Water (Special Measures) Bill [HL]

Lord Sikka Excerpts

2nd reading
Wednesday 9th October 2024 Lords Chamber

[Lord Sikka (Lab)]

My Lords, it is always a great pleasure to follow the noble Baroness, Lady Jones of Moulsecoomb. This Bill has more holes than Swiss cheese. I shall give noble Lords some examples. It promises to ban bonuses for senior executives but is silent on how the ban is to be implemented. Water companies can bump up basic executive pay and thereby eliminate the need for any bonus at all. Most water companies are part of large groups of companies and can offer multiple directorships to individuals, so no bonuses are necessary whatever. I hope that in her reply the Minister will tell us how this bonus ban will operate in practice.

The Explanatory Notes refer to a bonus ban for degradation of “financial resilience”. I know a thing or two about financial resilience, but there is no definition in the Bill and I have no idea whatever of what the Government mean by that. Again, I hope that the Minister will give us some ideas. How is this assumed financial resilience to be secured? Shareholders are already reluctant to invest. More debt will not increase resilience. Currently some 28% of the gross revenue of water companies is used to service debt payments. With higher debt that percentage would rise, which would destabilise companies. That leaves higher customer bills as the only option. After 35 years of abuse, that is simply not viable. Again, I look forward to some clarity.

The Bill promises to bring criminal prosecutions against some water company bosses but provides absolutely no criteria. How much sewage and how often does it have to be dumped to trigger an event for prosecution? There is no clue in the Bill. In any case, there is a backlog of 60,000 Crown Court cases, so the chance of any timely prosecution is slim. Perhaps the Minister has in mind some additional investment in the legal system. It would be good to hear that.

The Bill does not curb the payment of dividends. In March 2023, Ofwat said that it would

“stop the payment of dividends if they would risk the company’s financial resilience”.

To date, there have been no restrictions on dividend payments. Not a single water company discloses its distributable reserves, so we have no idea of their dividend- paying capacity anyway.

The Government are pinning their hopes on Ofwat, but Ofwat is not really up to the job. It has presided over the entire mess. It has not curbed financial engineering. Water companies continue to inflate their level of investment by capitalising interest and repair and maintenance payments. That is permitted by Ofwat. Ofwat systematically favours companies over customers. Anyone has only to look at how the pricing formula PR24 operates. Ofwat uses fictitious gearing ratios to enable companies to receive real excess returns. That should really be a criminal offence.

Ofwat cannot be trusted. It is too cosy with the water industry. Two-thirds of England’s biggest water companies employ key executives who have previously worked at Ofwat. Executives of water companies and regulators regularly meet in hotels and expensive private clubs to discuss their common position and how to quell public anger about bill rises and sewage dumping. This Bill does absolutely nothing to check collusion with and the cognitive capture of the entire regulatory apparatus.

On 5 September, the Environment Secretary said that

“customers will have the power to summon board members and hold water executives to account through new customer panels with teeth”.

Without a statutory base, customer panels will achieve absolutely nothing. In my view, at least 50% of the board of directors of any regulatory body and the regulated entity need to be directly elected by customers. Customers must also vote on executive pay. If they think executives deserve higher pay and bonuses, then they can award them. Let there be a bit of democracy. At least give people the power to check abuses. If the Minister has any objections to the democratisation of the water industry, it would be good to hear them.

The main aim of the Bill seems to be to prevent public ownership of the industry. It enables Ministers to restructure water companies and return the monopoly to the private sector, with the cost borne by customers and the public purse. Clause 10 empowers the Government to provide financial assistance that they may or may not ultimately be able to recover. This strategy cannot address the cause of the crisis, which is profiteering and cash extraction by water companies.

If the water industry had been in public ownership for the last 35 years, £85 billion would have gone into infrastructure instead of dividends. Interest payments on debt would have been much lower as the cost of government-backed debt is always lower than that borne by companies; that would have freed billions more for investment. But the Government oppose public ownership.

In response to an Oral Question from me on 23 July 2024, the Minister said that public ownership

“would cost billions of pounds”.—[Official Report, 23/7/24; col. 364.]

