Water (Special Measures) Bill [HL]

Lord Cromwell Excerpts

Committee stage
Monday 28th October 2024 Lords Chamber

[Baroness McIntosh of Pickering (Con)]

My Lords, I congratulate the Minister on bringing forward the first Defra Bill to Committee stage; I congratulate the noble Baroness and those who supported the amendments moved.

I wish to add a note of caution and I declare my interests in the register: not least, I am an officer of the All-Party Parliamentary Water Group, and I worked for five years with the water regulator for Scotland, the Water Industry Commission for Scotland. The degree of caution I would like to urge in this regard is that I believe we are already committed in law. The Water Industry Act 1991 reflects that very carefully, as do the Environment Act and the Agriculture Act and others, not least the Flood and Water Implementation Act 2010, which is built on that.

I urge the Minister to be cautious in trying to reach a balance both in the Bill before us in Committee today and, more especially, the review to which other noble Lords have spoken, which we will go on to consider. I believe that the balance is currently right but falls heavily on the side of environmental benefits. I do not think that it is entirely clear what the costs will be.

I will issue a note of regret that I have not had the chance to go through the 87 pages of the impact assessment, which was released only on Thursday when I was due to speak in a debate on the Friday—literally, the first working day before Committee. One thing I have picked up that the impact assessment looks at is what the cost of natural capital and decarbonisation, for example, would be. I would certainly like more information on this, if possible. In relation to natural capital and decarbonisation, it says:

“This measure will help to protect the Water Environment and improve the state of the UK’s natural capital. The measure will ensure Water Companies take steps to protect the environment”.


It goes on to say:

“The measure is not expected to significantly impact greenhouse gas emissions”.


That is possibly debatable.

We will go on to discuss my main concern in greater depth in relation to amendments in my name in later groups, so I will not argue this at length now. However, I was absolutely astounded to learn this week that water companies are prevented from encouraging customers to take water efficiency measures. This addresses the point raised by the noble Baroness, Lady Young of Old Scone—a very pertinent point in this regard—about keeping customers’ bills down, which has been the concern of successive Governments as well as of the Consumer Council for Water, Citizens Advice and many MPs, as I found when I was next door, along with other noble Peers.

I am concerned that the definition of “wholesome water” is focused entirely on environmental matters and does not allow for measures to introduce water efficiencies, which I think all noble Lords would sign up to, such as recycling grey water to wash vehicles and, possibly, even dishes. I am a firm believer that clean drinking water coming into the home should be kept precisely for that purpose. It is extremely expensive to produce. We should keep drinking water for the purposes of drinking water. We should seek at every opportunity to encourage water companies to encourage their customers, in whichever area they live. In an area of hard water, for example, it is more difficult to work up a lather. Water companies are best placed to know the water quality in that area and I believe they should be allowed to address it.

The second thing that astounded me this week was that Ofwat had taken away some of the powers for water companies to introduce water efficiency schemes. It took some of those moneys away for better use—to give back as grants for water efficiency. I have no truck with Ofwat in this regard, but I would argue that water companies are better placed to know what water efficiency measures will work in each region in which they operate.

I conclude by saying that, while I listened very closely and admire the eloquence and knowledge with which the noble Baroness, Lady Willis of Summertown, moved the amendment, I think we have to err on the side of caution and make sure we are allowing the water companies the tools they need to do the job, to ensure that we preserve as far as possible drinking water for drinking water purposes, and allowing them to roll out measures to ensure that water efficiency going forward will encourage us all to use water differently. They are currently prevented from doing that by the definition as I understand it of “wholesome water”. We will go on to discuss that at a later stage, but one has to be cautious with the best intentions that are sometimes expressed in these amendments.

[Lord Cromwell (CB)]

My Lords, I also add my support for these amendments, and I agree with much of what has been said already. On the matter of water usage, I have lived in deserts and I find the idea of people power-washing their cars with pure drinking water in this country extraordinary. But that is where we are today, I guess.

Why do I support these amendments? It is simply because it is vital that this Bill is consistent with existing policy and legislation to which it naturally links. The only reservation I have, which may be something that comes out of the review, is that it brings us back to the question of whether Ofwat and the Environment Agency should be a single agency or two separate ones with a division of responsibilities.

[Lord Blencathra (Con)]

My Lords, I declare my interests as on the register. I thank the noble Baroness, Lady Willis of Summertown, for moving the amendment and for the interesting points she makes regarding the importance of clarifying the intention of this Bill. As we said at Second Reading, we are committed to cracking down on pollution by water companies and we support the Government’s intention to deliver effective measures that bring polluters to justice. While government can always do better, we are proud of our record in the past: we increased the number of storm overflows monitored across the network from 7% in 2010 to 100% today; and the Thames Tideway Tunnel is now complete.

So we on these Benches share the Government’s concerns about the many instances of water and sewerage companies discharging pollution in recent years. This poses a risk to those who use and enjoy our waterways and is causing serious damage to the environment. It is imperative that the Government continue to build on the progress the previous Conservative Government made on improvement, monitoring and tougher action to tackle sewage overflow incidents.

The Government are right to prioritise this issue, but we have serious concerns about the impact of this Bill on the water industry that we expect to explore as we go through Committee. I reiterate my thanks to the Minister, who has continued to engage constructively with us. I am grateful for the time she has given us in the lead-up to Committee. I hope we will continue to make constructive progress and improve this Bill for the benefit of all stakeholders—cost-effective water for consumers and security for the 100,000 employed in the water industry—while protecting the Government from financial risk and restoring our natural environment and incentivising investment.

Amendment 1 would make the purpose of the Bill clear and place a duty on the Secretary of State to have regard to that purpose, as well as the need to meet certain biodiversity targets and the current unpredicted impacts of climate change. The noble Baroness, Lady Willis, is right that we should take every opportunity to improve biodiversity, and there is an opportunity in the Bill to deliver transformative change for our rivers. We have amendments coming up in later groups that would help to incentivise the industry to invest in catchment restoration. That would not only improve water quality and flood management but contribute to nature restoration, biodiversity protection and, more importantly, the recovery of our biodiversity.

The Government want to keep the Bill narrowly focused on the regulation of water companies and their manifesto commitments on penalties for water companies, with the promise of further reform soon. We on these Benches are disappointed that the Government have not brought forward more comprehensive reforms in the Bill. If the promised water Bill does not materialise next year, it would not be the first time that a Government had delivered just partial reform.

