Environment, Food and Rural Affairs Committee
Tuesday 20th October 2026
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09:30
Alistair Carmichael
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Alistair Carmichael
Order, order! Good morning, everybody, and welcome to this meeting of the environment, Food and Rural Affairs Select Committee. We return to our ongoing inquiry this morning into the form of the water sector, and we shall be dealing today with questions around ownership of companies within the sector. We have three panels, so we're going to try and keep a good pace. And welcome to you all, gentlemen, just for the benefit of those who are following our proceedings and for our own official record, can I invite you just to introduce yourselves to the committee? And we'll start with yourself, Hugh.
Yes.
Yes.
09:31
Speaker 2
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Speaker 2
Hi. Good morning. My name is John Abraham. I'm the chief operating officer for industrial water and energy at Veolia, covering the UK and Nordics. I'm a civil engineer, engineer, fellow of the Institute of Civil Engineers and the Chartered Institute of Environmental Managers spent nearly 40 years in water and waste water and energy across design and build operations and maintenance, and my responsibilities include several major PFI contracts for Scottish Water, Northern Ireland Water, the Ministry of Defence. I've a few other words about Veolia, but maybe later on.
09:32
09:32
Alistair Carmichael
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Alistair Carmichael
Right. Well, listen, thank you all very much for your attendance. And that's a timely prompt, David, to say that your experience goes back to the 1980s, because that's where I want to start . Back in the the mists of time. Believe it or not, I was still an undergraduate in 1989, but I want just maybe to take from yourself, David and Hugh. But John, feel free to jump in if you. If you feel moved, the logic of. Of privatisation as it was carried out in 1989. What were the problems if privatisation was the answer, what was the questions that were posed at that point?
David, I'll start with yourself.
David, I'll start with yourself.
09:33
Speaker 3
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Speaker 3
When you look at privatisation per se, it's not. It was very well expressed, actually quite recently by the new head of glass company door company Welsh Water, that it's not necessarily the management or the model that matters. It is the regulatory model that matters. And there has been a clear and present failure in regulation, most definitely for the last 15 years, arguably for the last 20 years.
09:33
09:34
09:34
09:34
Speaker 1
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Speaker 1
Yes. Well the White Paper in the mid 80s was clear about what the objectives were. It was supposed to be to provide benefits to the consumer. And I think the list of benefits that were going to flow from privatisation was more efficiency, more innovation, access to private finance. But it was also couched in terms of customers becoming shareholders in the companies, employees becoming shareholders of their own companies, and therefore interested in the benefits, the profitability of the company. So I think it was it was it clearly took place in the context of a wider of the wider privatisation process.
09:34
Alistair Carmichael
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Alistair Carmichael
Some of that would be driven by outcomes for customers, the efficiency savings, the rest of it. Some of it was then a more political project around share ownership, which was very much part of the political zeitgeist at the time. Let's park the the politics. We can do that. From the perspective of the outcomes for customers, the the drive for efficiency from going into private sector suggests that actually there were inefficiencies where these problems somehow inherent from being part of the public sector.
09:35
Speaker 1
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Speaker 1
I'm not aware of what the specific inefficiencies were. I worked with the water authorities prior to privatisation. I worked with the water companies and the regulator after privatisation. You know, the first thing that happened with with the new companies, water companies, was they started to look at ways of using all their assets more efficiently in different ways. And they they looked at things like voluntary redundancies so they could reduce their staff numbers. So they were clearly driven by an efficiency agenda in those early years. But I wouldn't I wasn't aware of specific issues around efficiency.
The other thing that is important to state is that they were you know, they were borrowing from Treasury or the Public Works Loans Board, and the finances were counting on the public sector borrowing. And one of the big motivations was to take the investment off the public sector balance sheet.
The other thing that is important to state is that they were you know, they were borrowing from Treasury or the Public Works Loans Board, and the finances were counting on the public sector borrowing. And one of the big motivations was to take the investment off the public sector balance sheet.
09:37
09:37
09:37
09:37
09:37
09:37
Speaker 2
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Speaker 2
So in 181989, I started work in the UK water industry. And I remember well at the time there was such a fierce competition for funding. You know, do we spend money on our railways, on our roads, on our on our public buildings, our hospitals, water and water almost got pushed to the end of the queue all the time and just didn't get funded. On the other hand of it, I remember seeing some of the you know, I think of an example back in the day in the North west when I went to what they used to call a treatment palace, they were there was a lot of overdesign.
There was no real focus on building efficient fit for purpose solutions, solutions. So I think there was a big drive also to get more efficiency in the design and construction. The other element of it was this is where the whole of Europe we're thinking about urban wastewater treatment acts, the the whole of Europe, we're trying to clean up, you know, primary treatment was the main source of treatment at the time. There was no secondary treatment that came in in the 90s. And by the way, UK were the first adopters. You know, we were so far ahead of the game in terms of secondary treatment.
We really built the next generation of treatment plants very, very early in the process. So I think the whole privatisation of the industry allowed the funding to be focused on those quality drivers and growth drivers and performance drivers.
There was no real focus on building efficient fit for purpose solutions, solutions. So I think there was a big drive also to get more efficiency in the design and construction. The other element of it was this is where the whole of Europe we're thinking about urban wastewater treatment acts, the the whole of Europe, we're trying to clean up, you know, primary treatment was the main source of treatment at the time. There was no secondary treatment that came in in the 90s. And by the way, UK were the first adopters. You know, we were so far ahead of the game in terms of secondary treatment.
We really built the next generation of treatment plants very, very early in the process. So I think the whole privatisation of the industry allowed the funding to be focused on those quality drivers and growth drivers and performance drivers.
09:38
Alistair Carmichael
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Alistair Carmichael
I mean, this is a familiar tension here. It's everything is important until there's a crisis in the NHS and that's where the money goes. And David, you spoke earlier about regulatory failure. How much of what has happened subsequently do you think is a consequence of regulatory failure as opposed to ownership?
09:38
Speaker 3
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Speaker 3
I think it's essential. I mean, you can break down the regulatory history and events to two crucial phases. Under Ian Byatt from 1989 to 2000 and his final a MP3 period, 2005, there was an emphasis, first of all, on increasing investment in infrastructure and its maintenance. Post that the regulator moved to what some would rather tritely call a cheap and nasty approach, whereby customer cost overruled everything. Just keep the bills low. That's right. So for example, in terms of operating spending and maintenance, it remains static for 25 years, even though £200 billion of new assets were brought in.
And that ultimately meant that a lot of new assets were simply not managed or operated. They were allowed to stagnate.
And that ultimately meant that a lot of new assets were simply not managed or operated. They were allowed to stagnate.
09:39
Alistair Carmichael
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Alistair Carmichael
Okay. Now we've had some studies showing that the growth in value amongst water companies has been mainly funded by debt, not equity. With the benefit of that 40 year hindsight. Now, to what extent do you think that tells us something about the logic behind the initial decision in the 1980s? This is an easy question for you, for the academics.
09:40
09:40
09:40
Speaker 1
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Speaker 1
They were given. a 1.5 billion green dowry. Yes. So so the the companies started life with working capital from from the government with no. And they were debt free. And there was an equity paid into the companies, the companies, you know, the, the, the purchase price by the people who bought shares went to government. It didn't it was a transaction about the future value of shares. It wasn't an investment in assets. So the companies started life with with a clean balance sheet. And therefore it was always going to be more attractive to fund all their investment by debt and debt.
Funding is the normal way in which infrastructure assets are funded all over Europe. I mean, that's the standard way you you borrow to invest. But then when the first regulatory review came out that gave a regulated capital value, which showed a regulatory equity in the system, that was significant, but it was created by the particular regulatory model, the, the indexed CV that was being used. So there appeared to be equity in the companies, even though equity hadn't been paid in for investment. So so debt funding was, was always going to be the main game for financing actual physical investments.
Funding is the normal way in which infrastructure assets are funded all over Europe. I mean, that's the standard way you you borrow to invest. But then when the first regulatory review came out that gave a regulated capital value, which showed a regulatory equity in the system, that was significant, but it was created by the particular regulatory model, the, the indexed CV that was being used. So there appeared to be equity in the companies, even though equity hadn't been paid in for investment. So so debt funding was, was always going to be the main game for financing actual physical investments.
09:42
09:42
Speaker 1
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Speaker 1
Well the I mean the CV model regulatory capital value model was was developed in the Treasury, I think actually by Ian Byatt when he was working in the Treasury. There's something called the Byatt Report. And that presented a way of making infrastructure assets attractive to private capital. And, and therefore, one of the things it does is it is it takes inflation risk away from investors and in effect passes it to consumers because consumer bills go up by RPI every year, less any efficiency gains and the assets inflate by RPI. And if that's all debt funded, your your equity value goes up over time.
But but it's not cash that was paid in to build real assets. Whereas whereas if you're dealing with sorry, if you're dealing with a green field project, so you do it on project finance, there's debt that comes in, there's a slice of equity that comes in from the investors, and that's all capital that goes into building the project and, and taking risk on delivering it and then the operations. But in this case, you know, that wasn't how the model worked.
But but it's not cash that was paid in to build real assets. Whereas whereas if you're dealing with sorry, if you're dealing with a green field project, so you do it on project finance, there's debt that comes in, there's a slice of equity that comes in from the investors, and that's all capital that goes into building the project and, and taking risk on delivering it and then the operations. But in this case, you know, that wasn't how the model worked.
09:44
Speaker 3
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Speaker 3
Yes, one thing to follow up here was that at privatisation, the credit rating agencies gave the sector two ways, which is the second highest possible sovereign debt rating off what in the next two periodic reviews made it clear that they were perfectly happy to have triple B rating. And one of the consequences of this was that the cost of capital, the coupon rose as with the debt. So the more debt the water companies have taken on, the more expensive servicing that debt has been. And in fact, it's a really interesting contrast between this and Scottish Water, where Scottish Water has as much debt in terms of its regulated capital value as the sector in England and Wales.
However, the interest it pays is materially lower and that has an impact on its cost sustainability.
However, the interest it pays is materially lower and that has an impact on its cost sustainability.
09:45
09:45
Speaker 1
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Speaker 1
Well, what. Yeah, I mean, I, I have been drinking Thames Water water for about eight decades now and it doesn't I mean, the quality of drinking water hasn't changed dramatically. I mean, you get from 99 to 99.3% improvements. Yeah. The big improvement has been in wastewater treatment as as John was mentioning. So so the, the introduction of European environmental regulations as driven much of the investment in the sector and the objective of that, the objective of the Water Framework Directive is long term to improve the ecological quality of water bodies. Yeah. So so the drivers are to more towards environmental quality.
There are people who are suffering from sewer flooding in their basements. Those numbers have gone down off what kept, you know, it keeps various performance measures and there have been improvements. But the big impact has been around environmental improvement of wastewater treatment. That's where the big investments gone.
There are people who are suffering from sewer flooding in their basements. Those numbers have gone down off what kept, you know, it keeps various performance measures and there have been improvements. But the big impact has been around environmental improvement of wastewater treatment. That's where the big investments gone.
09:47
Speaker 1
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Speaker 1
First, the Urban Wastewater Treatment Directive. And then there's all sorts of there's, you know, nitrates directive. There are a whole web of directives governing environmental activities. But then since 2000 in Europe anyway, there's the Water Framework Directive that got translated into the UK. And the aim is a very long term benefit, which is to make all the rivers of good ecological quality for the fish and for our grandchildren to swim in without risk of something nasty happening to them.
09:47
Alistair Carmichael
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Alistair Carmichael
We we touched earlier. And this is my final question for the moment on this grand vision of share owning democracy. In the 1980s, it was you were going to have employee share owners. You'd have wider public share ownership. You know, 20, 26. Very few water companies are even publicly listed. What's been the impact of that, do you think? And is that something where we should be looking for change?
09:48
Speaker 1
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Speaker 1
Well, okay. And I would take that and say that the water industry has evolved in many ways. So you've got things like the multi utility phase where United Utilities was created as a combined water and, and energy utility in the North east. Welsh Water tried to do the same thing in its link with with Swalec. And that got turned into Hyder. And then they got into financial difficulties. So you've got strategic investors. So Veolia and Suez and FCC and other and RWC, of course the German multi utility were were owners for a while. But really since the it was really after the 1999 price review, where the the share price dropped below the capital value regulated capital value.
That was a sort of critical moment for the industry. And since then it's been financialized because the major investors have been financial investors seeking to, you know, extract cash from the business and increase leverage. So that's really happened in that latter period.
That was a sort of critical moment for the industry. And since then it's been financialized because the major investors have been financial investors seeking to, you know, extract cash from the business and increase leverage. So that's really happened in that latter period.
09:49
09:49
Speaker 2
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Speaker 2
Just just to build on that, if I may, I think ownership is only part of the story. You know, if you think about the first third of the privatisation story, there was a huge amount of of capital that was put in to build secondary treatment, real fundamental basic treatment to clean up our rivers, to improve our drinking water. And I think there was a huge we build things in the water industry really well. You know, the CapEx delivery, it's very good value for money. We do very well. I believe the problem now is how we're actually operating and maintaining the assets that we spent the last 38 years building, and we're not operating.
And it's the same people operating the same assets the same way, because there's basically an operational monopoly within a monopoly organisation. And therefore, people like us in Veolia, with the biggest company in the world, we look after water for 110 million people. You know, you get on the Eurostar in Paris, 4 million people we produce drinking water for. I have no market in the UK. I can't deliver my world class operational and maintenance services across England and Wales. I have some market in Scotland and Northern Ireland and the Ministry of Defence, but I have no market in the UK and well, the English and Welsh market because it's operated and maintained by the same people the same way.
And I think that's where the problem is, not the ownership. It can be, it can be, it can be detached. As you know, a PFI is run.
And it's the same people operating the same assets the same way, because there's basically an operational monopoly within a monopoly organisation. And therefore, people like us in Veolia, with the biggest company in the world, we look after water for 110 million people. You know, you get on the Eurostar in Paris, 4 million people we produce drinking water for. I have no market in the UK. I can't deliver my world class operational and maintenance services across England and Wales. I have some market in Scotland and Northern Ireland and the Ministry of Defence, but I have no market in the UK and well, the English and Welsh market because it's operated and maintained by the same people the same way.
And I think that's where the problem is, not the ownership. It can be, it can be, it can be detached. As you know, a PFI is run.
09:51
09:51
09:51
Speaker 3
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Speaker 3
It's a very mixed story. Originally it was we called it the Welsh Way, the white company, that the key element to Welsh Water, the Glastonbury model, was being not for profit. Therefore any surplus was either put into customer rebates or discretionary spending. Unfortunately, when you look at the actual performance of Welsh Water on all the various publicly available metrics, it has not been a great success. I would I would classify the ten water plc's as the two, which are owned by International Utilities out of Wessex and Northumbrian. They generally outperform the rest of the sector.
Then you have the three Severn Trent, United Utilities and Pennon, which are still market listed which perform on average. Then you have Welsh water, which is below average, and then you have the four private equity companies which are , especially in the case of Thames, dramatically below average. And that is key. One has to have no sentimentality about ownership models. Private equity is simply there to strip money, and there's no other purpose for private equity than asset stripping. In the case of Welsh Water, there's no doubt that the finances have dramatically improved. When it was brought out of Swalec, debt was 93% of equity.
So it was a highly leveraged company. These days it's 53%. It's the least leveraged of all the water companies. So that side has undoubtedly been in excess. We actually had a very honest moment last week when the new chief executive of Welsh Water spoke to the Financial Times, and he previously ran Sydney Water. So he has a lot of experience in. State owned company run on private sector lines. And in his case, he said, I'm. Fortunately, he believes that the Glastonbury model is not delivering any specific advantage, and it's entirely dependent on the regulatory environment.
Then you have the three Severn Trent, United Utilities and Pennon, which are still market listed which perform on average. Then you have Welsh water, which is below average, and then you have the four private equity companies which are , especially in the case of Thames, dramatically below average. And that is key. One has to have no sentimentality about ownership models. Private equity is simply there to strip money, and there's no other purpose for private equity than asset stripping. In the case of Welsh Water, there's no doubt that the finances have dramatically improved. When it was brought out of Swalec, debt was 93% of equity.
So it was a highly leveraged company. These days it's 53%. It's the least leveraged of all the water companies. So that side has undoubtedly been in excess. We actually had a very honest moment last week when the new chief executive of Welsh Water spoke to the Financial Times, and he previously ran Sydney Water. So he has a lot of experience in. State owned company run on private sector lines. And in his case, he said, I'm. Fortunately, he believes that the Glastonbury model is not delivering any specific advantage, and it's entirely dependent on the regulatory environment.