That seemed to imply that the Government had actually done some calculation. So I quickly followed it up with a Written Question seeking details of that calculation. All I got in response was a reference to the Social Market Foundation report of 2018. If any of my master’s students had written that as a dissertation, they would have been guaranteed a fail. It is a dismal piece of work commissioned by water companies. A former government adviser has said that that report has “virtually no intellectual substance”. The £90 billion quoted in that report is utterly incorrect. When taking over an industry, one buys only the equity, not the debt—and that is what it included.

In 2019, Moody’s said that the equity value of water companies was only £14.5 billion. Since then, lots of changes have occurred: most water company shares are junk or worthless. Debt is junk: some of the Thames Water debt is trading at less than 6p in the pound. The Government should let the companies collapse and bring them into public ownership at low price. That is how capitalism operates: if a company collapses, it does not get bailed out. Only public ownership can provide long-term stability and it ought to be done through a not-for-profit organisation. The cost of this can be loaded on to the acquired companies, as the private equity model does, or it can be recouped by issuing public bonds, ensuring that people actually own essential industries.

The Bill is delaying the inevitable and, naturally, I will help the Minister by tabling some amendments.

--- Later in debate ---

[Baroness Hayman of Ullock (Lab)]

My Lords, this has been a very interesting and worthwhile debate. I thank all noble Lords who have spoken for their thoughtful, informative and constructive comments.

As we have heard, the Bill is going to be used to drive meaningful improvements in the performance and culture of the water industry, as part of our wider efforts to ensure water companies deliver both for customers and for the environment. Many campaign groups, as well as parliamentarians, have called for measures to hold water companies to account. We also know that there is huge public support for the Government to do something. There is clear and broad recognition of the need for action. Let me now take the opportunity to address some of the points and questions raised during the debate.

First, I would like to stress that the Bill goes beyond the previous Government’s ambition. It is not true that the Bill does not contain anything further than measures put in place by the previous Government. For example, the Bill will go beyond the current regulatory framework. To give a couple of examples, it will provide legal powers to ban bonuses—currently, you can only set expectations—and it will also require water companies to report in near real time on discharges from emergency overflows, which are at present largely unmonitored.

The noble Duke, the Duke of Wellington, the noble Earl, Lord Russell, the noble Lord, Lord Blencathra, my noble friend Lady Young of Old Scone, the noble Earl, Lord Devon, and many other noble Lords were particularly interested in what exactly the review is going to do. As I said, the Bill alone is not enough to fix our water system; it is only an immediate down payment on the wider reform that is needed after many years of failure and environmental damage. As I mentioned, the review is going to be carried out to fundamentally transform how our water system works so that we clean up our rivers, lakes and seas for good. We will invite views from a range of experts, covering areas such as the environment, public health, consumers, investors, engineering and economics. We will have a public consultation to test that any proposals are robust and ambitious enough to clean up the pollution from our waterways. Through our review, we will look at long-term wider reform of the water sector as a whole, including considering and clarifying the roles of regulators. We expect this work to culminate in shaping further legislation and intend to set up further details about the review later this autumn. It is also really important that specific measures are consulted on during the passage of the Bill, and we will be looking to do so.

The noble Baroness, Lady Jones, and my noble friend Lord Sikka particularly asked about nationalising water companies. As I have said previously, the Government have no intention to nationalise the water companies. We are focusing on improving the performance of the water industry as an urgent priority. The measures in the Bill are designed to do exactly that.

As we have said, it will cost billions of pounds and take years to unpick the current ownership model, during which time underinvestment in infrastructure and sewage pollution will only get worse. Research that has been commissioned by the Consumer Council for Water, which we have heard about—

[Lord Sikka (Lab)]

First, can the Minister say how many billions of pounds, and can she publish that calculation? Secondly, she says it will take a long time, but the Government are going to integrate the newly created companies to manage the railways, and there are numerous mergers and takeovers everywhere where new entities are accommodated. Could the Government publish a paper to see what the complications would be? Although I recognise some of the complications, I do not think that any of this is insurmountable.

[Baroness Hayman of Ullock (Lab)]

Rather than get into a discussion around this, as I have a lot of questions to answer, I suggest that perhaps the noble Lord and I—and the noble Baroness, if she so wishes—take this away into another meeting and discuss it further when we have more time.