We want to see a more ambitious approach from the Government, focused on the whole water sector and not just penalties for water companies—or for executives of water companies. For that reason, we believe there are areas beyond the Government’s fairly narrow focus in the Bill that ought to be included and should not be put at risk by the unclear timing of the future water Bill. The Minister has previously spoken about the need for incentives to attract talent to the sector, as well as an effective penalties regime. We need whole-sector reform if we are to deliver the clean rivers and healthy environment that people across the country are calling for. We support the spirit of the amendment by the noble Baroness, Lady Willis. We on these Benches agree that the Government must go further than the measures included in the Bill, and must do so urgently.

Amendment 91 similarly seeks to place duties on the Secretary of State to take reasonable steps to contribute to the achievement of our biodiversity targets and our climate change targets and to adapting to the impacts of climate change. The Minister will know that, in 2023, the last Government published the first ever comprehensive Environmental Improvement Plan, setting out targets and indicators for water-quality improvement.

Over 25 pages of the plan are devoted to water and targets. There were targets to reduce nitrogen, phosphorus and sediments; a target to halve the length of rivers polluted by abandoned mines; an interim target to construct eight water treatment works; targets on reducing water waste, reducing leakage by a further 20% by 2027; a target to restore 75% of our water bodies to good ecological status; a target to require water companies to have eliminated all adverse ecological impact from sewage discharges at all sensitive sites by 2035 and all other overflows by 2050; a target to create a level of resistance to drought so that emergency measures are needed only once in every 500 years; a target to direct water companies’ fines relating to environmental breaches to improving the water environment; a target to crack down on sewage pollution by holding water companies to account for delivering the targets set out in the Storm Overflows Discharge Reduction Plan; a target to require water companies to upgrade 160 of the wastewater treatment works to meet the strictest phosphorus limits by 2028, with a further upgrade of 400 of them by 2038, which would reduce nutrient pollution from treated wastewater; and—of great concern to me—a target to protect our chalk streams by supporting the chalk stream strategy. Lastly, there was a target to make sustainable drainage systems mandatory in new developments, subject to final decisions following consultation on scope, threshold and process.

I mention those targets to show that the Opposition are not coming here to say that we have just discovered some good ideas and actions for the future. We have a track record of setting tough targets, and they are in the EIP. These targets are specific to water quality and will greatly increase biodiversity. They are not just reasonable steps but specific, measurable targets.

The Government have said that they are urgently reviewing the latest EIP, which is about to be published. I do not expect the Minister to say what the tweaks will be, but can we expect any changes to the water EIP targets when the Government publish them? We share the ambition of the noble Baroness, Lady Willis, for water sector reform, and we hope that the Government will listen to the concerns of noble Lords, who are calling from all sides of the Committee for a more ambitious approach.

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We will of course listen carefully to the debate. I hope other noble Lords can support the amendments, and I hope the Minister is able to offer government support to help ensure that the pay and remuneration system for top water company executives and senior officers is made fit for purpose and does not continue to provide lavish financial support for persistent failure.

[Lord Cromwell (CB)]

My Lords, I will speak to Amendment 13 in my name. As this is my first contribution on an amendment of my own, I thank the Minister for meeting me, for the fact sheets and the letter, and for the good news that the commission and the review are taking place. We all appreciate that. I support the Bill and welcome the commission review to come.

I turn to the amendment. As touched on by other speakers, including the noble Baroness, Lady Pinnock, in the debates on the second and third groups of amendments, company employees require appropriate remuneration, just as investors need a return. But the financial engineering introduced previously by investors and company directors—for example, debt levels, transfers to parent companies and other practices that were forensically set out earlier by the noble Lord, Lord Sikka —has enabled opaque enrichment, and has subsequently brought some water companies close to bankruptcy. That is not what monopoly water companies are for, and I believe it lies at the very heart of the current problems of the water companies.

The amendment enables the authority to include rules or guidance, as we may decide, with regard to a company’s structuring and its transparent reporting. It is deliberately left as “may” rather than “must” because the authority may want some flexibility here. Nevertheless, the amendment would act as an overt reference to the responsibility of the authority and water company employees to evaluate clearly the company’s financial structures and changes to them, and how those would impact on the distribution of financial benefits across investors, employees, directors and, indeed, consumers.

[Lord Roborough (Con)]

My Lords, I will speak to Amendment 17 in my name. I thank the noble Lord, Lord Sikka, yet again for introducing this group and raising these matters for consideration when the Government are establishing the regulations surrounding performance, pay and bonuses.

Amendment 17 seeks to clarify the definition of what constitutes performance-related pay. There are many ways in which companies can create performance-based incentive schemes. That can include multiyear programmes containing cash bonuses, share awards, restricted stock units, share options and pension contributions. In answer to the noble Lord, Lord Sikka, it rarely includes chauffeur-driven cars, private schooling or any other benefits in kind, which tend to be part of the base package.

Is the intention to capture all forms of performance-based rewards within the powers of the Bill? If so, would it not be better to be exhaustive in defining them in the Bill? It is vital that such a definition be as clear as possible to ensure that the Bill achieves its intent to punish senior executives who are not fulfilling their obligations to us all in cleaning up our rivers, lakes and beaches.

In the Bill as drafted, the rules are not clear enough as to what financial components could make up the bonus of a senior water company employee in a given financial year. The amendment is therefore necessary to prevent water companies redesigning performance-based awards to take them outside the scope of the Bill. This is not to suggest any nefarious activity, but anyone currently captured by the Bill would choose not to be if they were able. It would then become impossible for a water company not to offer schemes outside the scope of the Bill if they wanted to attract the best talent.

I understand the intention of Amendment 5 from the noble Lord, Lord Sikka. It is indeed important that we ensure that water companies have no incentives to continue polluting our rivers. We have looked at this issue in our own amendments. Amendment 27 would ensure that any rules relating to pay and governance will be suitably scrutinised, so I believe the issue could be solved without the inclusion of Amendment 5.

