Water and Sewage Companies: Directors’ Remuneration

Debate between Baroness Ludford and Lord Douglas-Miller

Thursday 22nd February 2024 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Douglas-Miller) (Con)]

My Lords, I congratulate the noble Lord, Lord Sikka, on securing this important debate and sharing his extensive views on the subject, and thank other noble Lords for their thoughtful contributions to today’s discussion. I welcome the opportunity to speak about the progress we have made to improve the water environment and our reforms to the remuneration of company executives.

This Government have been leading the way on delivering clean water for customers and the environment. Our plan for water sets us on a holistic path to deliver more investment, stronger regulation and tougher enforcement of our water system. Through this, we will transform our management of the water system, delivering cleaner water for nature and people and securing a plentiful water supply for the future. We have set out significant funding to support this work. Our plan for water committed £2.2 billion of new, accelerated investment directed into vital infrastructure to improve water quality and secure future supplies, including £1.7 billion funding to tackle storm overflows. In September 2023 we also published our expanded storm overflows plan, which set stringent targets to reduce the use of storm overflows. This plan will lead to the toughest-ever crackdown on sewage spills. In answer to the question asked by the noble Baroness, Lady Bakewell, the Government have increased the number of storm overflows monitored to 100% since the end of last year. Furthermore, this plan will also drive the largest infrastructure programme in water company history: £60 billion of capital investment over the next 25 years.

It is important to put this investment into context. Since privatisation, we have unlocked more than £215 billion of investment in the water sector in England alone to deliver services for customers and the environment. Privatisation has delivered a range of benefits, including high-quality drinking water, leakage being reduced by around a third and 90% of our bathing waters in England currently being classed as good or excellent. In addition, since 2010 water bills have fallen by 1% on average per year while companies have been investing around £5 billion annually over the same period. Looking forward to the future, the next water company investment cycle will include the biggest environmental improvement programme since privatisation. Water companies’ business plans show a planned £96 billion of investment between 2025 and 2030.

The noble Baroness, Lady Hayman, raised customers funding investment. The Government have been very clear that customers will not be paying for water companies’ mistakes. However, new infrastructure will need to be paid for, and while water companies can attract private investment, this will also need to come from customers’ bills. Ofwat assesses any increase in customers’ bills to ensure that they are fair and proportionate. We recognise that a balance must be struck here between ensuring that we prioritise spending on infrastructure to reduce environmental harm and securing supplies for the future without unduly hitting customers with bill increases.

I turn now to address the main point made by the noble Lord, Lord Sikka. We are taking clear and decisive action to ensure that no one profits from illegal behaviour and that water company executives take personal responsibility for serious breaches and damaging the environment. On 12 February my right honourable friend the Environment Secretary announced that the independent regulator, Ofwat, will consult on preventing the executives of water companies receiving bonuses if their company has committed a serious criminal breach. That could include, as the noble Lord said, successful prosecution for a category 1 or 2 pollution incident, such as causing significant pollution at a bathing site or conservation area, or where a company has been found guilty of a serious management failing.

Subject to consultation, we expect the ban to apply to all executive board members and chief executives. In answer to the question from the noble Viscount, Lord Stansgate, it will come into effect later this year. This builds on Ofwat’s announcement last year that it will tighten restrictions on bonuses using new powers given to the regulator through the Environment Act. It is important to make clear that this new announcement sits among a strong and ambitious long-term strategy to tackle pollution, clean up British waters and ensure a plentiful supply for the future. For instance, in March 2023 Ofwat announced new measures enabling it to take enforcement action against water companies.

[Baroness Ludford (LD)]

I apologise for interrupting the Minister, but I have been slightly provoked by his talk of a long-term ambition and a vision of 25 years. Does he accept that it was 1991—I am sorry to be a nerd about this—when the relevant EU directive was passed, under a Tory Government, and it should have been implemented by 1998? We are already 25 years after that but now he is giving us another 25-year horizon, so it will have been half a century before the discharge of sewage is cleaned up.