09:54
Henry Tufnell
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Henry Tufnell
I mean, the gearing is I mean, it's below average 60, 62.8 credit rating is going down. So it's gone down. So it's gone from A minus to triple B plus . And the debt, the debt servicing costs equating to 25% of bills. So the situation for financially in terms of how you how you're going to get the money to pay for the infrastructure.
09:55
Speaker 3
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Speaker 3
It's the best rated company in the sector. Now, one of the things you do need to bear in mind is that the headline figures for debt are the lowest ratings. It's overall debt, in fact, is a minus to a. And only Anglian is the other company, which has an A rating on its senior debt. But that is the clearly the biggest thing. And it's one of the biggest challenges for the sector overall, its debt rating. There is a regulatory issue here that in the early 2000 there was no ceiling on debt, which allowed Macquarie to gear Thames Water up to 95% of its equity through various investment vehicles.
And that was a real issue for the for the private equity owned companies. Now, Ofwat says 65 should be the ceiling, 55% gearing should be desirable. So that is being brought down. But it's also quite evident that a lot of the gearing took up after the 2008 financial crisis, when the cost of capital was historically low, and now we've returned to normal levels of cost of capital, and the water sector is not equipped to finance those things without a profound impact on its profitability.
And that was a real issue for the for the private equity owned companies. Now, Ofwat says 65 should be the ceiling, 55% gearing should be desirable. So that is being brought down. But it's also quite evident that a lot of the gearing took up after the 2008 financial crisis, when the cost of capital was historically low, and now we've returned to normal levels of cost of capital, and the water sector is not equipped to finance those things without a profound impact on its profitability.
09:56
Speaker 1
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Speaker 1
Yeah, I just checked last night online. I want to make it very clear, I retired from EIB in 2021. So I'm speaking on a personal basis, but you can see information online about what its lending is and before the creation of of glass and the not for profit model. EIB was, I think, the biggest lender to Welsh Water. And subsequently it's been a major lender up until, you know, the difficulties of accessing EIB lending, because the UK has left the European Union. But the lending was I think it's 780 million, is the figure that I found online.
And it's been lending amortizing loans. So the difference in many countries is that people borrow and pay back like a mortgage. You don't necessarily take these, you know, long term bonds that then rely on your ability to refinance, which is what's caused. The big problem for Thames right now is it can't pay its maturing loans. So the debt that that Welsh Water took on from the EIB, and I noticed Tideway Tunnel also took on a more long term amortizing loans is is significant. So once you've left the access to that source of finance, which is the biggest source of water sector finance in Europe, I think , in the world still, then the new National Infrastructure Bank should potentially be stepping in to finance that.
So in in the Scandinavian countries, it's still it's largely municipally owned companies that run all the water services. They, on their own couldn't access the sort of levels of finance they need. So they've set up a, you know, a communal credit bank. Austria has a credit and credit bank. So so you set up public sector banks that can channel the necessary funding for that sort of investment. And Welsh Water was doing that, as I say, before and after it went into a not for profit model. But now I don't know what the attitude of the National Wealth Fund is to access to financing the water sector.
And it's been lending amortizing loans. So the difference in many countries is that people borrow and pay back like a mortgage. You don't necessarily take these, you know, long term bonds that then rely on your ability to refinance, which is what's caused. The big problem for Thames right now is it can't pay its maturing loans. So the debt that that Welsh Water took on from the EIB, and I noticed Tideway Tunnel also took on a more long term amortizing loans is is significant. So once you've left the access to that source of finance, which is the biggest source of water sector finance in Europe, I think , in the world still, then the new National Infrastructure Bank should potentially be stepping in to finance that.
So in in the Scandinavian countries, it's still it's largely municipally owned companies that run all the water services. They, on their own couldn't access the sort of levels of finance they need. So they've set up a, you know, a communal credit bank. Austria has a credit and credit bank. So so you set up public sector banks that can channel the necessary funding for that sort of investment. And Welsh Water was doing that, as I say, before and after it went into a not for profit model. But now I don't know what the attitude of the National Wealth Fund is to access to financing the water sector.
09:59
Henry Tufnell
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Henry Tufnell
What what about accountability within the governance structure? So I think Glastonbury has got obviously, the holding company has 47 members that hold the Welsh Welsh Water Board to account. So they don't they don't receive payments for this, but they can have up to 200. But they've got 47. It's not representative. There's no one from Welsh Government, no elected individuals from the consumer bodies. There's no no local authority involvement. I mean, who you know, who are these people? I mean, you know, we owned by bondholders in Luxembourg and then run by these 47 people who who answer to no one.
09:59
Speaker 3
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Speaker 3
Yes. The I was what was called a member of Glastonbury for 11 years. And. The selection is somewhat arbitrary. In other words, you were invited to apply. But as you say, there is no actual representative mandate. The idea is that you act there as a proxy. You are there as a quasi shareholder. So you you turn up twice a year to meetings and you ask interesting questions.
And that's as far as that goes. But yes, there's no actual other form of representation. However, the these institutions.
And that's as far as that goes. But yes, there's no actual other form of representation. However, the these institutions.
10:00
Henry Tufnell
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Henry Tufnell
That I mean in terms of leakage, you know, increased by 15% in 2019 to 2020. Per capita consumption has not met its target to reduce per capita consumption supply interruptions, one of the worst performers in the sector for three consecutive years. Their main complaints missed targets remains. I mean, presumably the questions, these interesting questions that are being asked aren't don't pertain particularly to performance. Performance has been going south. I mean, is that do you think that's a problem?
10:01
Speaker 3
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Speaker 3
I I'm very sad to say that, you know, when I was first involved with Glastonbury, I was an idealist, and I thought they were going to be an exemplar for the rest of the sector. And I'm afraid reality has been something of a disappointment. There's one also crucial thing here, which which doesn't apply to England, was that the 1999 devolution settlement meant that and off. What's blessing? They report directly to the Senedd, the Welsh Government, and you can't apply that model in England because there's no regional devolution. So, for example, Kelda, the Yorkshire Water in those days wished to also become a mutual.
But because they didn't have the devolutionary element of what overruled it, and they eventually got swallowed up by private equity, which was not necessarily in anybody's interest.
But because they didn't have the devolutionary element of what overruled it, and they eventually got swallowed up by private equity, which was not necessarily in anybody's interest.
10:02
10:02
Speaker 1
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Speaker 1
Well, I was just going to go back to that point about the. So. So in after the 1999 price review, the regulator effectively cut bills. And that was what pushed the the share value below the regulatory asset value, capital value. And several companies went to Off.what to effectively . Privatise themselves, there was the Kelda proposal. I think Anglian had a proposal. Southern water. Some of them wanted to become friendly societies, and the idea was to move to a model where the assets were owned in some kind of, you know, public sector. But the water companies would then take all the have all the staff and operate the assets.
So they move much something much closer actually to the French model. And that was being proposed by the industry itself. The particular and off. What opposed those until the proposal from Welsh Water. And the reason was, of course, it was perceived as being, you know, part of the Devolutionary settlement. That was what the Welsh people wanted. Therefore, there was a way in which they could create a not for profit model in Wales, but the actual governance structure. I agree with you. I've worked for a company limited by guarantee , and they are strange governance structures. You wonder who it's accountable to.
So they move much something much closer actually to the French model. And that was being proposed by the industry itself. The particular and off. What opposed those until the proposal from Welsh Water. And the reason was, of course, it was perceived as being, you know, part of the Devolutionary settlement. That was what the Welsh people wanted. Therefore, there was a way in which they could create a not for profit model in Wales, but the actual governance structure. I agree with you. I've worked for a company limited by guarantee , and they are strange governance structures. You wonder who it's accountable to.
10:03
10:03
Speaker 1
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Speaker 1
So. The the, the Scottish I'm not you know, I'm not familiar with the exact governance model in Scotland. And my understanding is publicly owned. Therefore, you have public accountability through, you know, I'm not sure whether you've got local government as well as national government involved on the board . Historically, you know, the previous stage when when water sector was being taken out of private ownership was in 1904 when the Metropolitan Water Board was formed. And there you had the representatives of, you know, essentially the local government, plus the Thames conservators, people who were democratically accountable for the area where the services were being provided.
So in terms of that governance element, Scotland's also got a different regulatory system with it's much seems to be much more negotiated rather than, you know, this sort of confrontational companies want this the off what says that. And ultimately it becomes the the it's no longer the Monopolies and Mergers Commission. What is it called? The the Competition and Markets Authority makes a judgment on it. So it seems to be much more of a sort of negotiated settlement about about prices. But the big difference, of course, in Scotland is, to my understanding, again, it does count as public sector borrowing.
So if what you're trying to do is, is ensure that water pays for itself, you know, the French say, yeah, water should pay for itself. There's this principle of full cost recovery and people are willing to pay for it generally. Then you want to do that in such a structure that it's not on the public sector balance sheet, but it can nonetheless be publicly owned. And that, you know, there are lots of examples of that.
So in terms of that governance element, Scotland's also got a different regulatory system with it's much seems to be much more negotiated rather than, you know, this sort of confrontational companies want this the off what says that. And ultimately it becomes the the it's no longer the Monopolies and Mergers Commission. What is it called? The the Competition and Markets Authority makes a judgment on it. So it seems to be much more of a sort of negotiated settlement about about prices. But the big difference, of course, in Scotland is, to my understanding, again, it does count as public sector borrowing.
So if what you're trying to do is, is ensure that water pays for itself, you know, the French say, yeah, water should pay for itself. There's this principle of full cost recovery and people are willing to pay for it generally. Then you want to do that in such a structure that it's not on the public sector balance sheet, but it can nonetheless be publicly owned. And that, you know, there are lots of examples of that.
10:06
Speaker 3
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Speaker 3
In Scotland. Scottish Water started off as 11 entities in the 1990s, which were merged into four, which became Scottish Water 2002, whereas England and Wales were merged into their current state in 1974. So there's been quite a bit of catching up, in a sense, on the rationalisation of Scottish water. It has adopted the off what model in that it has an external regulator, but it is a different relationship because it is indeed state owned and state funded for debt. But the company is run as a quasi public private entity. In other words, it's a it's supposed to generate a profit and so on and so forth.
When you look at its actual performance metrics, in their own admission, they outperform the English and Welsh companies on certain metrics. They underperform on others. You do have to bear in mind in Scotland, of course, that they have a completely different relationship with their water resources, that Western Scotland has an embarrassment of riches in water. Eastern Scotland is actually as vulnerable as southern England when it comes to reservoirs and droughts, so it is quite a mixed picture, but it's not necessarily a paragon. It shows you both the joys and the miseries of being in the public sector compared with the private sector.
When you look at its actual performance metrics, in their own admission, they outperform the English and Welsh companies on certain metrics. They underperform on others. You do have to bear in mind in Scotland, of course, that they have a completely different relationship with their water resources, that Western Scotland has an embarrassment of riches in water. Eastern Scotland is actually as vulnerable as southern England when it comes to reservoirs and droughts, so it is quite a mixed picture, but it's not necessarily a paragon. It shows you both the joys and the miseries of being in the public sector compared with the private sector.
10:08
Henry Tufnell
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Henry Tufnell
And I just I share just with Veolia because you you deal with both Welsh Water and also with Scottish Water. I think our friends in the colleagues in the Scottish Liberal Democrats found there were 12 sewer assets managed, managed by PFI. You had overflow data for nine of those assets which were run by you. And I think there were 513 spills in 2023 across all these assets. So how's that in terms of that public private partnership model working? I mean, I think in Wales you've got a contract with Welsh Water for the five Ford's wastewater treatment works and and and in Herefordshire.
But that's yeah.
But that's yeah.
10:08
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10:08
Speaker 2
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Speaker 2
Okay. We have obviously somebody like Seafield which is the catchment in Almond Valley in Edinburgh. Yeah. And we have a very rigorous compliance regime where we have actually standards higher than the actual regulatory compliance. And we have severe fines every time we breach our license, which we haven't. So the various spills, you know, there will be storm spills. They will be fully licensed spills during storm. You know, we had a 300 year storm 3 or 4 weeks ago in C C field. You know, we dealt with it very, very well. We worked with Scottish Water very well all the time.
So I think we've got a lot of data that proves that where you almost ring fence a catchment and you have a PFI like we have. And I think you want me to talk about later on, like the Almond Valley and Seafield and Esk AV. S the performance is actually very, very strong and very high. Also the efficiencies and the value for money. We've invested a lot of money into that plant. It's the only wastewater treatment plant in the whole of the UK that that actually exports energy net exporter of energy. We we produce 108% of the energy that the plant requires.
So we actually produce energy. It's the biggest wastewater treatment plant in Scotland. We hand it back to Scottish Water in less than three years time. So the concession is coming to an end. So we're very proud of the performance of C C field. So I can I can take that data away and look at it.
So I think we've got a lot of data that proves that where you almost ring fence a catchment and you have a PFI like we have. And I think you want me to talk about later on, like the Almond Valley and Seafield and Esk AV. S the performance is actually very, very strong and very high. Also the efficiencies and the value for money. We've invested a lot of money into that plant. It's the only wastewater treatment plant in the whole of the UK that that actually exports energy net exporter of energy. We we produce 108% of the energy that the plant requires.
So we actually produce energy. It's the biggest wastewater treatment plant in Scotland. We hand it back to Scottish Water in less than three years time. So the concession is coming to an end. So we're very proud of the performance of C C field. So I can I can take that data away and look at it.
10:10
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Speaker 2
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Speaker 2
The plant, if you're familiar with the plant, it's it's just near Portobello Beach in a very built up area, and it is the largest treatment plant in Scotland. So there is there is not zero smell coming from the plant. And at certain times when the wind is blowing at a certain direction, there can be a very mild odour. And there are local residents that are unhappy with the odour. It's a well documented and understood issue around the the Portobello area and Leith area. But yeah, I think the if you compare the performance of some of our fees to Beckton and Crossness, some of the other major plants in England and Wales, I think there's a there's a, there's a.
Very a very positive difference.
Very a very positive difference.
10:11
10:11
Speaker 2
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Speaker 2
Well, lots of parts of the UK, England and Wales are already working with Ofwat on what they call direct procurement DFCs. So they're already looking at major investments similar to the Thames Tideway Tunnel, where they're looking at various. For example, in Anglian Water, they're looking at D desalination plants. They're looking at almost like a p p p model where they're looking to ring fence the supply of drinking water from, from, from the sea. And they're looking for separate finances, the direct procurement model that Ofwat are pushing forward. So they're already planning to do similar, similar projects.
10:11
Alistair Carmichael
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Alistair Carmichael
Can I just pick up , David, your point about the relationship between the company and the regulator in Scotland? So you've. Scottish Water being regulated by Sepa as a as a government body. You contrast that with the relationship in the rest of the country and which you said was much more adversarial. Which might be a way of saying that it's a bit cosy in Scotland. The relationship south of the border has produced a quite remarkable range of metrics now against which performance is is assessed. How does that compare to the situation in Scotland? Is it the same or is it different?
10:12
Speaker 3
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Speaker 3
I think one of the things you need to appreciate about Scottish Water is there's been a sort of catching up exercise since 2002, so you could argue that England and Wales had a 1013 year start. And in practical terms, the key element of this relationship has to date been that the regulator has been much more amenable to increased costs and spending than in the case of England and Wales, and that now, with the current price review period up to 2030, has now levelled out. The cheap and nasty model in England. Wales has been superseded. And in a funny old way, I would argue that the relationship between the regulator and the company in Scotland has been an exemplar for England and Wales, that they have been more consistent and less confrontational about spending.
Acknowledging the challenges they had to face and the fact that they had to deal with them.
Acknowledging the challenges they had to face and the fact that they had to deal with them.
10:13
Speaker 1
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Speaker 1
Yeah. I thought it was been the whole debate about regulation and obviously the conclusions from the. The IWC review. Have raised the whole issue about about what happened with regulation and what went on. And I think one of the most interesting interventions was actually from the author of the the whole English model, which was Professor Stephen Littlechild, who went on to be the electricity regulator, and he made a submission to one of the regulatory hearings. I can't remember exactly which one it was and where. He basically said, this model has failed because it's I think he described it as purgatory between the regulator trying to outguess the companies, you know, this sort of a five year cycle that then just starts again.
And ultimately, when people don't agree, they go to the Competition and Markets Authority for a decision. And he actually argued in favor of the Scottish model because it was closer to the sort of negotiated outcome that you get actually, in some of the American type regulatory systems as well.
And ultimately, when people don't agree, they go to the Competition and Markets Authority for a decision. And he actually argued in favor of the Scottish model because it was closer to the sort of negotiated outcome that you get actually, in some of the American type regulatory systems as well.