Additionally, I ask the noble Lord, Lord Sikka, whether he has considered the impact that this amendment would have on the hiring process of water companies. I think it unlikely that many people would respond to a job advert indicating that you may have a salary but that there is a chance that by the end of the year it could be taken away from you. If the total remuneration of senior roles is included in the Bill, it is inevitable that water companies will lose people with relevant skills and experience in the sector. That will worsen the leadership and perhaps lead to more serious issues within the sector.

It is also possible that the water companies would be forced to delegate their own management to third-party consultants outside the scope of the Bill entirely, in order to find the necessary expertise to run the companies. Have the Government given thought to how to cope with the possibility of such third-party consultants not captured by the Bill?

On Amendment 6 in the name of the noble Baroness, Lady Bakewell of Hardington Mandeville, I agree that both legal and illegal dumping of sewage lead to undesirable outcomes. As such, I agree with the sentiment of the amendment. In 2022 we published the Storm Overflows Discharge Reduction Plan, which put in place targets to reduce the release of the overflow of sewage and in fact to stop it, except in situations with unusually heavy rainfall, by 2050. So we recognise that the issue is a pressing one and that action must be taken to ensure our rivers are kept clean. However, in order to stop the legal release of sewage, a substantial investment of money and time is necessary, and the amendment does not allow for such provision of time.

Our sewerage systems are a result of Victorian infrastructure design, and the increasing population and heavier, more frequent storms have led to increased pressure on this system. The suggested penalty will make it even less desirable to hold a senior role in a water company. As such, it will further decrease the number of people with skills and expertise at senior levels. This is unlikely to lead to an improvement in the water system for consumers, which is ultimately the aim we share across these Benches. I fail to see how we can support the noble Baroness’s amendment, despite the case put forward by the noble Earl, Lord Russell.

The amendments tabled by the noble Lord, Lord Cromwell, would require executives to take personal liability through their performance-related pay for unspecified structuring or restructuring that may put companies at financial risk. This would appear to us to be too vague to have much bite. It also potentially means that executives’ performance-related pay would be contingent on issues over which they might not have responsibility because they could be overridden by shareholders.

As I mentioned earlier, in response to an amendment put forward by the noble Lord, Lord Sikka, I encourage noble Lords to support Amendment 92 in my name in a later group, which would be a clear-cut prevention of payments to shareholders where there are potential issues of financial distress.

I look forward to the Minister’s response and hope that the Government will tighten up the definition of performance-related pay in line with our amendment.

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[Lord Cromwell (CB)]

My Lords, I support the amendments, but I want to make one comment on the discussion, which has possibly strayed a little from the Bill. Dealing with surface run-off and, in particular, developers’ right to connect are outdated. I hope that the Minister will urge those involved with the review to have a serious look at this, because it is completely outdated, and with increasing development, not to mention climate change, it will only get worse. It needs tackling properly.

[Lord Blencathra (Con)]

My Lords, I thank my noble friend Lady McIntosh of Pickering for moving this important amendment, which has caused a little bit of welcome excitement in the Committee. Both Amendments 7 and 8 seek to ensure that senior executives do not receive a financial penalty for failures that were not their fault or within their control, and we on these Benches feel that the noble Baroness’s amendments merit consideration by Ministers. The intervention by the noble Lord, Lord Cromwell, at the end also merits some consideration.

It is right that the Government should take steps to ensure that, when a water company fails to meet the standards set by Ofwat, the responsible executive is held to account. While it is right that company directors take responsibility for the successes and failures of a business, under the Bill, other senior officers, who may not be members of the board of directors, could be penalised under these rules. The argument that the relevant senior executive is held responsible, rather than an officer of the company who was not responsible for the decision, is a simple one. Rather than applying financial penalties to all senior executives, including those below board level, these rules should penalise only those who are responsible for the company’s conduct.

It is quite a long time since I last worked in industry, but I do not think that much has changed to this day. Who is responsible depends on the level of direct supervision by a more senior officer. At lower levels of a company, it is quite straightforward: the supervisor or the foreman has minute-by-minute relationships with the team under him or her, so they could be held responsible for faulty work or bad behaviour by their workers. But that is at the lower level. As you get higher up a company, the whole ethos changes. Executives are supposed to set objectives and delegate to their other officers how it is done. The CEO, or directors, tell officers under their command, “Here are your legal duties and these are the company objectives. Here are your own personal targets and objectives—report to me weekly, monthly or whatever on how you are progressing. Now, just get on with it”.

There is no direct day-to-day supervision, and the CEO has to trust that the senior officers below him or her obey the law, behave properly and do not cause the breaches that we are concerned about. It would be wrong to blame and reduce the pay of CEOs or directors based on a mistake by a person under him or her where they have no direct control. Of course, the exception would be in the extraordinary circumstances in which the CEO or executive director gave instructions to the worker to break the law or not to care about the rules. That would be a different matter.

Without these amendments, we are concerned that it may prove difficult to find professionals willing to take on senior roles at water companies if there is a risk they will suffer an unfair loss of performance-related earnings through no fault of their own. It is a basic principle of performance-based pay for employees below board level that it should be tied to their performance as an employee within a team. It would not be an effective incentive scheme if one individual or team were deprived of their performance-related benefits because of the behaviours of failures of another individual below board level. As we discussed at Second Reading, arbitrary punishment will not improve performance; it will only encourage people to seek employment outside the water sector.

If we are to deliver the improvements to the water sector that the British people rightly expect, we must attract more talent to the sector through a fair incentives and penalties regime. The Bill is a bit too broad and could permit rules to be applied to the sector by Ofwat that are unfair and ineffective. Furthermore, when a current bonus scheme, or contractual bonus, provides for the bonus to be payable on the achievement of certain performance conditions, and the performance conditions have been met, an employer is, in effect, obliged to award the bonus. In cases where an employer may grant discretionary bonuses, employers are required to exercise this discretion honestly and in good faith, not to exercise it in an arbitrary, capricious or irrational way, and not to breach the implied term of trust and confidence.

It concerns me that, should the Government choose not to include these amendments in the Bill, and individuals’ performance-related pay was docked for actions or responsibilities beyond their control or remit, it would put the employer in a position of complying with the requirements of rules created by Ofwat under this Bill but then acting contrary to these common-law and contractual requirements. That leads to a concern that this scenario could result in costly and time-consuming litigation, thus diverting funds which would otherwise be better spent improving our water and sewage systems. Therefore, I encourage the Government to accept these amendments so that, should a water company fail to meet the standards set by Ofwat, only the relevant executives are held responsible. However, if the Government are unwilling to put this on a statutory footing, we hope that Ofwat would be willing to enact these principles under its rules, which could be overseen by the House under Amendment 27 as an affirmative instrument.