[Lord Douglas-Miller (Con)]

I thank the noble Baroness for her question. Perhaps I might write to her on that subject, given that she did not contribute to the debate earlier.

Additionally, on 21 February we announced that inspections of water company assets by the Environment Agency would more than quadruple in order to strengthen our oversight of water companies and better hold them to account. That is not all. We have legislated to introduce unlimited penalties on water companies that breach their environmental permits and to expand the range of offences to which they can be applied. That can include criminal prosecutions, for which there can be unlimited fines.

Following the publication of its performance report in November 2023, Ofwat published the financial penalties and payments for all water companies. This required 13 companies to return £193 million to customers for underperformance in 2022-23, with money rightly being returned to customers through bills in the year 2024-25. We make no apology for setting high standards for the water sector or for our tough expectations of what companies have to deliver. That is why, in addition to returning money to customers, Ofwat and the Environment Agency will not hesitate to use the powers that the Government have given them to enforce the law and hold them to account.

I turn to various questions raised by noble Lords. If I miss any questions or run out of time, I will write to individual noble Lords and send a copy to the Library. The noble Lord, Lord Sikka, asked whether the Government will give customers the opportunity to vote each year on executive pay. Remuneration committees for each water company independently determine the appropriate level of remuneration for their water company executives. Ofwat expects water companies to take into account the legitimate concerns of stakeholders when making decisions on the application of remuneration policies.

The noble Viscount, Lord Stansgate, and others raised the issue of sewage spills and correctly pointed out that no one wants to see this happen. Significant progress has been made. The noble Viscount asked how the Government and regulators will hold water companies to account. The Environment Agency and Ofwat have recently launched the largest ever criminal and civil investigations into water companies’ sewage discharges, and into over 2,200 treatment works, following new data coming to light as a result of increased monitoring.

The Government are working with the Environment Agency to hold the water industry to account. Where water and sewerage companies are found to be breaking the law, we will hold them to account through enforcement. The Environment Agency can now use new powers to impose unlimited penalties for a wider range of offences following the Government’s changes to broaden the scope of the existing civil sanctions regime and remove the previous cap on penalties.

The noble Baroness, Lady McIntosh, raised the issue of the automatic right to connect to the sewerage system in Schedule 3 and Schedule 10. In April 2023, the Government published the Plan for Water. This plan included the requirement for standardising sustainable drainage systems in new developments in 2024. Subject to final decisions on the scope, threshold and process, we expect to commence consultation on this by spring 2024 and aim to have finalised the implementation pathway by the end of 2024. Schedule 3 would make the right to connect surplus water run-off to public sewers conditional upon the drainage system being approved as capable of managing it. The noble Baroness also raised issues around building on floodplains, water run-off, Schedule 10 and storing water. Perhaps I might write to her on those issues.

The noble Lord, Lord Sikka, asked whether the Government have confidence in Ofwat. We are confident the industry regulators are using their powers to hold water companies to account, and we will continue to work with them and drive improvements that benefit customers and the environment. The noble Lord, Lord Sikka, gave an admirable list of the fines that Ofwat have recently handed out.

The noble Lord also raised the issue of foreign ownership. Ofwat, as the independent regulator, protects the interests of consumers by making sure that water companies carry out their statutory functions and are financially resilient, as well as holding them to account on overall performance and delivery of essential services. These same standards and licence conditions apply across all water companies, regardless of whether they are owned by foreign or domestic investors.

As I come to the end of my remarks, I want to be absolutely clear that profit should never come at the cost of pollution. As I have set out, this Government are going further and faster than any before to protect and enhance the health of our rivers and seas. We are holding water companies to account on a scale never seen before. This new action proposed by Ofwat will help us go even further to ensure that no one profits from illegal behaviour and that water company executives take full responsibility. I therefore assure noble Lords that the Government are fully committed to addressing the issues causing pollution in our waterways and we will continue to strive for a healthy and thriving water environment.