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10:15
Terry Jermy
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Terry Jermy
Lovely. Thank you, chair, and good morning. Thank you for your time today. We've already touched upon some examples of ownership models around the world. And actually, as a committee, we've received a significant amount of evidence and examples of direct public ownership, delegated private management, something in between. Approaches you feel might. Advantages, disadvantages. But what do you think might work best for England? Start with you, David.
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Speaker 3
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Speaker 3
That's right. And. The Prime Minister's allusion the other day to increased state investment in the sector is a way forward. So. Looking retrospectively, things like private equity simply should not be allowed in the sector. Either owned by a sympathetic utility, which is very much the case in Northumbrian and Wessex and their parent companies operate other utility companies. They understand them. Welsh Water , it's flawed, but it's a way forward and the listed model is still appropriate. So the crucial thing is to eliminate private equity from the sector. And along with that is reinstating a sense of public participation.
I forget the exact year, but until the mid 1980s, you had local council representatives on each of the water authorities. I think it was 1984 that they were removed. Because they used to have boards of about 50 members, and then they were cut down to 11. So that sort of element of accountability, I think is important. Apart from anything. It's a process of rebuilding trust in the companies, and we have to appreciate that we've lost trust in the companies. I mean, my greatest analogy here is the drought of 1985, 86, nine, sorry, 1976 versus 95.
So in the 1976 drought, people stoically accepted standpipes. A friend of mine was working for Yorkshire Water when they mentioned that they might have to use standpipes. He went to a garage, took out his company credit card with Yorkshire Water on it and the person next to him spat in his face. The element of public trust and understanding was lost, and I don't think it's really. I don't think people realize just how fundamental that element of public understanding, stoicism, fortitude, whatever you like to call it, and was crucial in a utility. And when that was lost, it was damning.
I forget the exact year, but until the mid 1980s, you had local council representatives on each of the water authorities. I think it was 1984 that they were removed. Because they used to have boards of about 50 members, and then they were cut down to 11. So that sort of element of accountability, I think is important. Apart from anything. It's a process of rebuilding trust in the companies, and we have to appreciate that we've lost trust in the companies. I mean, my greatest analogy here is the drought of 1985, 86, nine, sorry, 1976 versus 95.
So in the 1976 drought, people stoically accepted standpipes. A friend of mine was working for Yorkshire Water when they mentioned that they might have to use standpipes. He went to a garage, took out his company credit card with Yorkshire Water on it and the person next to him spat in his face. The element of public trust and understanding was lost, and I don't think it's really. I don't think people realize just how fundamental that element of public understanding, stoicism, fortitude, whatever you like to call it, and was crucial in a utility. And when that was lost, it was damning.
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10:19
Speaker 1
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Speaker 1
Well, just absolutely. Second, what David has said, what are the objectives of this change? And rebuilding public trust has to be fundamental to that. You know, there are lots of ownership models out there. You do still get listed companies that are publicly owned, the the utility supplying energy and water to Rome is a chair is listed on their stock exchange, but it's 51% owned by the municipality of Rome. So, you know, there are many, many different models. And the challenge now is, having been through this learning experience in the UK, what do you want to do next?
I think that public ownership or something like public ownership, would probably be what the public is expecting. That seems to be the the sort of zeitgeist which then raises the question, how do you get there? There are some, you know, there are one of the examples that no one's spoken about is Northern Ireland and Northern Ireland. I went to Northern Ireland when they were looking for a large EIB loan to fund their drinking water. So they built they built new drinking water plants that supply about half of the. They supply about half of the drinking water to the region and.
And they were done as what at the time were called PFI type projects. They were both Dbfo, the company that bid on the drinking water. One did an amazing job because it was supposed to be costing 156 million. And they actually found a way of redesigning it and actually rethinking the way the project was going to be delivered. That cut the cost down to 110 million. It was done as private finance. The EIB lent half of the money, about 40% of the money. There was a Dutch bank that lent another proportion, and then there was some equity.
And I think it was Kelda who delivered the project. Alpha. Yeah. Kelda delivered Alpha. It's called Alpha Project. But they decided they wanted to withdraw from. The project was built. It worked. The performance was outsourced to the private sector. And at a certain point, Celtic decided it wanted to withdraw from operating its non-core business, and it sold the equity to the Northern Ireland Water. So it remains a private company. It remains the project financed special purpose vehicle, but it's now owned by Northern Ireland Water, which has also been able to get some synergies because it could then integrate that with other parts of its operations in a slightly better way.
So that's another way in which you can make that transition, that the public sector can purchase equity, but which is, you know, I think you have to you have to get away from any idea that there's a perfect model or that you can, you know, this is what they do. They're therefore, this is what we have to do here. These things evolve over time. And you can try and learn lessons and see what could we be doing better? And I absolutely mirror what, what, what both John and David have said. You can't look at ownership in isolation.
You have to look at ownership, governance, finance and affordability as a package. Yeah. These all things have outcomes in terms of ultimately consumer tariffs and consumers perception that their opinions then have an influence on the performance of the companies.
I think that public ownership or something like public ownership, would probably be what the public is expecting. That seems to be the the sort of zeitgeist which then raises the question, how do you get there? There are some, you know, there are one of the examples that no one's spoken about is Northern Ireland and Northern Ireland. I went to Northern Ireland when they were looking for a large EIB loan to fund their drinking water. So they built they built new drinking water plants that supply about half of the. They supply about half of the drinking water to the region and.
And they were done as what at the time were called PFI type projects. They were both Dbfo, the company that bid on the drinking water. One did an amazing job because it was supposed to be costing 156 million. And they actually found a way of redesigning it and actually rethinking the way the project was going to be delivered. That cut the cost down to 110 million. It was done as private finance. The EIB lent half of the money, about 40% of the money. There was a Dutch bank that lent another proportion, and then there was some equity.
And I think it was Kelda who delivered the project. Alpha. Yeah. Kelda delivered Alpha. It's called Alpha Project. But they decided they wanted to withdraw from. The project was built. It worked. The performance was outsourced to the private sector. And at a certain point, Celtic decided it wanted to withdraw from operating its non-core business, and it sold the equity to the Northern Ireland Water. So it remains a private company. It remains the project financed special purpose vehicle, but it's now owned by Northern Ireland Water, which has also been able to get some synergies because it could then integrate that with other parts of its operations in a slightly better way.
So that's another way in which you can make that transition, that the public sector can purchase equity, but which is, you know, I think you have to you have to get away from any idea that there's a perfect model or that you can, you know, this is what they do. They're therefore, this is what we have to do here. These things evolve over time. And you can try and learn lessons and see what could we be doing better? And I absolutely mirror what, what, what both John and David have said. You can't look at ownership in isolation.
You have to look at ownership, governance, finance and affordability as a package. Yeah. These all things have outcomes in terms of ultimately consumer tariffs and consumers perception that their opinions then have an influence on the performance of the companies.
10:23
Terry Jermy
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Terry Jermy
Okay. I think our task as a committee is to sort of tease out those different ownership models and advantages and disadvantages, but fortunately, we don't have to make a decision. So it's okay. But within the different models that we've looked at, there are clear trends about how different models serve different purposes, whether that's better for the environment, better for customers. Are there any particular trends for the different models that you think would be worth the committee being particularly aware of? If we wanted to get strong environmental improvements, that's the better model, or is it really just not as clear as that?
10:24
Speaker 1
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Speaker 1
Is that directed to me? No, there is there is no, there's not a particular model that gives you particular outcomes. I mean, there's actually been quite a lot of academic research looking at public ownership versus private ownership. And there are certainly cases where you've got a really badly performing public sector where you can get big improvements. But I think, as John said, I've dealt with a lot of the private water companies around the world, especially the French ones, and they're very good at their business. So if you package something like, will you operate these sewage plants for us?
And will you design, build, finance and operate, or will you just design, build and operate and you transfer risk through good contracts? You know, that responsibility is then on a company that's really good at doing that, but that's that's separate from the ownership of the company. Because most of the time, as I say, globally, the dominant model is publicly owned. And then financing tools that give you what you need, which is long term, low cost finance that can then feed into lower tariffs to consumers.
And will you design, build, finance and operate, or will you just design, build and operate and you transfer risk through good contracts? You know, that responsibility is then on a company that's really good at doing that, but that's that's separate from the ownership of the company. Because most of the time, as I say, globally, the dominant model is publicly owned. And then financing tools that give you what you need, which is long term, low cost finance that can then feed into lower tariffs to consumers.
10:25
Speaker 2
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Speaker 2
We're kind of neutral whether it's nationalised or whether it's privatised. It's we're more kind of interested. We don't bring capital. We say we save it. So we're very focused on operational and maintenance efficiencies on, on, on, on scale. And that's the opportunity we get in places like France and around the world. There's nothing to stop the English and Welsh Wasps from taking catchment and putting an international tender out there to get the world's finest operators and maintainers to come and tender over a 10 or 15 year concession period. They can do that. They just don't.
Nobody does. You know, the only concessions that we have are where the companies are nationalised. So we've got obviously four, well, three now in Scotland, and we've got one of the other five that that Hugh referred to. There was Project Alpha and Omega. Alpha was water, Omega was wastewater. We run Omega now, so we look after all the sludges and by resources in Northern Ireland and five major wastewater treatment plants and have done for the last 20 odd years. So this this is in the in the England and Welsh capabilities, they'd have to go off what?
Approval and regulatory approval and everything. But we don't understand why. We don't have comparative models. We just operate and maintain everything the same way. So for me, the conversation needs to turn to many of the Cunliffe Review recommendations. Many of the the comments that we've made, it needs to turn to alternative operation and maintenance models, where people have very clear black and white specifications of particular catchments of what the what the expectations are. And if you breach those expectations, you are instantly fined like you are in a PFI. There's not some big three year court case where there's the environmental agency brings the CEO to to a court.
And, you know, there's there's instant penalties for failure, which drives regulatory compliance. So I think it's more about that next tier of, of how you actually deliver the services and the customer services for the people of England and Wales.
Nobody does. You know, the only concessions that we have are where the companies are nationalised. So we've got obviously four, well, three now in Scotland, and we've got one of the other five that that Hugh referred to. There was Project Alpha and Omega. Alpha was water, Omega was wastewater. We run Omega now, so we look after all the sludges and by resources in Northern Ireland and five major wastewater treatment plants and have done for the last 20 odd years. So this this is in the in the England and Welsh capabilities, they'd have to go off what?
Approval and regulatory approval and everything. But we don't understand why. We don't have comparative models. We just operate and maintain everything the same way. So for me, the conversation needs to turn to many of the Cunliffe Review recommendations. Many of the the comments that we've made, it needs to turn to alternative operation and maintenance models, where people have very clear black and white specifications of particular catchments of what the what the expectations are. And if you breach those expectations, you are instantly fined like you are in a PFI. There's not some big three year court case where there's the environmental agency brings the CEO to to a court.
And, you know, there's there's instant penalties for failure, which drives regulatory compliance. So I think it's more about that next tier of, of how you actually deliver the services and the customer services for the people of England and Wales.
10:28
10:28
Speaker 2
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Speaker 2
Well, having alternative models, it's not one size fits all. You know, in England and Wales everything's delivered the same way. It's , it's, it's as Albert Einstein, it's the definition of insanity to expect different results from doing things to say we're doing things the same way we always have. You know, the model needs to evolve and we need to bring in, in, in private experts in, in, into the operation and
10:28
Speaker 1
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Speaker 1
There. The model needs to. evolve and we need to bring in, in, in private. experts in, into the operation and maintenance arena like we have with the CapEx arena. You know, you look at how the CapEx in this industry has evolved throughout privatisation. You remember well in the. the big process contracts, design and build and the.
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10:28
Speaker 1
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Speaker 1
The water industry has developed some world leading alliances. You know, I'm a founder member of the AT1 Alliance in Anglian Water. It's held up by the. Treasury as one of the best major capital framework. delivery reference references. You know, we work very well in creating the assets. Why can't we turn to all the international experts and global experts to actually operate and maintain the assets .
10:28
Terry Jermy
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Terry Jermy
For. efficiency and for performance? Conscious of time. So I'll just ask one more quick question. So David, you spoke quite powerfully earlier about. regulatory failure, essentially. And I think it's fair to say that there's very few countries that have privatised the sector to the same extent as England. And one of the countries we looked at as a committee was Chile, which is obviously a very different context entirely.
And I wondered if you thought there's any lessons that can be learnt from elsewhere in the world around how .
And I wondered if you thought there's any lessons that can be learnt from elsewhere in the world around how .
10:29
Speaker 2
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Speaker 2
A fully privatised system could be better regulated. I think we have to restrict ourselves more or less to OECD countries because they're comparable. I think one of the most useful comparators is Singapore. It's state owned. It actually has a problem. Its water is so cheap that people use bottled water because they don't trust this excellent water because it's so cheap. Their model has been that while things are state owned, if the private sector can come in with.
something which is more efficient, then they're open to it. So a lot of their major projects.
something which is more efficient, then they're open to it. So a lot of their major projects.
10:30
10:30
Speaker 2
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Speaker 2
Water reuse and so on are actually operated by the private sector companies. And the overall. result has been a. remarkably high quality of service. Are the models. You have then the. Scandinavian model, Denmark, for example. Water costs a great deal more than it does in Britain, but one of the things it has two aspects of that. First of all, it means that the water and wastewater is entirely.
10:30
10:30
Speaker 2
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Speaker 2
No debt. Secondly, the cost of the service really has. forced demand. management into the public imagination. So the average water consumption in Denmark is roughly. 100l per capita per day, against. 142 in England and Wales. So they're they have created something thoroughly beneficial. And then you have the sort of I would call the hybrid models like.
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10:32
Alistair Carmichael
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Alistair Carmichael
To be excellent. Thank you very much. Thank you. And that's how important point on which to end. It's the outcome for the consumer at the end of the day. Gentlemen that's all the questions we have for you at the moment. Thank you for your attendance. We will move on without any pause. Our next witness is joining us online, technology permitting. And we'll then have a further panel after them. Who will be again back at the table. So thank you for your attendance. You're very welcome to remain or to to leave as you choose. So I'm looking with expectation that screens in front of me, hoping that they are going to light up with links to Marina and Klaus Schwarz.
We. Right. Okay. I see. Good morning. Welcome to the Select committee. Thank you very much indeed for joining us. For the benefit of those who are following our proceedings and for our own records. Can I invite you, please, to introduce yourselves to the committee and marine?
We. Right. Okay. I see. Good morning. Welcome to the Select committee. Thank you very much indeed for joining us. For the benefit of those who are following our proceedings and for our own records. Can I invite you, please, to introduce yourselves to the committee and marine?
10:33
Speaker 3
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Speaker 3
We will start with yourself. Thank you. And good morning, ladies and gentlemen. First, I would like to thank you for giving me the opportunity to contribute to your Commission's work. I am currently a lecturer at Agroparistech. That is a higher education. institution that trains. engineers in the fields of life sciences and the environment. I'm also a researcher in public management and deputy head of the Joint Research Unit called Geo that gathers 100. researchers on different water matters. And I wanted to mention that I am in charge of the annual survey on concession contracts in the water sector in France for the French.
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10:35
Sarah Bool
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Sarah Bool
Questions, if we may. And Sarah, you're going to lead the questioning here. Thank you, chair, and welcome marine. It's lovely to have you with us online. So we're just wanting to look particularly obviously at the French model. So we know that France uses a leasing or concessionary model for many of its water resources. So can you just explain to us how that works and sort of set out some of the.
advantages .
advantages .
10:35
Speaker 3
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Speaker 3
And. disadvantages of this approach? Okay. So I will start by explaining the broader picture so that you can understand where the lease contract fits in. So first, the main. difference and. characteristic of the model French model is that local governments are. responsible for. delivering the water and sewerage services. And so they own the water systems. They take all decisions regarding investment. They have to look for funds to invest according to their long term planning. And they. organize all operation and maintenance. So what does it mean organizing operation and maintenance. They decide whether they create their own public water.
operator or whether they go for a lease contract. We call them concession contracts. Nowadays, according to the EU.
operator or whether they go for a lease contract. We call them concession contracts. Nowadays, according to the EU.
10:36
10:36
Speaker 3
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Speaker 3
And it's a contract that is signed between the local government and a private operator. They agree on a duration of the contract. They agree. They agree on. commitments that should be met , to deal with the core issues and. challenges that are in. characterized this territory. And this allows for the private company to build directly to the water users.
And with this money, they pay for their. operation and maintenance costs. And if there is a little investment that is. including the.