I want to comment on the points made by my noble friend Lady McIntosh of Pickering on surface water. I put it this way: if we were starting again from scratch a couple of hundred years ago, we would have designed a system whereby we never had rainwater from gutters or car parks running off into Mr Bazalgette’s sewage system—but we are where we are now. In an ideal world, two pipes would come into every house and, as the noble Lord suggested earlier, one would have clean water for drinking and the other water for flushing the toilet or for hose pipes. We cannot go back and do that now—but what we can do is look at new developments, and I hope that the Government will consider the suggestion from the noble Lord, Lord Cromwell, in that regard.

I understood that it is possible if one is building a car park, before one puts in the hardcore, to lay a whole series of ooze pipes and then collect all the rainwater run-off, so it replenishes the underground stream by putting the water back into the subsoil. That should be possible. Whatever it is, we need to look at new developments to ensure that surface water is not unnecessarily going into our sewage system. I hope that the Minister will carefully consider what my noble friend Lady McIntosh of Pickering has said.

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[Lord Cromwell (CB)]

My Lords, I will speak to Amendment 16 in my name. I underline at the outset that this is not about putting people on the board; if that is a misapprehension, I want to dispel it. Civil society has been at the forefront of raising issues around water pollution, including monitoring pollution incidents, and, frankly, it has done a better job than the regulators, which have been playing catch-up ever since.

There is an unbalanced and sometimes adversarial power relationship between civil society, water companies and the regulator, and this has given rise to numerous complaints about a lack of transparency—for example, companies deliberately adopting a very narrow definition of “environmental” in order to reject and bat away inquiries from civil society and others. This amendment would require the regulator and water companies to engage with civil society on a regular and formalised basis to agree actions and to record these actions publicly.

This achieves two things. It addresses the disbalance between civil society, the water companies and the regulators and will be an important means to increase transparency, including detailed public transparency as to what is going on, what the regulators and water companies are being challenged on and what actions are planned. It is very easy to underestimate the importance of this. In a previous role I had, we were handing over large sums of money to organisations and one of the stipulations was that they had to publish on their own website exactly what actions they had committed to. This made life very easy for us, because the media then held them to account against those actions. I suggest that a formal process where these things are recorded properly and publicly will be of great assistance to keep the water companies and the regulators up to the mark. Without a formal process of that sort, the relationship will remain distant and most likely adversarial. Therefore, I hope the Minister will look favourably on this amendment or produce one of her own from the government side.

[The Duke of Wellington (CB)]

My Lords, I will speak to Amendments 21 and 23 in my name. In effect, they both seek to amend new subsection (6) on page 2. The main point of my amendment is that I believe it does not lead to effective governance of a board of directors if sectional interests are represented directly on the board. It is much more effective and likely to have more influence if a specialist panel is created to advise and meet the chief executive. I cannot understand why the Government’s clause refers only to the views of consumers. It seems essential—I agree in various ways with the noble Earl, Lord Russell—that environmental interests are similarly represented on a panel. It could be a separate panel or one representing both consumer and environmental interests; I think it would be better to have two panels.

The real point is that I have never seen a board work effectively where there is a sectional interest represented directly on the board, with one or two members of the board speaking only for that particular interest. It makes it very difficult to reach a consensus on a board. Most boards work by consensus, and there has to be a collegiate atmosphere on any board. Where a particular interest is represented, be it environmental or consumer, that is less likely to lead to effective management of the board of that company.

I would like to persuade the Minister to delete from new subsection (6) “board” and “committee” but leave in “panel”, to include consumers and environmentalists on those panels and, importantly, that those panels should have regular meetings with the chief executive to exercise real influence over the conclusions of the board when it next meets on that subject.

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On environmental concerns, however, we need regular meetings with people who have a regular information source, so they can watch what is being done by the water companies in their role of dealing with the environment. Without this, we will get back into the same problems we have now, with two competing regulators of different sorts. Ofwat is bound by any Government—it has happened under both sorts of Government—to be looking constantly at prices, while the Environment Agency is bound to make sure the environment is constantly looked at. Let us have a structure which faces that problem and ensures that the environment is not forgotten.

[Lord Cromwell (CB)]

My Lords, we spoke earlier about the issue of two regulators and I will not go back over that. However, I will talk a little more about the presence of people on boards. I think there is a middle ground here—obviously beautifully set out in my amendment. To extrapolate a little from that, I agree that directors in a company have specific responsibilities which would not sit comfortably with having a consumer representative as a member of the board. That is clear and right.

These companies, however, are not just profit-making companies which represent shareholder interests; they are monopolies providing a service to the public for which they achieve a reward. That is an important distinction to make. For that reason, I agree with the noble Baroness, Lady Jones of Moulsecoomb, that avoiding groupthink and having challenge on a board is a very useful thing. However, I would not go so far as to make them directors, for all sorts of legal reasons that others have already expounded.

It pains me to disagree marginally with the noble Duke, the Duke of Wellington. I do not like panels, because they become ghettos that the unfortunate member of board who has to interact with them dreads going to—but they go anyway, they go through the motions and then they come back. I far prefer something more formal: a regular cycle of meetings with representatives of civil society, which are going to be challenging and sometimes uncomfortable but which end with recorded actions that are made public. Otherwise, it becomes just a token exercise and a ghettoisation into panels. I will not try to emulate the tone of the noble Lord, Lord Deben, but the representatives of consumers or environmentalists can be listened to but not heard.

[Earl Russell (LD)]

My Lords, this has been one of the really interesting groups in the Bill. I am not certain that any of us—from any party, in any amendment—has the complete solution. There are questions about whether a one-size solution fits all. In any case, there is a lot for all of us to go away and think about. These are crucial issues that go to the heart of what we do, how water companies operate, how they are accountable and how people who are impacted by them can feed in to and influence what they do and how they operate.

I thank the noble Lord, Lord Cromwell, for his contribution. I fully support him on the role of civil society. It is particularly important that we all acknowledge, as he did, that we would not be here without the role of civil society. I have an amendment in a later group to encourage the Government to work more with civil society in monitoring the environment.