The noble Baroness, Lady Jones of Moulsecoomb, asked about the special administration regime, as did other noble Lords, and she asked particularly about profits for shareholders and creditors. The special administration regime is there to enable a seriously underperforming or insolvent water company to be put into special administration, with the requirement that vital public services—that is, water and wastewater—are continued to be provided pending a rescue package and transfer to new owners. This contrasts with normal administrations, where the appointed administrator is focused on the creditors’ interests only.

A number of noble Lords—the noble Duke, the Duke of Wellington, the noble Baronesses, Lady Parminter, Lady Pinnock and Lady Bakewell, and my noble friend Lady Young of Old Scone, in particular—asked why the Bill is not being used to reform Ofwat or the Environment Agency. The Bill introduces the most significant increase in enforcement powers for the water industry regulators in a decade and is designed to give them the teeth they need to take tougher action against water companies in the next investment period. However, we want to go further. Through the review, as I mentioned, we will look at the regulators in order to carefully consider their roles and responsibilities and how we can ensure that they operate as effectively as possible. So that will be part of the review.

The noble Lord, Lord Douglas-Miller, asked whether the regulators were adequately resourced to implement all the new provisions in the Bill. Through the new cost recovery power in the Bill, we will enable the Environment Agency to fully recover costs for the full extent of its water company enforcement activities. That will include prosecutions and civil sanctions, revocation notices of permits, and pollution incidents. In addition, the EA is already recruiting up to 500 additional staff for inspections, enforcement and stronger regulation, increasing compliance checks and quadrupling the number of water company inspections by March next year. This will be fully funded by around £55 million per year through increased grant in aid funding from Defra and additional funding from water quality permit charges levied on water companies. I hope that helps to answer the noble Lord’s question.

There were also questions around the detail of Ofwat’s rules. The noble Lords, Lord Blencathra and Lord Remnant, mentioned this. We feel that it is more appropriate for Ofwat, as the independent regulator, to determine the specific performance metrics that should be considered when setting the rules. Allowing Ofwat to set out in the rules the performance metrics to be applied will also enable those standards to be more easily amended—subject to the relevant procedural requirements, of course—where or when it is appropriate to do so in the future. Ofwat would need to consult with relevant persons, including the Secretary of State, Welsh Ministers, the Consumer Council for Water and others, before such rules were finalised. I also reassure noble Lords that Ofwat will issue a policy consultation in October on the scope of the rules.

Consumers were mentioned a number of times. First, on representation on boards, as we go through the Bill, we will look at this in more detail, but the idea behind the Bill is that Ofwat will be required to issue rules on consumer representation. Customers largely foot the bills for water company decisions, so we believe it is right that they have a say where their interests are at stake. Ofwat will need to consult with relevant persons, including the Consumer Council for Water, before finalising the rules on performance-related pay, and fitness and propriety and customer representation. I think my noble friend Lord Whitty asked about some of those issues.

The noble Lord, Lord Roborough, asked in his speech just now about further increases to customer bills. Where increased costs are a result of penalties being issued by the regulators—for example, under the new automatic penalties regime—the penalties will come out of water company profits and not from customers. Where costs are unrelated to penalties—for example, where they will fund new and improved infrastructure—we are working closely with the water industry regulators to see how we can best minimise the impact of measures introduced by the new legislation on customer bills. We do not want to see the customers bearing the brunt of these new actions.

A number of noble Lords, including the noble Lords, Lord Remnant, Lord Douglas-Miller and Lord Cromwell, and the noble Earl, Lord Devon, asked about investor confidence. Private sector investment is at the core of how we grow our economy. The Government are committed to establishing a strategic framework in order to deliver long-term stability, and which is conducive to attracting the sustained investment in the sector that we need. The Bill will deliver a clear and consistent regulatory framework for the water industry and its investors. I do not think anyone would think that investors have a lot of confidence in much of the water industry as it stands. On 10 September, Defra and Treasury Ministers held a round table with investors where they outlined how the Government will work in partnership to attract the billions in private sector investment that we desperately need to be able to clean up our rivers, lakes and seas.