And with this money, they pay for their. operation and maintenance costs. And if there is a little investment that is. including the.
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Speaker 3
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Speaker 3
Everything that are turning, turning engines in a treatment plants. But it could be also bigger. investment which is less used today. But it's still a possibility. For instance, in NiMH, close to Montpellier, where we are, the city contracted with Veolia and to add. biogas in the. generator in the wastewater treatment plant. So this is the kind of elements that can be agreed on. So just to give you a proportion, and something I wanted to say about the French model is that we have around. 22,000 water and sewerage utilities. So it's a lot. Most I mean, more than half of them are operated by public.
authorities and that deliver water for half the population. So it means that compared to. English and Welsh standards, our utilities are very small. We have only few utilities. That looks like a standard English. utility around Paris. Obviously. I'm talking about eau de Paris. C-diff Ciap. So I think the situation may look like the situation in England .
Before the Water Act in.
authorities and that deliver water for half the population. So it means that compared to. English and Welsh standards, our utilities are very small. We have only few utilities. That looks like a standard English. utility around Paris. Obviously. I'm talking about eau de Paris. C-diff Ciap. So I think the situation may look like the situation in England .
Before the Water Act in.
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Speaker 3
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Speaker 3
Sorry. The regulation is made when there is a private operator through the contracts. So as it was. mentioned earlier, if the performance is not met, the the operators are fined. There are penalties included in the contract. So there are some incentive. mechanisms to make sure that the. operators deliver what is expected during the duration of the contract. The state still has a role, a role to check that the. drinking water quality and the. influence of released in the. environment are meet the standards set by the state. And and so that's that's an. important thing to, to think about regarding the French system is the huge.
responsibility .
responsibility .
10:40
Sarah Bool
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Sarah Bool
And of the local governments. And I guess in terms of advantages, so that there are so many smaller utilities and there is that sort of lack. I guess it means it's individualized and very personalized for the area. But do you see that as a as a benefit to the system, or do you think actually there should be more of that sort of central regulation,
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Speaker 3
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Speaker 3
But it has been perceived as finally, I mean, this project has been abandoned. At that time, there was a. crisis of. mistrust due to lack of. transparency about the management of water utilities. And this has been overcome by setting up a platform where water utilities have to share data about their systems and about their performance. Main performance indicators. But really, the main drawback of our system is that, as you pointed out, all these small water. systems lack. capacity first. I mean, in terms of. expertise and also in terms of financial. capacity to face the current.
challenges that we face with climate change. And so the state has been has tried to push all these small services to merge together. So there have been a drive, and we have dramatically reduced the number of water and sewerage utilities for the past ten years. But there is still a long way to go to reach a size where it becomes more. comfortable .
challenges that we face with climate change. And so the state has been has tried to push all these small services to merge together. So there have been a drive, and we have dramatically reduced the number of water and sewerage utilities for the past ten years. But there is still a long way to go to reach a size where it becomes more. comfortable .
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Sarah Bool
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Sarah Bool
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Speaker 3
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Speaker 3
Address both if you want. Okay. So in terms of performance, I think we are doing quite well then. It depends. I mean, among the. thousands water and sewage utilities. I'm not saying that. everywhere we are reaching the targets perfectly. Well. There are some issues in some places. So there are we have very good public operators. We have less good public operators. I mean, there is a great diversity of situations. And I think that the main lessons that we we can get from the French experience is, first, we have a we have to have a strong public sector, a strong local authorities able to really understand what are the main.
challenges that needs to be. addressed by the. operators and to set the right targets, etc. so the. There is. I think it's important to have to build this. capacity within our local governments and. authorities to, to, to improve and to make sure that the you can take. advantage of a very good firm that is very experienced and then can deliver. But if you don't understand its work, if you don't understand, if you are not able to draft proper terms of.
challenges that needs to be. addressed by the. operators and to set the right targets, etc. so the. There is. I think it's important to have to build this. capacity within our local governments and. authorities to, to, to improve and to make sure that the you can take. advantage of a very good firm that is very experienced and then can deliver. But if you don't understand its work, if you don't understand, if you are not able to draft proper terms of.
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Speaker 3
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Speaker 3
I think we have this issue. We have an issue of underinvestment. We don't. We are quite worried at the moment in the sector because we don't. The pace of. replacing pipes, old pipes is not good enough, and we know we are going to have to handle a lot of. investments to face to adapt to climate change . And the way water bills are. I mean, the way we we fund. investment only through water tariff is seen today as as leading to a situation where water tariffs are going to increase dramatically. And the model really depends on the volume of water that is sold, because we can, as it was said earlier, in France, only water can fund water.
So it means only water bills can fund our investment in the water sector. And since we know that we are going to have to. reduce the amount of water sold we have, we are in a tricky situation and we are looking for a new .
So it means only water bills can fund our investment in the water sector. And since we know that we are going to have to. reduce the amount of water sold we have, we are in a tricky situation and we are looking for a new .
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Sarah Bool
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Sarah Bool
To to fund our water systems today. Excellent. That was just about to be the next question I want to ask you. So you've already you've already answered that for us. And I guess that's something that we're having a big debate and questions about here in the UK about how we fund it with that underinvestment. And just looking, though, because you it's been mentioned that there are many cases now where some of those private contracts have actually been ended in France, and the local authority has taken over control of the.
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Speaker 3
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Speaker 3
And local governments really relied on the private sector to bring money and to bring their expertise in the treatment. etc. and at the same time, there have been this lack of. transparency in the. management and some cases of political affairs, of corruption you might have heard of. So all this has created a lot of.
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Speaker 3
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Speaker 3
Regarding this model of . involving the private operator. And so there have been. A growing idea that we should move away from this, this model, and trust more about the ability of the public sector to manage itself. So I think this is one of the roots of many decisions to, to go. towards building a public. ownership of the operator, but not I think it's not the only reason. It's not only the more moral idea that it's not right to make money out of the water business. I think there is also something else. The idea that at the times where water.
issues are become so.
issues are become so.
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Speaker 3
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Speaker 3
He won with a program that. includes the. Remunicipalisation that the first step. And then it is like really. creating a small. enterprise in Montpellier at that time. So in Montpellier there was a contract with Veolia ending. So it was a 25 years contract. And so the issue was to to find the right people, the head of the regime, then to, to recruit the.
employees to build an organogram, etc., to fund offices.
employees to build an organogram, etc., to fund offices.
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Speaker 3
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Speaker 3
Etc. and, but with the issue of human resource management, that is key, as you are aware of, I'm sure. And what is interesting in the case of France is that we have a law that protects workers, all. employees of local public services. If there is a change, if there is a new operator, be it public or.
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Speaker 3
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Speaker 3
The new operator has to offer a position to the employees working in the utility so that they can keep their position. And it's not only protecting the workers, but also. enabling to. guarantee the continuity of the service. Because in the case of Montpellier, for instance, the head of the production water. production plant chose to follow the regime and not to work for Veolia anymore. And so it was very nice for the regime to rely on this high level expertise to guarantee that once they will take over, they will have the expert of the water treatment production plant with them, you know, so that's something that is tricky.
And then at the end of the day, you get a regime looks like a small enterprise with people coming from the private operator, but also employees coming from other types of organizations. And the challenge is to make all this work. All these people work together with common values. And lastly, I just wanted to mention that in the case of Montpellier, but in other cases also it's a great opportunity to involve citizens. So in Montpellier. citizens have been involved throughout the.
And then at the end of the day, you get a regime looks like a small enterprise with people coming from the private operator, but also employees coming from other types of organizations. And the challenge is to make all this work. All these people work together with common values. And lastly, I just wanted to mention that in the case of Montpellier, but in other cases also it's a great opportunity to involve citizens. So in Montpellier. citizens have been involved throughout the.
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Speaker 3
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Speaker 3
There is not yet really a study of such. And I think we should do it in France. It would be interesting. What I can tell. In the case of Montpellier, for instance, Montpellier, the regime has been existing for more than ten years. So I can tell you, for instance, in this case, that the regime is. performing almost at the with the same level of. performance than before, than Veolia is able to. invest a lot. New water production plant has been delivered. recently to secure the supply in Montpellier and even the worry for with public operator is often.
Are they going to be able to do. Also to. innovate and to keep a high level of. expertise in Montpellier, they won an EU funded research and development project to develop a mobile unit to develop wastewater reuse in Montpellier, to flush the. networks and for diverse. uses in the city. So I think it's a proof. It's an evidence that .
Are they going to be able to do. Also to. innovate and to keep a high level of. expertise in Montpellier, they won an EU funded research and development project to develop a mobile unit to develop wastewater reuse in Montpellier, to flush the. networks and for diverse. uses in the city. So I think it's a proof. It's an evidence that .
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Josh Newbury
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Josh Newbury
Now regarding the Netherlands experience. And, Josh, you're going to lead the question. Thank you very much, chair. Morning, Professor Schwartz, and heartily Danke for your time to be with us this morning. We were really interested as a committee to look at the example from the Netherlands, because you obviously have a relatively large regional water companies, which is similar to the system that we have in the UK, but very differently. They're owned by local authorities, and in the UK we don't have any kind of involvement for for councils in water. So could you. To begin with, give us a bit of an overview of how the Dutch model works and what you see, the .
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Speaker 4
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Speaker 4
Feel like it's a it's a safety net that they want to keep in place? So it's a bit, I think until now, or at least until the recently. It's a model that has worked very nicely in the Netherlands. There's. There. We of course, also went through the. 1990s with questions about efficiency. I think that is still a question that remains. You know, on the one hand, the nice or the the advantage of the model is that you separate or you create a distance between the public. shareholders and a water utility, which basically. operates relatively autonomously.
And at the same time, the disadvantage is that you have a model in which you have.
And at the same time, the disadvantage is that you have a model in which you have.
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Speaker 4
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Speaker 4
Which are at arm's length, and a utility that operates relatively autonomously. So a lot depends on how the utility fills in that that role. I think the. challenges for the Netherlands are especially going to come into the in the near future, the challenges facing the sector with droughts like we've had last year, but also for the previous 4 or 5 years, are highly problematic. Newly emerging. contaminants are problematic.
We're also at a stage where a lot of the.
We're also at a stage where a lot of the.
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Speaker 4
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Speaker 4
A lot of the investments that were done 50 years ago need to be replaced. And so this is. Yeah, this is something that is just developing. And the big question is how the model will fare under these pressures, because one of the things that is going to happen is that the tariffs are going to increase. I think in.
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Josh Newbury
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Josh Newbury
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Speaker 4
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Speaker 4
They . I mean, so the it was also a bit referred to earlier about about consumer trust. So the Dutch consumer of water supply services has a great deal of trust in the water utilities. If you would go out onto the street and ask people, how much do you pay for water? I don't think anyone could actually tell you what tariff they pay. I, I work in a, in a water institute. If I ask my colleagues, it is unlikely that they will actually know how much they pay. So the tariff is relatively low also because other services are much more expensive electricity, gas.
So in.
So in.
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Speaker 4
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Speaker 4
Water is not not something that. consumers think about other than that they want to have they want to be able to open their tap at any given moment of the day. And the water that comes out needs to be potable of good quality. And as long as that is assured at this moment, then, you know, and also the water utilities understand that the trust of the consumer is extremely important.
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Josh Newbury
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Josh Newbury
So they're also investing in maintaining that trust. Yeah. Well, public trust in the UK is in a very different place, I think, with most of our water companies. So we're very keen to get your insights into that. I want to ask you about the fact that the local authorities play such a big role in the water system, and I know from being a member of a local council previously that anything that the council touches can potentially become a point of political debate is is there any. politicization of of that system in the Netherlands? Is it kind of a feature of some of those local election campaigns, as Doctor Cullen was referring to in France?
Or is this something that, like you said, everyone kind of .
Or is this something that, like you said, everyone kind of .
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Speaker 4
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Speaker 4
Trusts that it's being dealt with well and they just sort of leave it alone and focus on other issues. I think one major difference is that in the Netherlands we have regional water utilities. So I think Maureen was talking also, especially about situations where you have one. municipality which. decides and and if you have one shareholder, one government.
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Speaker 4
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Speaker 4
Then it's easier to. politicize decisions about what. utilities in in our case, for example, if I look at a utility like fitness, they have five provinces and 92. municipalities as their shareholders. So none of these. shareholders has a majority. There always would need to be a, a coalition of. municipalities that that argues for a certain position. And second, the question is what would you gain? What would you win? I mean, so the level of service being provided at the moment is, is quite good. The tariffs are considered acceptable by the consumers. They they rate water services at a at a.
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Josh Newbury
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Josh Newbury
One of the things we're looking at at the moment in the UK quite intently is public involvement. So recent legislation passed by our government. mandated customer panels to kind of empower customers, give them more of a direct say, or at least be able to lift the lid on what's going on in their water company. How much kind of direct public involvement then is there in .
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Speaker 4
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Speaker 4
Water system again, is that something that people just aren't clamoring for? No, it's very little. I mean, there is a there are cases where utilities have tried to, I think also actually sort of following customer service councils in, in England and Wales, that they had the idea of, of. establishing a customer council, but they couldn't find people that were interested in actually dedicating their time to, to be part of such a council. So it's, it's, it's, I think the utilities would be open for it, but I, it's there are not a lot of citizens or consumers who .
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Josh Newbury
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Josh Newbury
Yeah, are quite severe. One of the things I was struck by when I was looking at the map of the, the areas that the water companies cover was that some seemed considerably larger than others. You mentioned vitamins. They seem to cover like a huge chunk of the country, whereas others, you know, relatively small. Do you see any kind of advantage or. disadvantage in the size of those companies within the Netherlands? Does that have a bearing on .
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Speaker 4
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Speaker 4
Water companies or groundwater companies, that really impacts the the tariffs, some areas are have easier access to water than others. So these factors are much more determinant in in the performance of the utilities. In the case of fitness, fitness, you. I mean, that was you, you had a managing board and a board of directors that was. So they really became big in the 1990s. There was the threat of privatization. And their idea was that if we become big, then it's going to be more difficult to be taken over. That's one of the reasons why they are why fitness is relatively big.
But also for them, it it has it is quite problematic because. In fitness, although it's a large company, it. Its service provision system consists of hundreds of smaller systems that are not very well connected. And that leads to a lot of difficulties because they're not able to. actually ensure that the water is going to the systems that where it's most needed. So it's the size of the company itself is, I think you need to distinguish that also from, you know, in the end, the provision of water services, the provision of water supply is about infrastructure.
And that infrastructural system .
But also for them, it it has it is quite problematic because. In fitness, although it's a large company, it. Its service provision system consists of hundreds of smaller systems that are not very well connected. And that leads to a lot of difficulties because they're not able to. actually ensure that the water is going to the systems that where it's most needed. So it's the size of the company itself is, I think you need to distinguish that also from, you know, in the end, the provision of water services, the provision of water supply is about infrastructure.
And that infrastructural system .
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Josh Newbury
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Josh Newbury
Is crucial, perhaps more than the size of the company. And it was the infrastructure I wanted to come on to now, because you mentioned that similar to the UK, there's a lot of aging infrastructure in the Netherlands. There's obviously a lot of investment going to be needed in the coming decade or two. Obviously, the difference with your system is that you don't have. private shareholders that are able to put equity in. It's it's got to come from the local authorities.
So how .
So how .
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Speaker 4
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Speaker 4
Been able to invest and what's the forward view for that? Yeah. So the, I mean, similar to, I guess to France, we don't the companies don't receive any funding from the local authorities. So the companies are completely self self-funding, self-financing. They fund their investments through loans, which they then have to pay off through the revenue generated through the tariffs. Apart from the tariffs, they have no other source of income. They're able. So the Dutch water utilities are able to source relatively. Favorable loans because they are well, they are a monopoly for water supply, for which there's always going to be a demand.
They are.
They are.
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Josh Newbury
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Josh Newbury
Yeah, that's that's the way it is. And we're kind of interested in the role of the Dutch water bank in this, which is obviously set up in the wake of devastating flooding in the Netherlands. And they seem to have played a really crucial role in providing that kind of stable, low interest finance. But then we've also heard that the bank has expanded its operations massively, and there's some concern that it's not providing enough finance now for its kind of original objective of securing the country's water supplies.
So is there is there role.
So is there is there role.
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Speaker 4
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Speaker 4
Well, I mean, so the, the, the Netherlands water bank, I mean, it was initially established by the water boards, so not by the water supply companies but by the water boards. So more for water security, water safety issues. They in principle have a mandate to lend to. entities which have a public purpose. There are the water supply companies do have access to the Netherlands water Bank, and there are also quite some utilities that have loans with them. However, at the moment the Dutch or the Netherlands water Bank, I believe their main source of loans is in social housing.