I also thank the noble Duke, the Duke of Wellington, for his comments on the need for environmental representation. I am not quite certain where I agree on that debate; I will go away and think about it some more. I have also been on a board, and to be honest, it was one of the most difficult things I have done in my life. That was even on a good, well-functioning board. Sometimes, if you are in a difficult situation, even with good people who work together, things can be very difficult.

I also thank the noble Lord, Lord Remnant, for tabling his amendment. The board should decide on its own make-up and we should not dictate to it. Perhaps there is some kind of compromise here between the Government setting guidelines for what needs to happen, while perhaps allowing some freedom within the way that it is organised and monitoring the outputs that come from it. Maybe there is something we can all work on there.

I also thank the noble Lord, Lord Sikka, for his contribution. It is a bold move, indeed, and I am not entirely certain that I agree with that kind of prescriptive democracy. I think that it is better to allow things to be inclusive, as opposed to dictating that they must be in their make-up, but again, I will think about that.

The noble Baroness, Lady Jones, spoke about bringing some democracy into the regime. I certainly think we need that, and that the environment needs a proper, formal voice. I take up the point from the noble Lord, Lord Deben, about the need to watch the environment. If we do not do that, and if nobody has that responsibility or role, then that protective piece that needs to happen will not be there.

I think our areas of agreement were the need to broaden representation to include the environment and community, the need for diversity, the need for boards to work well, the need for constructive challenge to operate and to be brought to these companies at the highest level, and the view what we have now is not working, so we need to go away and find something else.

Water (Special Measures) Bill [HL]

Lord Cromwell Excerpts

2nd reading
Wednesday 9th October 2024 Lords Chamber

[Lord Cromwell (CB)]

My Lords, I support the intention of this Bill in its pre-Committee stage. I know that the Minister will be looking forward to the flow—possibly even the flood—of useful and constructive amendments that will be coming her way from all across the House and beyond.

Water is our most precious resource, yet we have allowed it to be managed for short-term financial gain and with inadequate regulatory intervention. The saying goes, “Don’t excrete where you eat”—or words to that effect—and yet mixing sewage and water, initially excused as an occasional force majeure, is now standard practice. Turning around the decades of infrastructural neglect and creating a resilient water and sewerage system will take a generation and need consistency through multiple electoral cycles. The last Government talked about 25 years and more than £50 billion. Taking water companies into public ownership, as some advocate, would apparently—and I look toward the noble Lord, Lord Sikka, on this—cost an estimated £90 billion and take a long time to implement. Either way, the investment cost is going to be enormous, but not meeting it in the past is how we have got into this mess in the first place.

Meanwhile, climate change, rising population—to which the noble Baroness, Lady Pinnock, referred—and new types of high demand for water, such as data centres, are adding further challenges to the existing infrastructure. I therefore welcome, as others have, the full review of the water system announced by this Government. I hope that the Minister will be able today, to some extent, to share with us what the scope, the format, the timetable and the level of independence are going to be of that review.

The Bill sets out a range of punitive measures for water companies, both personal and corporate, including imprisonment, which many others have spoken about, so I will not detain the House further on those. It also includes consumer representation at board level, and I am with the noble Lord, Lord Whitty, on this. I welcome that challenge being brought to board level rather than being ghettoised in some panel on the second floor. I would much rather it was a board-level issuing challenge. However, while these things may reflect the public mood, the fact is that, as the last speaker mentioned, many of the guilty horses have long ago bolted, heading for the hills with their saddlebags full of treasure. Debt-free companies have been loaded with debt, now at 70% to 80% debt to equity. Despite the failure to invest sufficiently in the infrastructure, substantial transfers of value have been made by water companies to their parent companies across the globe while, in some cases, piously claiming that they had not paid shareholders a dividend for years. This is something that the regulator repeated to us when giving evidence to the committee I was on.

While some water companies—and here again I agree with the noble Baroness, Lady Pinnock—have performed better than others, it is going to be a long, hard and expensive slog to put things right. It will be a thankless task of trying not to succeed but just to make things less bad for a long time, while at the same time under personal risk of financial and/or criminal penalties, compounded by public resentment that the cost will ultimately fall on the consumer. This makes me ponder, as others have: who would now want to take on such a role, with such possible outcomes and high levels of public hostility?

My two questions to the Minister, therefore, are as follows. First, do the Government accept that a very attractive—but no doubt therefore criticised—employment package will be needed to secure, retain and hold to account managers of water companies and of regulators with the necessary skills and robustness? Secondly, do the Government also recognise that, for earlier investors, the party is largely over? They are decreasingly willing to provide capital to UK water companies, and that is a very big challenge for a Government who are seeking private finance to right the wrongs of the past.

Turning now to the regulators tasked with enforcing this Bill, Ofwat has been, so long as water was plentiful and cheap to the consumer, light-touch—and, frankly, outsmarted by private equity financial engineering. The Environment Agency, which will have a vital role in monitoring performance against the stipulations in the Bill, has been drained of resources and morale. I agree again with the noble Lord, Lord Whitty, on the disconnect from Ofwat. Defra, as a supervising department, was found by a committee of this House—of which I had the privilege to be a member—to have been overly complacent about both the water companies and the regulators.

Will the Minister explain how all these issues— the lack of skills, of resources and, above all, of incisiveness—will now change as part of achieving the purpose of this Bill? Simply putting up water bills, as the companies propose, will not create enough money. Hedge funds know this and are reportedly buying up discounted Thames Water paper, to which other speakers referred. Financial restructuring and swapping debt for equity are likely to follow. Will the Minister therefore explain on what grounds the Government think that the regulators—or, indeed, government departments—will be any better at understanding and supervising hedge fund strategies than they were with private equity financial engineering?

Finally, there have been significant issues around the lack of monitoring data and I am glad to see that the Bill starts to address this. Let us remember that it was civil society, not the regulators, that persistently highlighted the sewage pollution issues and it will be an important monitoring ally in keeping both the water companies and the regulators up to the mark. Otherwise, there a risk here of the regulators marking their own homework and blame-shifting between organisations. New Section 141F set out in the Bill is helpful on this, and this is reflected in the positive comments of the Information Commissioner’s Office. Nevertheless, an amendment is going to be needed that expands it to include requirements that monitoring data must be automatically available, online and in real time, including the volume and type of discharge and an explanation of why it happened and what is being done to mitigate and prevent a recurrence.

