious long-term strategy to tackle pollution, clean up British waters and ensure a plentiful supply for the future. For instance, in March 2023 Ofwat announced new measures enabling it to take enforcement action against water companies.
Baroness Ludford (LD)
I apologise for interrupting the Minister, but I have been slightly provoked by his talk of a long-term ambition and a vision of 25 years. Does he accept that it was 1991—I am sorry to be a nerd about this—when the relevant EU directive was passed, under a Tory Government, and it should have been implemented by 1998? We are already 25 years after that but now he is giving us another 25-year horizon, so it will have been half a century before the discharge of sewage is cleaned up.
Lord Douglas-Miller (Con)
I thank the noble Baroness for her question. Perhaps I might write to her on that subject, given that she did not contribute to the debate earlier.
Additionally, on 21 February we announced that inspections of water company assets by the Environment Agency would more than quadruple in order to strengthen our oversight of water companies and better hold them to account. That is not all. We have legislated to introduce unlimited penalties on water companies that breach their environmental permits and to expand the range of offences to which they can be applied. That can include criminal prosecutions, for which there can be unlimited fines.
Following the publication of its performance report in November 2023, Ofwat published the financial penalties and payments for all water companies. This required 13 companies to return £193 million to customers for underperformance in 2022-23, with money rightly being returned to customers through bills in the year 2024-25. We make no apology for setting high standards for the water sector or for our tough expectations of what companies have to deliver. That is why, in addition to returning money to customers, Ofwat and the Environment Agency will not hesitate to use the powers that the Government have given them to enforce the law and hold them to account.
I turn to various questions raised by noble Lords. If I miss any questions or run out of time, I will write to individual noble Lords and send a copy to the Library. The noble Lord, Lord Sikka, asked whether the Government will give customers the opportunity to vote each year on executive pay. Remuneration committees for each water company independently determine the appropriate level of remuneration for their water company executives. Ofwat expects water companies to take into account the legitimate concerns of stakeholders when making decisions on the application of remuneration policies.
The noble Viscount, Lord Stansgate, and others raised the issue of sewage spills and correctly pointed out that no one wants to see this happen. Significant progress has been made. The noble Viscount asked how the Government and regulators will hold water companies to account. The Environment Agency and Ofwat have recently launched the largest ever criminal and civil investigations into water companies’ sewage discharges, and into over 2,200 treatment works, following new data coming to light as a result of increased monitoring.
The Government are working with the Environment Agency to hold the water industry to account. Where water and sewerage companies are found to be breaking the law, we will hold them to account through enforcement. The Environment Agency can now use new powers to impose unlimited penalties for a wider range of offences following the Government’s changes to broaden the scope of the existing civil sanctions regime and remove the previous cap on penalties.
The noble Baroness, Lady McIntosh, raised the issue of the automatic right to connect to the sewerage system in Schedule 3 and Schedule 10. In April 2023, the Government published the Plan for Water. This plan included the requirement for standardising sustainable drainage systems in new developments in 2024. Subject to final decisions on the scope, threshold and process, we expect to commence consultation on this by spring 2024 and aim to have finalised the implementation pathway by the end of 2024. Schedule 3 would make the right to connect surplus water run-off to public sewers conditional upon the drainage system being approved as capable of managing it. The noble Baroness also raised issues around building on floodplains, water run-off, Schedule 10 and storing water. Perhaps I might write to her on those issues.
The noble Lord, Lord Sikka, asked whether the Government have confidence in Ofwat. We are confident the industry regulators are using their powers to hold water companies to account, and we will continue to work with them and drive improvements that benefit customers and the environment. The noble Lord, Lord Sikka, gave an admirable list of the fines that Ofwat have recently handed out.
The noble Lord also raised the issue of foreign ownership. Ofwat, as the independent regulator, protects the interests of consumers by making sure that water companies carry out their statutory functions and are financially resilient, as well as holding them to account on overall performance and delivery of essential services. These same standards and licence conditions apply across all water companies, regardless of whether they are owned by foreign or domestic investors.
As I come to the end of my remarks, I want to be absolutely clear that profit should never come at the cost of pollution. As I have set out, this Government are going further and faster than any before to protect and enhance the health of our rivers and seas. We are holding water companies to account on a scale never seen before. This new action proposed by Ofwat will help us go even further to ensure that no one profits from illegal behaviour and that water company executives take full responsibility. I therefore assure noble Lords that the Government are fully committed to addressing the issues causing pollution in our waterways and we will continue to strive for a healthy and thriving water environment.