So it's it's they have gone they have moved beyond the the water sector. I think for the water utilities, it's not such a problem because also the the private banks are quite.
So it's it's they have gone they have moved beyond the the water sector. I think for the water utilities, it's not such a problem because also the the private banks are quite.
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Speaker 4
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Speaker 4
Quite interested to, to lend money to the water utilities. It's it's most what utilities will have loans with multiple banks also because they want to spread their loans over multiple. providers also to keep contacts in case they need to have quick access to loans, etc.. So I, I personally don't think that the Netherlands water Bank, the.
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Speaker 4
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Speaker 4
That's therefore going to fall on tariffs because that's the only other option. You've got it. It is going to fall on tariffs. And there the. So the question there is is how to to deal with keeping the tariffs more affordable. In the Netherlands we've never. subsidized tariffs. So that's not something that we have ever done really. But what we do is the the, the social security system. provides benefits or. allowances which can support low income. families in covering higher costs for certain basic services. So it's, it's the , the support for low income. households to deal with higher .
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Speaker 4
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Speaker 4
Would come from a different source than from the water utilities. Okay. The tariffs also by law, they need to reflect the cost of production. They need to reflect the cost of provision. They're allowed to make a small profit, which usually or which sometimes share goes to the shareholders sometimes is reinvested in the system. But the tariffs are not.
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Josh Newbury
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Josh Newbury
I mean, they need to reflect the real costs of providing services. Okay. Just lastly, I want to ask you about the research you've done on kind of public ownership more broadly, you know, the studies you've looked into outside of the Netherlands. What kind of lessons do you think we can draw from that, from the work you've done looking overseas, because nobody's got a perfect system, but it seems like there are very good features of lots of different systems that .
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Speaker 4
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Speaker 4
To to bring into our. Yeah, I think it's I mean, I think I think what is important is to look at the, the, if it is a public ownership, if it is a public utility to look at it in the broader governance structure. So in the Netherlands, you have the Water Supply Act, which is crucial, the. shareholders and that there are multiple. shareholders is crucial. You have a lot of shared collaboration between the water utilities. So although we have ten water utilities, we only have four water quality laboratory because most of these laboratories are co-owned by different utilities.
And it's that broader structure that. makes a water utility, in my view, that provides an enabling environment and a situation in which it can perform well. And I think that's if I look at the cases that I've studied abroad, often what is tried is just to reform the utility, perhaps change its ownership, or make it into a private company owned by a public shareholder rather than a than a direct public utility. You know, that in itself is, is I I'm not so convinced that that's enough. You need to think more also about the broader governance structure, the enabling environment in which that operates.
And if you don't address that, then changing .
And it's that broader structure that. makes a water utility, in my view, that provides an enabling environment and a situation in which it can perform well. And I think that's if I look at the cases that I've studied abroad, often what is tried is just to reform the utility, perhaps change its ownership, or make it into a private company owned by a public shareholder rather than a than a direct public utility. You know, that in itself is, is I I'm not so convinced that that's enough. You need to think more also about the broader governance structure, the enabling environment in which that operates.
And if you don't address that, then changing .
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Speaker 3
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Speaker 3
Maureen, I think you wanted to come back in. Yes. Thank you. If time allows, I just wanted to add something regarding funding of our water sector, just to mention that we have a fourth of our water bills that funds water. agencies and all this money that is collected within River basin can be used, then is. redistributed to local government to help them to fund investments so local governments can not only use their revenues from water bills, but also. subsidies or concessional loans from water agencies, but also from European Union and other local governments to help them to to fund their investments.
This was a quick add on that I find useful with this idea of having an agency at a scale of a river basin that also can give priority in terms of investment and orientate the action of local governments by bringing additional funds on issues that are seen as really most .
This was a quick add on that I find useful with this idea of having an agency at a scale of a river basin that also can give priority in terms of investment and orientate the action of local governments by bringing additional funds on issues that are seen as really most .
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Alistair Carmichael
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Alistair Carmichael
Within a river basin. Thank you. Okay. Interesting. I think I'll probably , Maureen, a class. Thank you so much for joining us. Our little select committee, Eurovision hommage. We do appreciate your attendance. There's a lot more that we could discuss, but unfortunately time is against us today. But thank you for your attendance and your cooperation. And now we will move on to our third panel if we have .
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Speaker 15
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Speaker 15
Remain unaddressed? I'll start with the first of David's. Thank you very much. Well, I think it's a very good report, I should say, in representing all of the water companies across the United Kingdom, I represent the state owned Scottish Water and Northern Ireland Water, the not for profit in Wales, as well as the private companies in England. And I think it's very clear that the challenges are the same. Climate change does not discriminate the ownership model, the changing needs of businesses, especially data centres, some of which can use a hell of a lot of water when it comes to high temperatures.
That does not discriminate against ownership model and nor is population growth. And we're seeing that in all four nations of the United Kingdom. What Sir Jon Cunliffe has identified is that there's no correlation between ownership and performance. That's a view backed up by the OECD in Paris, when they look across Europe as well as the rest of the Western world, what kind of has identified is that regardless of ownership model, there are three crucial ingredients, and they are clear strategies set by the governments of the day. The government needs to be clear about the trade offs, what it wants, broadly understanding the cost impact.
Then you need strong.
That does not discriminate against ownership model and nor is population growth. And we're seeing that in all four nations of the United Kingdom. What Sir Jon Cunliffe has identified is that there's no correlation between ownership and performance. That's a view backed up by the OECD in Paris, when they look across Europe as well as the rest of the Western world, what kind of has identified is that regardless of ownership model, there are three crucial ingredients, and they are clear strategies set by the governments of the day. The government needs to be clear about the trade offs, what it wants, broadly understanding the cost impact.
Then you need strong.
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Speaker 15
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Speaker 15
It has to come. And we see. challenges in the financing, whether it be privately owned or publicly owned. And I thought it was very interesting hearing some of the financing challenges in France and and in the Netherlands that you just heard earlier, where we have state owned companies insufficiently invested in in their infrastructure. So that is what kind of has set out to reform its 88 recommendations in total. I think it's an excellent report. It's now been with the government for 15 months, 15 months. Tomorrow, actually, to be exact. We think it's very necessary for them to get on and deliver that report.
And if they do, I think it's going to deliver the transformation to the sector .
And if they do, I think it's going to deliver the transformation to the sector .
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Speaker 16
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Speaker 16
Rightly deserves. Thank you. David. Okay, so what do I agree with? And then the but so the regulatory model is not fit for purpose, and particularly aufwarts modeling and approach to things. So I agree with that. There there's a much better need for better public control and more local control. So the idea of having more catchment.
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Speaker 16
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Speaker 16
For water basin management, and we need 50 operating units and economies of scale and how we run things and how we do things are so different if it's a city or a small place and so forth. But I don't know who did it. I never found it out. But loosely, quote unquote, the politicians got a hold of it and they said, ten is a good number. And they merged everything up to ten units. That system was never economically rational. The tasks were not based on any economic rationality. Most of the systems that we've talked about today, including I know about Japan, I know about Germany, I know about the Netherlands.
I've written on two of those countries. They organically develop and merge. They're not forced together like that. So when we come to Cunliffe, I absolutely agree that we should go to catchment. management and think about it that way. But that means that the the way that all thought has been assessing costs would need to fundamentally. change because the what. drives and what will be needed will be different in different catchment areas, different ways to treat sludge, different ways you got the water.
We heard about surface versus.
I've written on two of those countries. They organically develop and merge. They're not forced together like that. So when we come to Cunliffe, I absolutely agree that we should go to catchment. management and think about it that way. But that means that the the way that all thought has been assessing costs would need to fundamentally. change because the what. drives and what will be needed will be different in different catchment areas, different ways to treat sludge, different ways you got the water.
We heard about surface versus.
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Speaker 16
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Speaker 16
He basically cost a representative. My own research shows that the CV values were completely overvalued. So if the price if the prices of companies went below that, that was just reflecting the true value that the investors had put into the companies. Skipping ahead to the most important thing. 2015 to 2025 is an expenditure that needs to be funded. It is not a cost. So the regulator this is conversations with Alan Sutherland at Wickes a long time ago. The regulator is responsible for making sure there's enough money but not. That's not a cost. And the whole idea of Cunliffe is saying we need to do more about thinking about how capital is invested.
Breaking up opex a bit. I don't have that down exactly in my head what he said. So I think what's missing in Cunliffe is what is the right. structure that needs to be. And it doesn't mean you have to break up the companies, but how you assess them. And secondly, the way that all water assesses there's not all fault wasn't a bad regulator because it did too much econometrics. I would say that I do.
Breaking up opex a bit. I don't have that down exactly in my head what he said. So I think what's missing in Cunliffe is what is the right. structure that needs to be. And it doesn't mean you have to break up the companies, but how you assess them. And secondly, the way that all water assesses there's not all fault wasn't a bad regulator because it did too much econometrics. I would say that I do.
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Speaker 17
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Speaker 17
Thank you. Sorry, that was a bit long. That's great. Thank you very much indeed. Ewan. I agree with a lot of what Dave has just said, but I think the essential question that kind of couldn't answer because he wasn't asked was the ownership question. And so we're going to hear a lot today. And we've heard a lot from the water industry about what matters is good regulation.
And ownership doesn't really matter, if at all. And I think that there's at least four reasons why that's clearly mistaken. The first is that if you've got private.
And ownership doesn't really matter, if at all. And I think that there's at least four reasons why that's clearly mistaken. The first is that if you've got private.
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Speaker 17
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Speaker 17
Then they are paying shareholders. And if you don't have private ownership, you don't have to pay. It's been about. 85,000,000,085.2 billion last time, I think David checked since. privatisation that has gone to shareholders. And that's money that could be reinvested in the system. But isn't the second big. disadvantage of having private ownership is a higher cost of borrowing, because if you're publicly owned, you can access the lowest cost of borrowing close to the Bank of England base rate, the Public Loans Works Board. Whereas if you're a private entity or a mutual entity as well, because non-profits are still private, then you're going to have to access the private bond markets and the amount that has been returned to banks and other bondholders since.
privatisation is now in excess of the amount that's being returned to shareholders. So I just did some figures myself in a report. Short report last year, Thames Water had returned over. 13 billion on the figures that I came up with since. privatisation to bondholders, whereas to shareholders it's a little bit over 10 billion. So second point is higher borrowing costs. The third reason that ownership really does matter, and it's not just about good.
privatisation is now in excess of the amount that's being returned to shareholders. So I just did some figures myself in a report. Short report last year, Thames Water had returned over. 13 billion on the figures that I came up with since. privatisation to bondholders, whereas to shareholders it's a little bit over 10 billion. So second point is higher borrowing costs. The third reason that ownership really does matter, and it's not just about good.
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Speaker 17
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Speaker 17
Is that if you've got public ownership, you can set public purposes in a statute, whereas you know, the. purposes of a privatised water company are going to be, you know, oriented towards returns to capital. But the fourth thing, and I think this is so vital , is that when you have a privatised water.
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Speaker 18
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Speaker 18
This committee is a great opportunity. Thank you. David. Yeah. To cut it short. agreeing with much of what Ewan said, and also 1 or 2 of the interesting points that David made. But to pick up on the elimination of public ownership from his terms of reference, I think was. really serious error , and highlighted by Maureen. Cullen's initial statement about France, which was very simply, local.
authorities are responsible.
authorities are responsible.
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Speaker 18
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Speaker 18
Are responsible for nothing in the system at the moment. That's the result of a couple of major. decisions made in previous decades. One was the decision that David referred to of the creation of the regional wasks in 1974. Again, as he says, it wasn't done on economic grounds of economic rationale, but it was done on the grounds of environmental rationale. And that is a difference from the Dutch system, where the regional companies have been, as it were, developed on an ad hoc basis.
But that decision in. 1974 effectively.
But that decision in. 1974 effectively.
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Alistair Carmichael
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Alistair Carmichael
Ownership of the system to take decisions. I just put down a marker here before you carry on that nationalisation didn't happen in Scotland. Water remained under the control of the regional councils, which themselves were then reorganised in about 1996, I think. And it was only then with the creation of Scottish Water in 2002 that you got that process of of of nationalisation. Are there lessons that we might draw from that, bearing in mind I don't want to start a .
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Sarah Dyke
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Sarah Dyke
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Speaker 16
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Speaker 16
Hall, because only because you mentioned that. Yeah. Well, the first thing is I would say is that the going back to lessons learned, it's kind of like as a parent, you don't want to make the mistakes that your parents made or you want to fix them when you're with your kids, right? So if we think that there is a great paper, when I first started doing privatisation work by Hunt and Link, which basically said that there was a loss, a loss when at.
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Speaker 16
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Speaker 16
Sort of flood management, I forget exactly what they were, but other activities were hived off from the water authorities and put into what was the National Rivers Authority. So. So what I want to get after is that one of the things that really matters here is water is different and sewage is different because it's got so much non.
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Speaker 1
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Speaker 1
So you've got to be. careful because you need separate agents. So one of the benefits of. privatization is you had a separate economic . You had you had an entity that was. responsible other than the Regional Water Authority for drinking water quality and environmental management. But on the other hand, you need you need advocates. So there's, there's some balance. between bringing. together and understanding and capacity, right? Because you need capacity to know what's going on and to plan and to think. But there's also a need for agents. And one thing I did pick up in Cunliffe, there's a very contradictory statement in there about the water regulator should be merged, meaning oflot, but it also should be independent.
And but it's all going to be in the same independent. And that won't happen if it's in the same entity. So so I think .
And but it's all going to be in the same independent. And that won't happen if it's in the same entity. So so I think .
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Speaker 2
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Speaker 2
And that seems to me to. clarify an important reason why these. responsibilities should be devolved to local level, which they are in virtually every other major country in Europe and North America. Can, can, can. just carry on a bit for 1 or 2 points. I mean, one of the. frustrations that I came across over the lack of local authority. responsibility was after following a.
presentation by somebody of. precisely a. catchment area plan for the Eden Valley in Cumbria. And it was a very eloquent. presentation of what was being. beautifully prepared plan , discussion with.
presentation by somebody of. precisely a. catchment area plan for the Eden Valley in Cumbria. And it was a very eloquent. presentation of what was being. beautifully prepared plan , discussion with.
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Sarah Dyke
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Sarah Dyke
But that issue of local. responsibility is key. Thank you, thank you. I will move on because I know we're pushed for time, but the People's Commission on the Water Sector stated that public ownership could save the public over. £22 billion over five years because this is the return on. capital allowed by Ofwat for private operators to distribute to shareholders, banks and other. lenders and supporters of the private.
sector often point to its role in.
sector often point to its role in.
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Speaker 4
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Speaker 4
I would argue, and some of your earlier witnesses agreed in the terms, specifically in terms of wastewater treatment. We used to have almost no treatment of sewage before. 1989 in large parts of the country. Now we have tertiary treatment in almost all of the major urban areas. That has radically reduced the amounts of ammonia and phosphates entering our rivers and streams. 8,070% reductions. Also, we've also seen the quality of bathing waters increase 6 or 7 fold in terms of those that are rated good or excellent. This was not the case back in 1989. Drinking water was always pretty good, but is now around the world's very, very best.
That was not the case back in 1989. We used to have, unfortunately, cryptosporidium incidents, which can be very.
That was not the case back in 1989. We used to have, unfortunately, cryptosporidium incidents, which can be very.
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Speaker 4
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Speaker 4
Happening almost every year now they're happening about every decade. So there have been improvements. That's not to say there isn't a lot more to do. There definitely is. We know that the people rightly need to have a far better performing sector, which is why this report is so important. And the catchment based area that's just been discussed, we are all in on. We think that's an excellent model for enabling people on the ground to understand their areas best to be able to identify what needs to happen working with farmers, housebuilders, highways agency and local.
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Speaker 4
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Speaker 4
Which actually isn't a good use of funds. So we think that there can be a lot done there. The other thing I'd say is there was a discussion earlier about dividends. It's not true to say that the public sector doesn't extract dividends. In Northern Ireland. The water company there is forced to pay dividends to its owner, the Northern Ireland government. In my home state of Victoria, the state government owns all of the water companies and extracts billions of dollars over time from its water companies. The same is the case in New South Wales, and the returns on the investment, as it were, the return on equity measure, are far higher than here privately owned companies in England and Wales, so dividends can be paid whether you are privately owned or publicly owned.