To conclude, I support the Bill as far as it goes. It is a first and belated step to address one aspect of the problems of the UK water and sewerage system. The systems we inherited from the Victorians reached their capacity in 1960. To build a resilient water and sewerage system fit for the future, we will need a long-term strategy, cross-party co-operation and consistent long-term resourcing. All of these are very, very substantial challenges.

Water Companies: Financial Resilience

Lord Cromwell Excerpts

Tuesday 23rd July 2024 Lords Chamber

[Baroness Hayman of Ullock (Lab)]

The water special measures Bill that we will bring in front of your Lordships shortly is going to deliver on our manifesto commitment. As well as strengthening regulation, it is designed to make sure that the water industry will be fundamentally changed and transformed. It will ensure that water company bosses are not rewarded with bonuses if a serious environmental breach is committed. It will strengthen and enhance the ability of regulators to bring robust charges against water companies and executives when they have committed offences, including through automatic and severe fines. It will also require that water companies install real-time monitors, so that we can actually see what is going on. I also reassure the noble Lord that this is just a start.

[Lord Cromwell (CB)]

The Ofwat website refers to an £88 billion programme of investment that will go into the infrastructure, and describes this as

“initially … funded by shareholders or through borrowing, with these costs then recovered”

from consumers over five years “and beyond”. Does the Minister have any concern as to whether that money will actually be raised, and does she share my concern about the financial resilience of consumers to pay for it over time?

[Baroness Hayman of Ullock (Lab)]

As the noble Lord quite rightly says, Ofwat has set out a record £88 billion upgrade so that we can deliver the cleaner rivers and seas, and better services for customers, that we need. It is absolutely not right that the public should pay the price for years of mismanagement in the water sector. Any water bill rises are the result of these years of failure, but it is important that we do not put too much on to vulnerable customers, so officials are exploring options for improving affordability measures in the sector.

Fly-tipping

Lord Cromwell Excerpts

Tuesday 14th May 2024 Lords Chamber

[Lord Douglas-Miller (Con)]

That is a novel idea. I am certainly happy to take it away and consider it extremely carefully.

[Lord Cromwell (CB)]

My Lords, the Minister told us earlier that the Government were going to tackle waste sites. I would love to know what that actually means. If it means clearing them up, it simply creates the space for more waste to be tipped. He also talked about on-the-spot fines. The essence of fly-tipping is that there is no one on the spot when you tip it.

[Noble Lords]

Oh!

[Lord Cromwell (CB)]

That is not personal experience. I came across one fly-tipping incident where the offender had actually thrown down the parking ticket that was previously attached to their vehicle and had their number on it. When the police found this, they told me they were not going to take any action because the person whose vehicle it was would simply deny they were driving it.

[Lord Douglas-Miller (Con)]

The noble Lord raises a series of extremely good points. By the very nature of fly-tipping, as he rightly points out, it is extremely difficult to be in the right place at the right time when someone is doing it. I completely accept that there are limitations around this. However, the Government have introduced a number of new initiatives, such as the use of cameras, to help councils on this issue. It is very difficult to deal with it. To be honest, my personal view is that it is an education issue rather than an enforcement issue, but we are probably getting a little off topic.

Water Pollution

Lord Cromwell Excerpts

Tuesday 16th January 2024 Lords Chamber

[Lord Douglas-Miller (Con)]

Again, I thank the noble Baroness for her kind words. The Environment Agency has fully reviewed the evidence about this incident and concluded that the most likely cause of the Cunsey Beck issue at Lake Windermere was algal bloom. However, since the Environment Agency did not identify a definitive source of this serious problem, it asked the Scottish Environment Protection Agency to review its response. As a result of the review, the Environment Agency has made improvements to water quality monitoring in the area, including installing sensors that monitor river quality in real time. We have no plans to reopen the investigation in the absence of any substantial new evidence.

[Lord Cromwell (CB)]

My Lords, senior members of staff from water companies appearing in front of the regulatory committee told us that the monitoring that they have put in place is available freely, in real time, to the public. They now appear to be claiming that they are quasi sub judice because they are under investigation and are not prepared to provide that information. Is that something the Government will let them get away with?

[Lord Douglas-Miller (Con)]

The Government are very clear that we will be providing real-time information and that it will be available publicly. If any of the water companies feel that they will not be doing that, I can assure your Lordships that the Environment Agency will be chasing them.

Water and Sewage Regulation (Industry and Regulators Committee Report)

Lord Cromwell Excerpts

Monday 16th October 2023 Lords Chamber

[Lord Cromwell (CB)]

My Lords, I had the privilege of being a member of the committee that produced this report under the incisive chairmanship of the noble Lord, Lord Hollick. At the start of our inquiry I actually had some sympathy with the regulators and the water companies. The regulator, Ofwat, had been left by government to take what amounted to controversial decisions about the prioritisation between its objectives and those of the water companies. The water companies were primarily tasked with providing clean, cheap water, and to a great extent they have done so. If noble Lords need proof of that, please consider that, every weekend, millions of people in this country wash their cars and water their gardens with what amounts to pure, purified drinking water. Rightly or wrongly, environmental issues have been moved up the list of priorities only more recently.

However, this pool of sympathy dried up during the course of our inquiry. As the noble Lord, Lord Hollick, referred to, we uncovered financial engineering being used to take advantage of regional monopolies, including debt loading and opaque dividend extraction. This was at the expense of much-needed—now frighteningly overdue—investment into the very infrastructure on which our water and sewerage system depends.

How did we get here? As regards the regulators, the committee was far from convinced that Ofwat had the business savvy to spot what was going on and act early enough to stop it. By its own admission, it took only a light-touch approach to regulating the industry. The Environment Agency—demoralised and lacking the resources it needed to hold the water companies to account—has also not kept water companies up to the mark on their environmental performance. Indeed, civil society organisations called out the issues of pollution long before the regulators did. The committee’s very timely report also helped to bring the issue to prominence, as the noble Baroness, Lady Taylor, mentioned. Finally, Defra, the department with overall responsibility, appears to have been far too complacent in looking into what was going on. It left the regulators and water companies themselves to make decisions about the competing demands of sewage and water management, and profit.