It's a question of whether that is being used to. finance the investment and that 22 billion you mentioned, that is the return being paid. And if we had it separately paid by the taxpayer, for example, we would be paying a return to the people who lent us the money or taxes would need to rise, or we would need to inflict spending cuts elsewhere to fund it. So the funds have to have to flow from somewhere. And we do think that there is a benefits. And from having you see benefits and you see disbenefits from different models, what is important that you identify what is needed?
That's the strategy that kind of points to his first recommendation of his 88, I think is the most important. Government needs to be clear about what they want.
It's a question of whether that is being used to. finance the investment and that 22 billion you mentioned, that is the return being paid. And if we had it separately paid by the taxpayer, for example, we would be paying a return to the people who lent us the money or taxes would need to rise, or we would need to inflict spending cuts elsewhere to fund it. So the funds have to have to flow from somewhere. And we do think that there is a benefits. And from having you see benefits and you see disbenefits from different models, what is important that you identify what is needed?
That's the strategy that kind of points to his first recommendation of his 88, I think is the most important. Government needs to be clear about what they want.
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Sarah Dyke
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Sarah Dyke
Then the regulation can flow and then the funding needs to flow to do. Greenpeace has stated that England's 35 year experiment with privatised water has failed. Shareholder returns have been. prioritised over public service, and Surfers Against Sewage. similarly argued that in the review that there review utterly fails to prioritise public benefit .
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Speaker 4
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Speaker 4
80% reductions in ammonia, very large reductions in phosphates in our rivers and seas. But they are the consequence of very large investment. That is, those are facts independently verified. The state of our environment is better. It's not as good as it should be. That much is very clear. It needs a much more investment. Climate change is putting huge pressure on our network, and that is true across the whole of the United Kingdom. It's going to need very large investment. And as we just heard, the same is true in the Netherlands. The same is also true in France.
Climate change is putting huge pressure across the whole world, and that is going to require a stronger system and a bigger system, more able to withstand those torrential downpours of rain, and then enable us to provide water when we haven't had any rain in some parts of the country. Here in the most recent drought that we're currently experiencing for. 60 or 70 days. So we need very large. investment and it can come .
Climate change is putting huge pressure across the whole world, and that is going to require a stronger system and a bigger system, more able to withstand those torrential downpours of rain, and then enable us to provide water when we haven't had any rain in some parts of the country. Here in the most recent drought that we're currently experiencing for. 60 or 70 days. So we need very large. investment and it can come .
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Speaker 5
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Speaker 5
But it does need to come. Thank you. David Ewan. So I don't agree with hardly any of that. I mean, the first thing is the idea that we need tax rises or spending cuts to finance water improvement. No. If we had a public system, we'd have about a third more of our bills going into infrastructure spending. It wouldn't be going in the returns on capital that you mentioned. So off what sets in the price reviews a limit on returns on capital, which is. 22.47 billion in the current price review period. By the way, in the last price review period, it was about 11 billion.
So the amount that shareholders and banks can get out of our water system has almost doubled in the last five years. The other thing is this sort of fantasy story that everything is hunky dory and that our water system has improved. I mean, so just some quick statistics. We've got the seventh worst surface water quality in Europe. We've got the fifth worst bathing water quality in Europe. This is in England . And we've got the six highest bills. So you can find that in the Euro report. Drinking water in Europe statistics. And so you know. it's untenable to suggest that things are getting better.
And I'll just give you one more example. So the other thing that off what does is it sets targets for pollution reduction and leak reduction. In PR. 19 it set for Thames water pollution reduction target of 30%. By the way, that means that. 70% of the statutory duty to make sure that all sewage goes through secondary treatment is not being touched by Ofwat. It's just saying, you know, do 30% of your statutory.
obligations and Thames Water not only couldn't reduce the pollution by.
So the amount that shareholders and banks can get out of our water system has almost doubled in the last five years. The other thing is this sort of fantasy story that everything is hunky dory and that our water system has improved. I mean, so just some quick statistics. We've got the seventh worst surface water quality in Europe. We've got the fifth worst bathing water quality in Europe. This is in England . And we've got the six highest bills. So you can find that in the Euro report. Drinking water in Europe statistics. And so you know. it's untenable to suggest that things are getting better.
And I'll just give you one more example. So the other thing that off what does is it sets targets for pollution reduction and leak reduction. In PR. 19 it set for Thames water pollution reduction target of 30%. By the way, that means that. 70% of the statutory duty to make sure that all sewage goes through secondary treatment is not being touched by Ofwat. It's just saying, you know, do 30% of your statutory.
obligations and Thames Water not only couldn't reduce the pollution by.
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Speaker 1
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Speaker 1
The disastrous system that we've got at the moment. Thank you. I would I'd like to come. I I'm not I don't think there is a decision that says. nationalisation or private is better, I think. I don't think the. experience for many. consumers has been. perceived or has been good in the UK. But I think some of the issues boiled down to what David said before about the current system. There is just not any local public voice. So if you've got a problem with a stream near you, or how do you get that through? Even in Cunliffe's idea that the Birmingham mayor, where I live in Solihull, is going to be my.
representative or something, that's just not going to work. It's also about the incentives and what you value. And I agree with David, the government and or the catchment authority and emphasize again, you have to assess costs at catchment level.
representative or something, that's just not going to work. It's also about the incentives and what you value. And I agree with David, the government and or the catchment authority and emphasize again, you have to assess costs at catchment level.
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Speaker 1
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Speaker 1
Not at company level. If you're going to do that, but you have to set priorities, you need to get local voice to that, and then you need to set the incentives, right. So I'll give you two examples. Leakage came up. I can't find them anymore. But I remember years ago I did a paper on water leakage and incentives and efficiency. And we found a couple of quotes at the time that I thought was telling companies, no, no, no, no, do less. You're doing too much on water leakage. And the second example, when I was working with Anglian Water, I did their cost modeling for the.
2019 price review. We developed some beautiful models that took into account that they were an absolute leader on per capita. consumption and leakage. There was nothing in all Ford's modeling directly in the econometrics that took that into account. Okay, so if the incentives are not being set. properly by either. So there could be a the statements above saying we want this, but it's not being followed through.
There's a problem with regard to the whole dividend debate and so forth. I think regulatory capital values, at least I had data that was consistent till 2015.
2019 price review. We developed some beautiful models that took into account that they were an absolute leader on per capita. consumption and leakage. There was nothing in all Ford's modeling directly in the econometrics that took that into account. Okay, so if the incentives are not being set. properly by either. So there could be a the statements above saying we want this, but it's not being followed through.
There's a problem with regard to the whole dividend debate and so forth. I think regulatory capital values, at least I had data that was consistent till 2015.
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Speaker 1
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Speaker 1
Were higher than any investment that went in. So they're not a true measure of value. There definitely were issues in the beginning with excess funding. And and and we've lost that even if private companies are stewards. And I'm just say it, my perception of working with Anglian Water closely for about 3 or 4 years, I no longer do the people there cared and wanted to do something about the environment. I believe that they did the ones that I was interfacing with. But if the incentives and the system isn't supporting that, you're going to have a .
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Sarah Dyke
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Sarah Dyke
Problem and that. So it's all about and getting that right clearly got some differing views around the table. But the stark reality is that it's it's. estimated that over. £300 billion worth of investment is needed over the next 25 years to reach the government goals and improve future water security. So on that basis, is it the private sector or the public sector, which is better and better. equipped to really raise that money at the scale that's.
required and. invest .
required and. invest .
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Speaker 4
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Speaker 4
In over that timeframe and bring value to our customers? If we agree that it's 300 billion and that's the estimate of the National Audit Office, then that money would need to be found either by the taxpayer if it were owned by the state or by bill payer, which is slowly paid over time, just like a mortgage is, which has been, first of all, paid .
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Speaker 4
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Speaker 4
Clear that still have bill payers in a nationalized system. That's right. So just like a bank provides the funding for the House upfront, if you have a mortgage and then the mortgage holder slowly repays the price of that acquisition of the house over time, here in England and Wales, we have investors putting the money up front and it's slowly recouped over time through the bill. So yes, the bill pay is ultimately pay. You could, as in Northern Ireland, have no bill payers and instead just have the taxpayer. So if the taxpayer is prepared to find that.
£300 billion over 25 years and is very clear on how that's going to be funded, then of course, that that would be able to work. But in the queue for scarce.
£300 billion over 25 years and is very clear on how that's going to be funded, then of course, that that would be able to work. But in the queue for scarce.
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Speaker 4
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Speaker 4
And we have a lot of people standing in that queue, people who need money for defence, people who need money for health, people who need money for education. We see across the world ministers. prioritising generally. expenditure from those quarters rather than from water. Ministers frankly prefer to cut ribbons on submarines than sewers. That is true across the world, and I go to many international conferences. There are not that many votes in sparkling, clean sewers compared to sparkling clean schools and hospitals.
But if the government can absolutely be certain it's going to find that.
But if the government can absolutely be certain it's going to find that.
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Speaker 1
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Speaker 1
David, and then I'll come back to you. Yeah. There's a there's possibly a case with Scottish Water, because I think some of the PFAs on treatment plans were put in because Scotland was late. But I my understanding, I'm not sure if I'm correct on this, but that Scotland's moving away from those fees because they were they're actually relatively expensive and they've been trying to do that. What I wanted to kind of change the debate, just like if we want to talk about catchment, we want to talk about public interest. We need to do the right thing.
The point before what really matters is we have we need a plan, we need where we're going and what environmental and drinking water issues we care about that really satisfies people's needs and the environment. And then what we need to do is what is the best outcome for who. consumers and the environment. And then what I was just thinking about that goes back to the public interest. How do you get that in? But it also gets into what is the cost of capital, right? You often talk about a weighted average cost of capital, which is what various ways you can do it.
Well, I'm aware that we we've had.
The point before what really matters is we have we need a plan, we need where we're going and what environmental and drinking water issues we care about that really satisfies people's needs and the environment. And then what we need to do is what is the best outcome for who. consumers and the environment. And then what I was just thinking about that goes back to the public interest. How do you get that in? But it also gets into what is the cost of capital, right? You often talk about a weighted average cost of capital, which is what various ways you can do it.
Well, I'm aware that we we've had.
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Speaker 1
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Speaker 1
Companies like Scottish Water and apparently Welsh, they they used retained earnings. So they quote unquote make a profit. It goes back into investment. They also use debt. That debt could be private or public. Scotland borrows money from the Treasury, Anglian Water, Severn Trent. They borrow money privately. There's equity investment. We can have injections into the model. And I think somebody comment earlier today that there was no equity actually invested in privatisation.
I just bought the company is true right. But you could get equity investment and of course you get public.
I just bought the company is true right. But you could get equity investment and of course you get public.
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Speaker 1
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Speaker 1
Which is very common in America and Japan, that the national government actually gives. grants to build capital . The right way to do this, and I'm not a financial. economist is what is the not the cheapest, what's the best, lowest risk way to do that? And, and, and so things like my pension fund is in trouble with Thames Water because they want risk free assets. USS owned a lot of Thames Water. And so we want to attract those kind of investors. And we need to think about that. I, I think we need to move forward and find the cheapest way.
I'm not sure if .
I'm not sure if .
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Speaker 5
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Speaker 5
If we want to get more investment into the water system, then there needs to be potentially there needs to be borrowing. And water companies might go into debt for borrowing if water companies are taken into public ownership. Our current fiscal rules under the Charter of Budget. Responsibility says that if you've got a publicly owned water company, its debt counts as part of the national debt. And we're the only country in Europe that does this. So all other countries, under the European system of accounts say that when you're adding up national debt, if you've got publicly owned companies, including water, energy.
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Speaker 5
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Speaker 5
Borrowing that they do doesn't add to the national debt. And so one of the big reasons why the former treasurer, Rachel Rees, did not want to look at public ownership of Thames Water and putting it into special administration, was a concern that it would add to the national debt. Well. £2 trillion worth of investors or assets under management wrote to the. Treasury saying please change the Charter of Budget. Responsibility accounting rules so that we take out public corporations that are market actors from the. calculation of national debt. But it was never replied to. But so it's so important to understand that we are unique in artificially inflating our national debt under our own accounting figures, unlike the .
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Speaker 2
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Speaker 2
And that's just in the last two years. It's a matter of judgment. Whether that counts, as you regard that as being. controlled level of dividend payments. But another thing that's. illuminating in the annual reports is that United Utilities, they both say more or less the same thing. I'll give you United Utilities one, our dividend. policy is to grow. annually in line with.
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Speaker 2
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Speaker 2
Of United. Utilities and United Utilities proudly say it's a commitment they've maintained since 2010. And so the idea that equity capital is somehow risk capital would seem to no longer apply if the companies are. guaranteeing CPI linking of dividend payments. And we need to, I think, ask the simple economic question, how on earth can they do that economically? And they can only do that. economically if they have a regulatory. system that they can rely on to .
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Speaker 4
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Speaker 4
Generate the revenue sufficient to cover all that? Well, I mean, there are some companies that have paid no dividend in the last year, six, five the year before that. I mean, the shareholders of Thames Water have not received a dividend for quite some time. Northern Ireland, the shareholder the Northern Ireland government, has received a dividend dividend. There's only about 2%. So that's quite a bit higher than for the six companies and not paying any dividend at all. So dividends are a function of return. And return is set by the regulator, be it the utility regulator of Northern Ireland or Ofwat in England and Wales.
And we can argue about whether the return is being set at the right level, whether the incentives are in the right place. I mean, we've been very open. We think the system in England and Wales is broken and the government should get on and fix it. And Cunliffe has set out a very clear set of recommendations for fixing it, starting with strategy, then strengthening. regulation and then enabling financing to flow. So the question of dividends is actually immaterial to ownership. You can have a publicly owned system that is taking dividends, or you can have a privately owned system.
And in the case of some of the privately owned operators, they're not taking any dividend at all and haven't for some time. So the dividend situation is,
And we can argue about whether the return is being set at the right level, whether the incentives are in the right place. I mean, we've been very open. We think the system in England and Wales is broken and the government should get on and fix it. And Cunliffe has set out a very clear set of recommendations for fixing it, starting with strategy, then strengthening. regulation and then enabling financing to flow. So the question of dividends is actually immaterial to ownership. You can have a publicly owned system that is taking dividends, or you can have a privately owned system.
And in the case of some of the privately owned operators, they're not taking any dividend at all and haven't for some time. So the dividend situation is,
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Speaker 4
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Speaker 4
Dividends just to keep more money in the system for investment? There are, at the moment of what has introduced rules to keep dividends and block them if certain criteria are satisfied gearing levels, for example. And for some companies that has affected their ability to pay dividends. So there are rules and it's up to Ottawa to set them wherever it wishes. If it wishes to set different rules, it's totally able to do so. So this is a question, I think, for independent .
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Speaker 1
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Speaker 1
Regulators looking at the the factors before them. I just have I'm not going to try to comment on if the current system is right to deal with this. And I think there's people who are better qualified on that around the table. There's a second issue related to this is that is the state of the. finances of the companies currently worse? Because in an earlier time, excess dividends were taken out. And the only period that I because I won't work with the tote based data after because it's inconsistent with the earlier data.
But up to.
But up to.
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Speaker 1
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Speaker 1
There were excess. There was a. combination of interest rates got low. So of course you move to debt financing. There were high profits being made. Previous comment about the price caps by being too high right after privatisation. Is it excess dividend or it's taking those profits out should more have been retained? Almost certainly. So you've got a problem where maybe the finances weren't as good as they should have been in the past, even if the companies aren't doing it anymore. Let's remember if you do have equity investors, or if you have government bond. investors or whoever, they they don't just give you your money, you need to give them a return.
Right? So, so I don't think that dividends are inherently evil, but they, you know that or they're bad that they're being paid, but there is a correct amount. So I think you have to think about what do we do about the problem? We can't do anything about, which is perhaps the financial state of the .
Right? So, so I don't think that dividends are inherently evil, but they, you know that or they're bad that they're being paid, but there is a correct amount. So I think you have to think about what do we do about the problem? We can't do anything about, which is perhaps the financial state of the .
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Speaker 5
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Speaker 5
Works pretty well. There are other special administration regimes in lots of other sectors. Of course, Railtrack was put into special administration. It cost 70 million for about one year, and then it was passed on to Network Rail, which of course is now the publicly owned rail operator. Bulb Energy, was put into special administration, transferred to private sector. And, you know, the system that we've got at the moment, I mean, it hasn't been tested. That's the problem. It's not the existing system. So let's imagine that the government bites the bullet, which I think they definitely should, and puts Thames Water into special administration.