Where does this leave us? The regulators have taken some steps, at least latterly, but Ofwat’s Water Company Performance Report 2022-23 makes for depressing reading. Performance has fallen short for the majority of companies. Seven of the water companies are described as “lagging”, the report’s lowest categorisation, while fewer than half achieved their performance target on reducing pollution incidents.

We now have a water and sewerage industry desperately in need of a massive catch-up on spending, with numbers ranging from the Government’s quotation of £56 billion—noble Lords should remember that that will be spent over 25 years—to the hundreds of billions cited by the water companies, and the almost fantasy figures that the noble Lord, Lord Agnew, quoted from the task force.

Long-term money for infrastructure needs to be raised and sustained, not just in the short term but over the years and decades ahead. A crucial question therefore is how to raise the necessary investment funds. First, there is currently no suggestion that the money extracted by private equity investors will ever be recovered. Secondly, we have a number of water companies that have themselves been teetering on the brink of being washed over the financial weir into bankruptcy. Thirdly, we were told initially that the water companies would raise this money in the City or from their existing investors, but the talk now is of putting up customer bills. At a time of economic uncertainty and a cost of living crisis, when the benefits of investment might take 25 or more years to be felt, that is an extremely challenging proposition to put forward.

So we seem to be up sewage creek without an affordable paddle—but this is not just about money. The committee had severe doubts about the capability of some water companies, even if the necessary billions of pounds were made available to them, to manage the very substantial infrastructure projects that are required. Ofwat, when asked about this, appears to be crossing its fingers and hoping for the best.

To conclude, solving the problems highlighted in this report is going to be a long haul, and for that reason I hope that the current and future Governments will take note of it. I will pose four questions to the Minister and look forward to his responses when he winds up. How much money is needed to modernise our water and sewerage systems? How is that money going to be raised? How will this massive infrastructure renewal be competently delivered? Finally, are Defra, the regulators and the water companies really up to the job of getting these matters right?

--- Later in debate ---

[Lord Benyon (Con)]

I think it has been wonderful to see pension funds invest—perhaps those paying the pensions of those of us in this Room. I totally welcome the fact that people want to invest in the regulated utility sector in this country, whether water, energy or any of the other sectors. It has seen a step change in investment and has helped keep bills down.

I was interested in the speech of the noble Lord, Lord Cromwell, who talked about our ability to do big infrastructure projects. I was involved in trying to persuade a lot of sceptical people, within government and outside it, of the importance of building the Thames Tideway tunnel. There was opposition from the Liberal Democrats, from Members of my party in both Houses, and certainly from the Labour Party. There was a belief that it would not work and that it would put up bills by £85 in the Thames Water area. It will actually put up bills by around £22. It is being built and it was the right thing to do. The Government stepped in as the guarantor. It is an example of a very large investment in one piece of infrastructure. There are many others that are much smaller that have—

[Lord Cromwell (CB)]

Either the Minister is agreeing with me or perhaps I was not clear. My concern is whether the water companies have the competence to implement these sorts of infrastructure projects. He has given a very fine example of a non-water company implementing the Thames Tideway. Will there be more of that? It seemed very doubtful that Ofwat had confidence in the water companies delivering these multi-billion pound infrastructure projects.

[Lord Benyon (Con)]

Multi-million pound infrastructure projects are being done by water companies; I will come on to talk about reservoirs. Some are doing them better than others; it would be a very strange world if they were all the same. The Government watch this matter very closely. We require investment and we want it done in the right way.

The noble Baroness, Lady Jones, who is shaking her head before I have even said anything, said that water companies should be fined; they are being fined record fines. One was fined £90 million last year.

Disposable and Reusable Nappies

Lord Cromwell Excerpts

Wednesday 28th June 2023 Lords Chamber

[Lord Benyon (Con)]

With five children, I should perhaps also declare an interest. I like to think I pulled my weight, though my wife might disagree. The noble Baroness’s point about 3.6 billion nappies is right. About 78% of those go into incineration but 22% go into landfill, which is 22% too much. We have looked at this in a number of ways. Local authorities have the lead on this, and it is about supporting them to have schemes that work locally; the Government do not feel we can take action at a governmental level. There are many other—if noble Lords can excuse the expression—crocodiles closer to the canoe in terms of tackling environmental problems. Textiles and plastic are an absolute priority for us, but we certainly want to support local authorities in trying to achieve better disposal of nappies in the future.

[Lord Cromwell (CB)]

My Lords, on a subject related to nappies, a recent House of Lords report recommended banning non-degradable wet wipes; the Government response was that they will ban wet wipes subject to consultation. I find it hard to believe that any consultation is really needed. If it is a procedural requirement, can the Minister tell us how soon this can be completed and a ban put in place?

[Lord Benyon (Con)]

In the Plan for Water published in April we said that we were going to do this, and 96% of respondents to our call for evidence supported a ban on wet wipes. More information on the proposed timing of any ban will follow the announcement of the details of that consultation.

Agricultural Tenancies

Lord Cromwell Excerpts

Monday 12th June 2023 Lords Chamber

[Lord Benyon (Con)]

I am grateful to my noble friend. One of the greatest criticisms of the Tenancy Reform Industry Group—I pay tribute to the many hours many people sat on that organisation—was that it was a talking shop. People did not feel they were being listened to, and it was a way of getting off their chest concerns they knew existed. We want to make sure that the new forum is not that; that it is executive and has a snap to it. As I have said, it will meet every quarter and the Farming Minister will be one of the co-chairs. Its remit and the determination to keep it close to Ministers shows that it will be more than that.

My noble friend makes valid points about trees and hedgerows. We have published guidance on how tenants can approach tree planting and woodland schemes such as the England woodland creation offer, and we have made sure that both the tenant and landlord will need to agree to any EWCO proposal on tenanted land. I do not think that is wrong—it is absolutely right that if a major change in land use is being promoted, the landlord’s interests matter. If they do not, it will be another incentive for landlords not to let land, or indeed to bring to an end a letting arrangement when a farm becomes available and take it in hand. We want to make sure we are still providing the incentives.