We can do that for two reasons. Firstly, because it's effectively insolvent, because Ofwat has not been. enforcing the anti-pollution duties and secondly, the licence could be withdrawn for poor performance and we could talk about at least 4 or 5 other water companies around England fulfilling the same criteria. Too much pollution, too many leaks or both. What would happen then is that the special. administrator is appointed by the court, but ultimately the government is choosing them. They're selecting them. The special administrator would look around for a potential bidder. Now, you might have private bidders, but just as easily, for instance, the mayor of London could set up a publicly owned company, perhaps organised with local councils, and it could also bid for Thames Water.
And the argument that I've been making and is, I think, increasingly widely shared, is that the shareholders have obviously done such a terrible job that they are entitled to zero compensation, but the. creditors should not be due anything at all because of the state of the infrastructure, because of the bill that's been run up for repairs and because of the excessive returns of capital. David Henderson isn't mentioning . Although there's no restrictions on dividends, there are massive returns to capital, to bondholders. And it's basically Elliott, Apollo and Silver Point, the American funds that are in control of Thames Water.
And so if a public body bid zero but said and the Special Administrator is entitled to choose that we're going to fulfil the statutory duties better than the special administrator will be entitled to transfer the assets to a public body for zero.
We can do that for two reasons. Firstly, because it's effectively insolvent, because Ofwat has not been. enforcing the anti-pollution duties and secondly, the licence could be withdrawn for poor performance and we could talk about at least 4 or 5 other water companies around England fulfilling the same criteria. Too much pollution, too many leaks or both. What would happen then is that the special. administrator is appointed by the court, but ultimately the government is choosing them. They're selecting them. The special administrator would look around for a potential bidder. Now, you might have private bidders, but just as easily, for instance, the mayor of London could set up a publicly owned company, perhaps organised with local councils, and it could also bid for Thames Water.
And the argument that I've been making and is, I think, increasingly widely shared, is that the shareholders have obviously done such a terrible job that they are entitled to zero compensation, but the. creditors should not be due anything at all because of the state of the infrastructure, because of the bill that's been run up for repairs and because of the excessive returns of capital. David Henderson isn't mentioning . Although there's no restrictions on dividends, there are massive returns to capital, to bondholders. And it's basically Elliott, Apollo and Silver Point, the American funds that are in control of Thames Water.
And so if a public body bid zero but said and the Special Administrator is entitled to choose that we're going to fulfil the statutory duties better than the special administrator will be entitled to transfer the assets to a public body for zero.
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Alistair Carmichael
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Alistair Carmichael
Did anybody else want to come in on that? Otherwise? If not, we kind of we really need to get get moving on. But I do want to just tease out and Henry, you want to come in this point about let's stop talking about this as an exercise in corporate finance and look at it from the customer perspective. As you say, David, there's nothing inherently evil about dividends. We live in a capitalist economy, but the concern that a lot of customers have is that dividends represent money being taken out of the industry, which should be there for service improvement.
And David, this now, since we've raised the example of Thames Water, no dividends being paid out of Thames Water, but Thames Water is a very particular structure now where if anybody owns it and nobody seems to want to admit to being the ultimate controller, it's owned by its own creditors and its own creditors now lend it more money, we believe, to be fairly significant rates of return. There's not a great deal of transparency here. And by that route, money comes out of the industry that should be put into service. So that, I think, is the objection.
And David, this now, since we've raised the example of Thames Water, no dividends being paid out of Thames Water, but Thames Water is a very particular structure now where if anybody owns it and nobody seems to want to admit to being the ultimate controller, it's owned by its own creditors and its own creditors now lend it more money, we believe, to be fairly significant rates of return. There's not a great deal of transparency here. And by that route, money comes out of the industry that should be put into service. So that, I think, is the objection.
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Speaker 4
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Speaker 4
That most customers would see to the current set up. I understand that objection, but in the case of Thames Water, the company has been very clear that those interest rates that are not being funded by bills off what sets the cost of debt, and that is the limit of interest that can be paid by a company through the water bills to any financing it receives. So companies that .
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Henry Tufnell
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Henry Tufnell
Could debate Thames Water for the rest of the day, but, Henry, you wanted to come in. Thank you. Chair, can I just have a question for David Henderson? If you you've been said that today, you're sort of the excellent report set out by Cunliffe. And I just wonder the sort of supervisory model of the regulation. There's a sort of added cost right to to, to the companies in terms of the.
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Speaker 4
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Speaker 4
Companies, state actors or local businesses. So you're right, it kind of points to both. He says that we should have regional system planning, which is how you allocate resources at the local catchment level that are going to best affect change in the environment, bringing together all of the actors in that catchment farmers.
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Speaker 4
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Speaker 4
Series upon series upon series of. unbelievably difficult to understand. technically rich, jargon filled, acronym. drained econometric models that teams of economists in Canary Wharf, which is the head office of Ofwat, have dreamt up. They. They cause so much cost and expense for companies, for analysts, for investors, and even for Ofwat, which is why it continues to grow. I mean, it's got more than 100 people working for it after the government said it was going to abolish it. This is a sort of an animal that is feeding on itself. Kind of looked at that and said it has been tested to destruction.
It should stop. And in its place, instead of models that. invented a figment of imagination in often times, which is the notional company, which bears no resemblance to the real world. Instead, we have real assessments made by real engineers, not. economists of what each company needs. And if we did that, I think we'd have a much, much better system. And the cost of enforcing and implementing and monitoring it would be far cheaper to. In fact, I think it provides a model for many other sectors. So instead of having modelling being done where you try and pitch one company against this fantasy idea called the Notional company, you instead look at .
It should stop. And in its place, instead of models that. invented a figment of imagination in often times, which is the notional company, which bears no resemblance to the real world. Instead, we have real assessments made by real engineers, not. economists of what each company needs. And if we did that, I think we'd have a much, much better system. And the cost of enforcing and implementing and monitoring it would be far cheaper to. In fact, I think it provides a model for many other sectors. So instead of having modelling being done where you try and pitch one company against this fantasy idea called the Notional company, you instead look at .
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Speaker 1
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Speaker 1
Independently assess what it needs. Give it a minute or less. Oh, I'd like to agree and completely disagree with what David said, because first of all, your question was about supervision. One of the. issues of false modeling is. not the problem. Read a separate report that I was involved in. And then I parted company with spin off because I said the modeling they were going to do this is about. 2013 was completely inappropriate. They didn't understand what they were doing. When I worked with Anglian Water for the first time and got to know their engineers and had the kind of engagement that would happen with supervision, I understood what drove costs.
So it's you need to have some method to evaluate companies at catchment area, not company level and. econometric or Da modeling, which all these countries use in Netherlands and and Denmark, for.
So it's you need to have some method to evaluate companies at catchment area, not company level and. econometric or Da modeling, which all these countries use in Netherlands and and Denmark, for.
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Speaker 1
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Speaker 1
But you also need a regulator who. understands and is engaged with the company. So supervision is positive and worth the effort because all right, now they I don't know what they're modeling as an expert, an academic expert in water modeling, I, I wouldn't, I wouldn't even use the data that they use. That's how bad the modeling is. So I just want to emphasize the issue is not about the modeling. Interaction with the companies through a supervisory process could really be positive, because you get that understanding of what really .
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Terry Jermy
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Terry Jermy
You're going to lead some questioning on public control and other approaches. Yes. Thank you. Chair. Just a couple of quick questions. Just starting really with sort of public opinion, because I think it's fair to say. water management, water ownership, very much a hot topic at the moment. And we feel that as MPs, I think the Westminster Hall debate on water recently was the most attended debate ever, which is quite telling. And I wonder, given your. experience and awareness of the industry, whether there's evidence or a view about what the public want to happen in terms of public ownership, I'm really careful because we talk about public control and public ownership, but they are very different things.
But in terms of public.
But in terms of public.
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Speaker 2
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Speaker 2
Whoever people voted for, the figures come out pretty much the same. In fact, there's a slightly higher percentage of Lib Dem voters who want public ownership than Labour voters and so on. But also, going back to. privatisation itself, it was never popular. The poll that was taken in. July 1989 showed.
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Speaker 2
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Speaker 2
We should be quite confident that they understand what public ownership broadly means. And it doesn't mean a. regulator who isn't even accountable to a. minister deciding what to do for them. A bit tougher with the companies that he or she meets on a regular basis. That's barely counts, I think, as as public control, if the regulator itself isn't under any kind of public .
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Speaker 2
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Speaker 2
I think also there's. sufficient folk memory and awareness of what can happen elsewhere in distant countries like. Scotland that that. actually local public ownership seems to be what would make sense. And I'd be very confident that if those debates could be. started around the nature of the the structure. Going back to earlier questions about the boundary.
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Speaker 5
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Speaker 5
Yeah, Ewan, we don't really mind what model we use. Oh no. It really does matter. And so so yes, as David said, the last two YouGov polls said that. 82% of the British public support public ownership. And by the way, that's been rising 8% support privatisation. There's a few people that don't know, but the rest of the world knows as well. This is the other thing. 80 to 90% of the OECD has water in public ownership. And you can see a more detailed analysis in the euro document. Sometimes it's national ownership, sometimes it's more local ownership.
And so what the water industry has at the moment is just scare tactics. And you know, there's this narrative that, well, it started with the Social Market Foundation report in. 2018 that it would cost. 90 billion to take water into public ownership. Then it was 144 billion. In a recent paper by Frontier Economics reported in the Telegraph a few weeks ago. And I think just in the last week or two, the water industry has commissioned another think tank called Public First to say it's 105 billion. But the reality is, and this is what people know, is that those figures are insanely.
And so what the water industry has at the moment is just scare tactics. And you know, there's this narrative that, well, it started with the Social Market Foundation report in. 2018 that it would cost. 90 billion to take water into public ownership. Then it was 144 billion. In a recent paper by Frontier Economics reported in the Telegraph a few weeks ago. And I think just in the last week or two, the water industry has commissioned another think tank called Public First to say it's 105 billion. But the reality is, and this is what people know, is that those figures are insanely.
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Speaker 5
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Speaker 5
Under the Bank of England inflation calculator. Moody's calculated that it would cost. 14.5 billion in 2019 to take water into public ownership. And the report that I've done suggests that if you take the worst companies into special administration and we don't bail out, the banks in America for that have been running the water companies into the ground, you get a few water companies into public ownership for zero. But if you take the whole sector into public ownership, it'll probably cost in the region of 12 billion. But these are very, very rough estimates because what we don't have is the actual true cost of repairs for the water companies to make sure that all sewage goes through secondary treatment and to pair the leaks sufficiently.
So one of the things that this committee could really do, and I really urge, is you could tell Off.what or you could put pressure on Off.what to make sure that they find out, you know, what is required to make sure that all sewage is subject to secondary treatment. I did an FOI with Ofwat and .
So one of the things that this committee could really do, and I really urge, is you could tell Off.what or you could put pressure on Off.what to make sure that they find out, you know, what is required to make sure that all sewage is subject to secondary treatment. I did an FOI with Ofwat and .
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Speaker 1
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Speaker 1
So maybe just keep to this for the moment. David. Yes. You asked a question about public or private. What's better? Can I just I will answer that, but I just wanted two things. The answer for on what Edwin has said is there. It is very important that the committee takes on board that the archives are not. representative of value, and that that goes beyond what we can discuss here and is worth further. I can provide some paper from my perspective. The other thing is, I want to correct what David said about or how he interpreted my comments about the Rwas, and this goes to accountability.
The RWA were. created at ten, and the logic of that was for river basin management and transferring water between rivers and managing operation unit wise. There is no justification for that because there is no. interconnection or in many systems, a sewage system by definition only has one plant. So if we had done 50 operating systems, there would be much better local. accountability because they would be closer to that. I don't know if that's efficient or not, but there would be better. accountability and possibly more efficient with regard to, I think, what the public really wants.
Let me answer that honestly a little bit for myself is I want the water to come in. I want it to be clean. I want it to have proper pressure. That's definitely gotten better because when I moved here, I wouldn't have drunk the water if I knew what it was like. When I found out later, when I started doing water , right, and they want the sewage to go away, right. But after it's gone and then they they want vaguely a better environment. But there is a tension about, well, if that means. 100 billion is going to go here and it's going to come out of the NHS, I think that opinion will change pretty quickly.
So I think what the public wants is they want they want better trust in the system, which couldn't have talks about a lot. They want more public accountability. And I believe that means more local public control, which is down at catchment area, and they want to be paying a fair price for that. And I don't I think what it boils down to it, they want the more public control, but if they were told it's going to cost you, you know, tuition fees are going to go up to 11,000 as a result then. And they're balancing all those public interest things.
I think they would go for what is the best and cheapest way to do this. And I think that's a that's a .
The RWA were. created at ten, and the logic of that was for river basin management and transferring water between rivers and managing operation unit wise. There is no justification for that because there is no. interconnection or in many systems, a sewage system by definition only has one plant. So if we had done 50 operating systems, there would be much better local. accountability because they would be closer to that. I don't know if that's efficient or not, but there would be better. accountability and possibly more efficient with regard to, I think, what the public really wants.
Let me answer that honestly a little bit for myself is I want the water to come in. I want it to be clean. I want it to have proper pressure. That's definitely gotten better because when I moved here, I wouldn't have drunk the water if I knew what it was like. When I found out later, when I started doing water , right, and they want the sewage to go away, right. But after it's gone and then they they want vaguely a better environment. But there is a tension about, well, if that means. 100 billion is going to go here and it's going to come out of the NHS, I think that opinion will change pretty quickly.
So I think what the public wants is they want they want better trust in the system, which couldn't have talks about a lot. They want more public accountability. And I believe that means more local public control, which is down at catchment area, and they want to be paying a fair price for that. And I don't I think what it boils down to it, they want the more public control, but if they were told it's going to cost you, you know, tuition fees are going to go up to 11,000 as a result then. And they're balancing all those public interest things.
I think they would go for what is the best and cheapest way to do this. And I think that's a that's a .
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Speaker 4
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Speaker 4
Not a public or private question. David, anything you wanted to add? Well, I mean, I agree when confronted with the price of what people want, sometimes their decision about how much they really want it does tend to change. And you'll be familiar with that with all of the constituents that you meet, having competing and sometimes contradictory. expectations placed on. parliamentarians to do a lot with not very much. There's been some discussion about £104 billion. That was an estimate put out by Paul Johnson, who's a highly respected economist who used to run the Institute for Fiscal Studies.
And he's looked at two components. Really, how much would you have to compensate the shareholders, and how much would you have to compensate the debt holders? And the debt is they are legally enforceable contracts. So a lot of estimates can fly around. None of us ultimately knows. It would be for a court to.
And he's looked at two components. Really, how much would you have to compensate the shareholders, and how much would you have to compensate the debt holders? And the debt is they are legally enforceable contracts. So a lot of estimates can fly around. None of us ultimately knows. It would be for a court to.
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Speaker 4
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Speaker 4
And I would suggest that if a government were to try and. unilaterally break a binding legal contract between a lender of money and the recipient of that money, there would be some potential risk to the. creditworthiness of the country as a whole. Other countries have tried this, and they've received pretty swift reactions from rating agencies, and they've been negative, and it's made the cost of their ability to borrow much, much, much, much higher. So this is all obviously a matter of opinion. It would finally be for a court to determine. But I think the risk is not zero.
There would be a dispute. In fact, the professor McGuffey has talked about the fact that this would result in some litigation. And anyone who can guarantee that which how litigation is going to end, I think is is being rather foolish. These are serious investors with serious money at stake, and they have choices. They don't have to put their money here. And that's just as much as it's true for the investors in the water industry as .
There would be a dispute. In fact, the professor McGuffey has talked about the fact that this would result in some litigation. And anyone who can guarantee that which how litigation is going to end, I think is is being rather foolish. These are serious investors with serious money at stake, and they have choices. They don't have to put their money here. And that's just as much as it's true for the investors in the water industry as .
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Speaker 1
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Speaker 1
It is those who invest in the. country by lending to our exchequer. I think we're really confusing. cost and cost of of ownership. And I'm not even sure what because who owns a company? Its equity owns the company. Okay. So you could in principle change ownership. And again, I'm not a financial economist, just common sense here by buying the equity and giving a fair return to that, the debt doesn't necessarily have to be paid off. You could just take it on board and you've got to pay it initially, but you could restructure it gradually over time, right?
Because the government is running GDP, you know, has debt of one 100% of GDP roughly because. So the issue of ownership is distinct, that debt is not really a cost of ownership, because that could be .
Because the government is running GDP, you know, has debt of one 100% of GDP roughly because. So the issue of ownership is distinct, that debt is not really a cost of ownership, because that could be .