My noble friend is entirely right about hedgerows. That is why we have published our new hedgerow standard as part of the new six standards for the sustainable farming initiative. But he is absolutely right that a hedge no higher than this table does not really achieve very much in terms of carbon and biodiversity. If it is much wider, much higher and preferably has an unploughed, unfarmed cultivated headland, it will be immensely more important.

My noble friend is absolutely right, of course, that a lot of agents are excellent people—I think I was when I was one—but we should not create legislation around trying to put everybody in the same boat as the bad ones. Agents are undoubtedly advising their clients as to what is best for them to secure their interests for the future and the future generations of their family. That is why we want to see the kind of changes we are making to inheritance tax, which give the incentive to landowners, on the advice of their agents, to do the right thing and encourage that. I have received inspiration from my colleague, the Minister. I might have misled the House. He is not the co-chair but, importantly, he will attend every meeting of the tenants’ forum.

[Lord Cromwell (CB)]

My Lords, I did not intend to speak this evening, but apart from sharing the noble Lord’s scars of IACS from the past—he has my profound sympathy—I declare my interest as a shareholder in the family farming company. I will make two points. One is that well-intentioned changes can produce unintended consequences. I am not going to get into the details of hedgerow widths or heights tonight, but simply say that history shows us you cannot force landlords and tenants to have a happy, long-term relationship. It is based on trust, performance and mortality—people die, people get ill and things move on. You cannot oblige people, any more than you could in any other relationship, to stay together if it is not working.

Secondly, on introducing taxation in this form, if you make it obligatory to have an eight-year tenancy or you do not get tax relief, the answer will not be eight-year tenancies; it will be no tenancies, because no landlord in their right mind will be tied down in that way. They will simply take the land in hand and contract-farm it. We have had tenants farming with us for whom we have run back-to-back short-term tenancies for years and years, because we have a relationship of co-operation and trust. However, if the law obliges us to enter a multiyear relationship in which they can change the land use entirely, those tenancies will simply come to an end. The tax system should not interfere in what are fundamentally human relationships between people trying to work together in their mutual interest.

[Lord Benyon (Con)]

The noble Lord speaks an awful lot of sense. To an extent, it is impossible for government to be perfect here because, as he says, we are dealing with human relationships. Government should create the right incentives. We are talking about a business relationship. There are so many different types of tenure in this country—owner-occupier, tenancies under the Agricultural Holdings Act 1986, farm business tenancies under the 1995 Act, graziers, contract farmers, share farmers and multiple graziers on commons. The complications of trying to create a farming support system that can be accessed by them, particularly in areas such as Countryside Stewardship, are really difficult, but it is vital that they are there.

The noble Lord is absolutely right that, if we get this wrong and government tries to impose things that the market does not want, we will end up getting the worst of all possible worlds—people we want to see on the land not on the land. We want to make sure that we keep this vibrant, diverse form of occupation and use of land, which requires landlords and tenants to work together for their mutual benefit and for the societal benefit of us all, through the use of our vital natural capital, which will deliver many more wider societal benefits.

Water Companies: Water Pollution

Lord Cromwell Excerpts

Wednesday 1st March 2023 Lords Chamber

[Lord Benyon (Con)]

We are asking water companies to spend a lot more—£56 billion. In this period alone, they are putting an extra £7 billion into investment in infrastructure. Water companies make a profit of about 3%. This is not dramatic, compared with what some other companies make, but we watch it very carefully through the instructions we give to Ofwat. We want to make sure that customers are getting a good deal but, more importantly, that there is investment going into infrastructure.

[Lord Cromwell (CB)]

I wonder if the Minister is aware that, in two weeks, the Industry and Regulators Committee of this House will be producing its own report into governance and regulation in the water and sewage industry. This will clearly be of interest to many in this House. Can the Minister confirm that putting right the sort of problems we are talking about is going to take decades, not years? Can he also confirm that the money for it will not be public money, but that the companies themselves will raise money in the City, take on debt and possibly put up water bills?

[Lord Benyon (Con)]

At a time of concern about household expenditure, it is important that we balance water bills. It is always a balancing act. We want to make sure that, with an average bill at just above £1 a day to provide all the water a household needs and to have all the sewage taken away, water companies can invest in the necessary infrastructure. Most importantly, during the next decade or two, we must eliminate rainwater getting into sewage. This is the challenge. At the moment, we have water coming off roofs and going into Victorian or Edwardian sewers. Many of them have been updated and improved, but billions of pounds still need to be spent to tackle this recurring problem.

Agricultural Transition Plan

Lord Cromwell Excerpts

Wednesday 1st February 2023 Lords Chamber

[Lord Cromwell (CB)]

My Lords, I declare my farming interests. I very much enjoyed the Minister’s upbeat presentation on the situation in agriculture, but I know that, from his own farming experience, he will empathise with the fact that any farming business is a complex series of ecosystems that interact with each other, and a decision on one will affect others in many different ways. Therefore, can he help me by explaining why the Defra strategy appears to be to drip out bits of the environmental programme, for example, piece by piece? One month it is soil, the next month it is hedgerows. Farmers, who are trying to feed the nation and improve the environment, find it impossible to plan a business when these bits of information are dropped out on a fragmentary basis, as I understand it, right out until 2025.

[Lord Benyon (Con)]

There are two reasons for that. First, we have a programme of tailing out the basic payment scheme and replacing it with ELMS. That requires us to manage the public money properly. Secondly, we want this to be an iterative—a wonderful Civil Service word—process that responds to our understanding of real life. We have had our tests, trials and pilots and have learned from them. In the autumn we had a serious tyre-kicking session on this, which drew some criticism. I can understand why; people were very nervous that we were going to do a screeching U-turn, but we have not. Out of that has now come the announcement of six, as opposed to three, new standards—because farmers wanted to know precisely what the noble Lord said.

It takes time to get this right because, as he says, it is about people’s livelihoods and businesses, and they want to be able to plan for the future. I think farmers much prefer that—or will in hindsight, when they look back on this era—to some big bang moment where we stop one scheme on 31 December and go into another on 1 January. By and large, when Governments have tried that across a whole range of different reforms in different departments, it has been a disaster. We have tried to do this over many years, and in time farmers will understand that they have been able to migrate from one system to another. As a farmer, that is certainly what I want; I understand if other farmers have different views. I want a Government who listen to farmers and change accordingly, and that is what we have tried to do.