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Speaker 5
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Speaker 5
For instance, as I say, let's say we've got a private bidder that's offering a few billion and we've got a public bidder that says we're going to fulfil statutory duties as long as the Special administrator acts within the law and follows the rules, then there isn't going to be a court deciding what the compensation, if any, would be. And then you've got a second situation. If you bring water companies into public ownership through an Act of Parliament, that's not ultimately going to be decided by a court. It's going to be decided by Parliament. Now, it is true that.
Parliament wouldn't want to deprive people .
Parliament wouldn't want to deprive people .
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Speaker 5
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Speaker 5
But I don't think that will happen. I beg your pardon? That would scare the market. Well, no, I think I think that's a really important myth to dispel. I mean, so markets at the moment, as I mentioned, want to have borrowing by. independent market actor publicly owned corporations, including water companies. I mean, obviously if you nationalize for no.
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Terry Jermy
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Terry Jermy
Already been returned in capital to the polluters in charge of water companies. Yeah, I'm just going to move on to my next question, if I may. I'm conscious of time, David. I was struck by the contribution from the chap from the Netherlands earlier when he was talking about essentially mayoral elections there. Water isn't, you know, it's so good or perhaps so boring that it's not not an election issue doesn't even register. But then we've got.
suggestions in this country about mayors having more control, more say in water, and we sort of risking.
suggestions in this country about mayors having more control, more say in water, and we sort of risking.
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Terry Jermy
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Terry Jermy
Responsibility and forming the entities. And the last point I just wanted to make was around different models. We've not spoke too much about mutuals and community interest. companies today, very much sort of private public, somewhere in between with not for profits. And to what extent do you think these approaches could deliver more public control and better outcomes?
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Speaker 2
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Speaker 2
Which is based on a lot of errors. including the simple error, all too common, of treating Welsh water as though it was a mutual, which it isn't. It's just a not for profit company accountable to no one. As people have already said, it also. treats John Lewis as a mutual. Which it is, but it's a workers co-op, not a customer co-op. So that doesn't give any confidence for the rest of the conclusions.
But the third thing is there's really very little evidence for. mutuals having a very. strong public.
But the third thing is there's really very little evidence for. mutuals having a very. strong public.
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Speaker 2
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Speaker 2
Are the if you look at nationwide Bank, for example, about. 520 people turn up at the annual meeting. It's not a very. powerful force. Mutuals are not used very much at all around the world. The biggest mutual in water mutual in the world by common consent is in the town city of Santa Cruz. In Bolivia, which covers.
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Speaker 2
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Speaker 2
Or at least. 50% of them, because the poorest ones aren't covered by the by the mutual. And so I don't think there's any international evidence to support it. And there's we know what is likely to happen, because that was what was done with Network Rail originally. Originally it was set up as a, to be precise and not not for profit entity. And it always relied on a. 100% government guarantee to be able to borrow any money at all.
. And select.
. And select.
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Speaker 2
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Speaker 2
The mutual because its management processes were incredibly. obscure and subject to cronyism. And so in the end, it was taken into full public ownership. including the debt being taken onto public books. And I just want to add one thing about that as well, because that. happened in. 2014 and the Treasury was very up front. I'm sure to avoid any. accusations of cover up as to how much debt was involved and in real terms to money. Today it was 72 billion. I hadn't realized how high it was, but that's pretty close to the total debt of all the water companies.
Now that was taken onto the public books. And during the course of.
Now that was taken onto the public books. And during the course of.
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Speaker 5
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Speaker 5
That's really I appreciate that you had any views on mutuals, just higher cost of capital because they are not public. They can't borrow from the Public Loans Works board. And I think just to touch on governance, because this has come up, if you look at Berlin, Berlin was privatised, got taken back into public ownership in.
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Speaker 5
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Speaker 5
Mostly for parasitic council. representatives and then some workers and some people who are chosen in consultation with consumer environmental groups. So that's the sort of stakeholder model that we could have. And actually, the existing law that we've got now because of the Water Special Measures Act, passed a year or two ago, says that off what has the power to change governance? So we could already have worker. representation and local authority or mayoral representation. And I agree that, you know, until you complete the map of mayors around England,
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Speaker 1
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Speaker 1
Those of us without a mayor feel a bit left out. Yes. David. Yeah. You the first part of your question, you said something about politicising. And so I just wanted to respond to that first, is that the what we need to realise is that we are the. exception that these very large. So if we take all those big Netherlands companies, I. I doubt they add up to seven.
Trent. But I don't know if that's right, but it's. They may have regional authorities, but they're small.
Trent. But I don't know if that's right, but it's. They may have regional authorities, but they're small.
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Speaker 1
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Speaker 1
Which does, in a way, make it political. But what it also leads to is what I mentioned before about organic solutions. I know Pamplona very well. There's 15. municipalities around it. They decided to form a quango that does waste water and sewage, and that was their solution. I know Japanese utilities well, some of them their municipal control. They've completely. outsourced the French model. We said that there's a choice going on, but there's public control. And it is political because they can change their mind if it's not working. And you also get these other perverse incentives.
The entire debate here is, you know, the rivers aren't safe. Right? And I'm I'm seriously working on a project right now about. measuring the cost of improving sewage quality in Japan. And one of the research questions is, why do the companies go beyond their requirements a little bit different than what we talk about? And we're hypothesizing it might be because the mayors are competing with each other for votes. I'm not saying that's what they're doing, but there's a so it's about.
The entire debate here is, you know, the rivers aren't safe. Right? And I'm I'm seriously working on a project right now about. measuring the cost of improving sewage quality in Japan. And one of the research questions is, why do the companies go beyond their requirements a little bit different than what we talk about? And we're hypothesizing it might be because the mayors are competing with each other for votes. I'm not saying that's what they're doing, but there's a so it's about.
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Sarah Bool
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Sarah Bool
Questions around opportunities, costs and risks of public ownership. Sara. Thank you. Chair. It's yeah, no, it's been very clear today. I think that there is no perfect model. I think that we can we can adopt. And just looking at this purely pragmatically, because I think you always have to be end up following the money. But if you are setting out the train to set out the case for public ownership, what evidence do you have that it is actually better in terms of better outcomes? Because I think you and you mentioned at one point on one metric where the seventh worst, you know.
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Speaker 2
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Speaker 2
Before the sixth. Yes. Yes. And there's more beneath. Professor David. Yeah. Sorry . But done done various things on this. Let's take it point by point on the economics. Firstly on price. There have been two big studies, comparative studies of between private and. public provision of water within the same country. One was in.
France about 15 years ago now, which was. 100% sample. It covered everything. And it. concluded that caterers paribus private water ended up being.
France about 15 years ago now, which was. 100% sample. It covered everything. And it. concluded that caterers paribus private water ended up being.
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Speaker 2
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Speaker 2
Which is pretty good. As a sample, they actually found a figure so embarrassing they. They only quote the numbers rather than the percentage. But they found that private water, other things being equal, is. 59% more. expensive than public water. What they also tried to look at was, does tough regulation make a difference? And they found that in relation to.
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Speaker 2
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Speaker 2
You don't need a regulator. The public. authority is the. regulator on behalf of the public, with the accountable. mechanism and the ownership. relationship giving them the power. So that's one interesting. dimension in terms of efficiency. There's a number of comparative studies that are being done around the world. Not only water sector but in others. I'm sure David knows many of these as well. And I think it's fair to say at the broad conclusion of most of them is no significant difference. There was one very detailed econometric study by Bell and Warner about ten years ago that claim very, very firmly to that conclusion.
And I think it's it's really quite firmly established, so equally efficient in terms of.
And I think it's it's really quite firmly established, so equally efficient in terms of.
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Speaker 2
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Speaker 2
The if you take all the total financial costs of water in England and England and Wales, it works out about 35%. This was a couple of years ago. These figures works out about. 35% of all revenue. Over a third of all revenue was going straight out in dividends and interest payments in England and Wales. In Scotland, just. 8% are. So there's an obvious huge, huge in saving there in the Scottish system. The other thing about Scotland was that. prices were and still are, I think about. 20% lower than in England and Wales, and. investment capital.
investment has been. 50% higher per household over a 20 year period quite consistently. And that, I think is strongly indicative. I mean, this is not sort of definitive statistical proof, but I'd offer all those as.
investment has been. 50% higher per household over a 20 year period quite consistently. And that, I think is strongly indicative. I mean, this is not sort of definitive statistical proof, but I'd offer all those as.
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Speaker 2
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Speaker 2
If you have a public system, you can mobilize people to work out solutions. I'm a big fan of South Bend, Indiana, because they had a terrible sewage in the rivers problem. And the. consultant shook their head and said, you're going to have to spend. $950 million and you're going to have to destroy two of your parks. And then they just had a big public debate, which involved a computer geeks and the Greens and everybody else in town. And after a couple of years of that, batting at bat was before they worked out a solution that only cost 400 and something million dollars and kept all the existing parks and in fact, created three new ones.
And .
And .
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Sarah Bool
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Sarah Bool
There's other examples of those things happening around the world. It is an interesting one, though, I guess, with those. Those are good examples, but we need to be able to compare from light, from light with us. I mean, in terms of our starting position will be different to where it was for Scotland or for France in terms of when they took it on. So I guess .
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Speaker 2
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Speaker 2
There's a there's a bigger question to be had in that. But I mean, I don't know if anyone else. Yes, David. The first thing there was a question about opportunity cost I thought was mentioned or somebody mentioned that which has to be thought about here. And the other thing is I I'm I think it's very difficult to know what the real answer is to that question. I know you don't want an academic to say that, but it's true because just a couple of examples. So I don't know if it's a study, but I remember I think it was Daniel Simon.
I was talking to someone who was doing a study on French systems, and he was finding privates were more costly. But it turned out that when you looked at the contracts, they were doing a lot more. investment than the ones that weren't. So and I don't know if that I'm not disparaging that, if that's right or wrong, but there's also issues about the opportunity cost is a is a key issue. And we've kind of talked about that because you mentioned that that in Scotland only 8% goes to.
I was talking to someone who was doing a study on French systems, and he was finding privates were more costly. But it turned out that when you looked at the contracts, they were doing a lot more. investment than the ones that weren't. So and I don't know if that I'm not disparaging that, if that's right or wrong, but there's also issues about the opportunity cost is a is a key issue. And we've kind of talked about that because you mentioned that that in Scotland only 8% goes to.
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Speaker 2
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Speaker 2
But their political decision is that they get a lot of grants and loans from central government. And if they're not paying, if they're not paying anything on that, there's still an opportunity cost of that. So I so the most important thing on. So we have to make sure. I'm not saying David's answers are wrong because I don't know what his studies, what he's looked at, but there's important issues. And the most important thing though, is that it's very difficult to compare across countries or even within a country because and this is why I said I wouldn't use all waltz modeling because they don't properly control for operating characteristics.
So very. As an example, I'll end on this point a very long time ago, I part who I've done some consulting work for a long time ago. They wanted to use all sorts of models to assess Sydney water. They did. They put the data into that structure for their company, and they abandoned it after three years because they were so different. So I think unless you've controlled for all those differences.
So very. As an example, I'll end on this point a very long time ago, I part who I've done some consulting work for a long time ago. They wanted to use all sorts of models to assess Sydney water. They did. They put the data into that structure for their company, and they abandoned it after three years because they were so different. So I think unless you've controlled for all those differences.
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Speaker 4
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Speaker 4
And that somehow magically didn't quite explain how these benefits would be passed on to consumers. And of course, that just hasn't happened at all. So, you know, the numbers that I quoted to you before, we are the seventh worst in surface water quality. So rivers and so on, fifth worst in bathing water quality. And we have the sixth highest bills. So, you know, if you wanted to. So if you wanted to ignore the sort of logic and we just want to look at empirical stuff, what we'd have to do is look at lots and lots of countries, see how the law has changed over a significant amount of time, and then match that together with data and regression analysis.
But, you know, the answer is that you'd probably find just what 90% of countries around the world have already found, which is that it's probably going .
But, you know, the answer is that you'd probably find just what 90% of countries around the world have already found, which is that it's probably going .
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Speaker 5
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Speaker 5
Water is a natural monopoly. David, do you want to add anything? I think it's interesting that that we just had the word probably. Of course, it's impossible to prove a counterfactual given that we're talking about what might happen in the future. Surface water quality is not just affected by water companies. Unfortunately. We have a lot of.
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Speaker 5
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Speaker 5
House building, runoff from highways. Actually, a lot of chemicals can come off tires, for example, which can cause a lot of pollution. So it's not quite as easy to compare surface body water quality in one country and another. The population density matters hugely. The other thing about cost is, as I'm sure this committee knows all too well, it sadly costs a lot more to build in this country, the equivalent piece of. infrastructure than in just about any other country in the world. We see that in aviation, in transport, in housing, in energy. And the same is sadly true in water.
The cost of.
The cost of.
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Speaker 5
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Speaker 5
The planning process. It takes years and years and years to build reservoirs. I mean, I think it's shameful, actually, that we've not built a single reservoir in more than 35 years. It's not for want of trying. We have sought again and again to build reservoirs that have been. rejected by the last government and by regulators. And then finally, once we get the approval to build these reservoirs so that we can cope with the pressures of climate change, then the games begin with the planning. authorities or the environmental impact assessments. And it takes so much longer, and it ends up costing a fortune more than it should.
So there are complicated reasons why the average bill in England might be more than the average bill in France or Germany. I think it's interesting that we, despite all of those planning obstacles that I just mentioned, that we don't have the very highest bills. Actually, it's. Despite that actually the companies are bending over backwards to try and be as efficient as possible. Why? Because it's in their owner's interests. They have no interest in running inefficient operations. If anything, Ofwat has squeezed down the allowances provided to companies too much, which is why bills fell since. 2010 for the following 40 years, down by a fifth according to real terms, which is why the maintenance of our assets is not anywhere near where it should be.
And we're right to look at Scotland. Scotland's regulator took a very different approach. It's consistently enabled just above inflation investments to maintain the quality of the assets. They actually looked at the assets and established what was needed as opposed to off what, which took these backward looking models. So that's not specific to having a privately owned company or a publicly owned company. That is about the quality of the regulation. And Sir John Conyers report spends a lot of time looking at what is good quality regulation. And it's that is a crucial ingredient. And it's true, as he .
So there are complicated reasons why the average bill in England might be more than the average bill in France or Germany. I think it's interesting that we, despite all of those planning obstacles that I just mentioned, that we don't have the very highest bills. Actually, it's. Despite that actually the companies are bending over backwards to try and be as efficient as possible. Why? Because it's in their owner's interests. They have no interest in running inefficient operations. If anything, Ofwat has squeezed down the allowances provided to companies too much, which is why bills fell since. 2010 for the following 40 years, down by a fifth according to real terms, which is why the maintenance of our assets is not anywhere near where it should be.
And we're right to look at Scotland. Scotland's regulator took a very different approach. It's consistently enabled just above inflation investments to maintain the quality of the assets. They actually looked at the assets and established what was needed as opposed to off what, which took these backward looking models. So that's not specific to having a privately owned company or a publicly owned company. That is about the quality of the regulation. And Sir John Conyers report spends a lot of time looking at what is good quality regulation. And it's that is a crucial ingredient. And it's true, as he .
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Speaker 2
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Speaker 2
Public goods, merit goods, all these types of things and that. And that makes it much more difficult to bring the competition in the comments on Scotland. I agree, but it also brings out what's been wrong here because Alan Sutherland wicks what they did. He said I've had the conversations with him. We want two texts because that's what I have to fund. And he then thought through what does the company need? There was a more supervisor supervisory process with government and the. company effectively, because it's such a small, flat regulatory system and they came to an agreement and funded it.
Okay. Down here we just started regulating Codex, right? Which isn't doesn't make economic sense because it's CapEx plus OpEx to one one builds capital stock one's gone.
Okay. Down here we just started regulating Codex, right? Which isn't doesn't make economic sense because it's CapEx plus OpEx to one one builds capital stock one's gone.
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Alistair Carmichael
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Alistair Carmichael
Thank you. I could ask you a million questions more, but unfortunately time will not allow. So no. Well, look, I've been reviewing the areas that we'd hoped to cover. And actually, gentlemen, you've I think basically covered it all quite organically without us having to sort of be too prescriptive in our approach. So can I thank you for your attendance here. Can I thank you, in fact, in particular, for the way in which you've handled your differences. You know, look, none of this is easy. None of it's straightforward. I think if there was a simple solution, we would have found it by now.
But a being able to take something which is of public significance and a concern, but to manage differences well is is worth doing. So thank you for for your attendance and indeed the way in which you presented your evidence. But for today,
But a being able to take something which is of public significance and a concern, but to manage differences well is is worth doing. So thank you for for your attendance and indeed the way in which you presented your evidence. But for today,