On that issue, there was also discussion around attracting talent. A number of noble Lords talked about the fact that it is more stick than carrot and asked how we are going to attract people into this. We believe it is right that companies and their executives are held to account for basic and fundamental performance requirements. Should companies meet their performance expectations, we believe that executives should rightly be rewarded, and there are also previous and existing examples of similar rules in other sectors. I will give a couple of examples. The financial services sector previously had a set cap on the level of bonuses—somebody mentioned that; I am sorry but I cannot remember who it was—and fit and proper person tests are also conducted by the Financial Conduct Authority and the Prudential Regulation Authority in that sector. Those sectors have continued to attract talent.

The noble Earl, Lord Devon, asked about ensuring that water companies invest sufficiently when considering pressures such as climate change and population growth, and about ring-fencing money for improvements. In July, Ofwat announced in its draft determinations a proposed £88 billion worth of expenditure between 2025 and 2030, which will be the largest investment in infrastructure that has ever been made by the water industry. We hope that that investment will deliver much of the work needed to achieve the issues that the noble Earl referred to.

The pollution incident reduction plans were discussed by many noble Lords during the debate. One question was: why have we not included a duty to implement the plans rather than just publish them? I think the noble Baroness, Lady Parminter, in particular talked about this. We say that these plans should be seen as part of the broader package of powers for regulators which exist and which are strengthened through the Bill to reduce pollution incidents.

The Environment Agency already has access to a range of tools to enforce against pollution incidents and this Bill is designed to supplement this with its provisions for automatic penalties and for Ofwat to ban bonuses when water companies have not met environmental standards. Water companies will also be required to report on overall progress on the actions that were set out in the previous plans. A specific duty to implement the plan would make enforcement more difficult, we believe, as it would cut across the wider legal requirements for pollution reduction.

The noble Baronesses, Lady McIntosh, Lady Browning and Lady Pinnock, all talked about sustainable drainage systems—SUDS. This is a complex issue. Existing planning policy requires that SUDS are included in all new major developments unless there is clear evidence that that would be inappropriate. This is in addition to requirements that SUDS should be given priority in new developments in flood-risk areas. However, I am aware of the issue around the previous legislation that has been sitting in front of us for 14 years, so I want to assure noble Lords that the Government are currently assessing how best to implement their ambitions on SUDS, while also being mindful of the cumulative impact of new regulatory burdens on the development sector. We are having regular discussions and trying to co-ordinate joint work with MHCLG officials on this issue. We want to move this forward.

The impact assessment was mentioned. There is an impact assessment for the Bill—I am sure noble Lords will be delighted to hear that—but it is currently with the Regulatory Policy Committee. We will publish it as soon as it has concluded its review. We are hoping that will be fairly soon.

The timeline for implementation was mentioned. Our ambition is to implement the provisions to give the regulators the powers they need to take tougher action against water companies for the next investment period, which is due to start in April next year.

The use of delegated powers was mentioned by the noble Duke, the Duke of Wellington, the noble Lord, Lord Sandhurst, and my noble friend Lady Young of Old Scone. I want to reiterate the reassurances I made in my opening speech that the provision of delegated powers will be subject to appropriate scrutiny and safeguards. We believe the powers are necessary to ensure that the provisions in the Bill keep pace with the changing requirements on the water industry and the changing expectations of customers. A full justification for the inclusion of delegated powers in the Bill is available through the delegated powers memorandum which has just been published.

On the statutory instruments for new penalties, we will be consulting on whether new automatic penalties can be used. Parliament will debate and vote on secondary legislation before any changes are made, so we intend to bring that before the House.

A few noble Lords mentioned local issues. The noble Earl, Lord Devon, talked about Devon, not unexpectedly, and my noble friend Lord Lipsey talked about the River Wye. I was impressed that he got away with that word. When I was in the other place and we had a similar debate, I got ticked off and had to change what I had said. But we are concerned about the issue of poo in the River Wye and he is right to raise it. There are also issues in Cumbria, where I live, around Lake Windermere and the other lakes, as mentioned by the noble Lord, Lord Inglewood. This is something that I personally feel we need to sort out. Our national parks are hugely important. They should be peaceful, beautiful places, not places that have been damaged by sewage overspills and other pollution. I reassure noble Lords that cleaning up iconic sites such as the River Wye and Lake Windermere is a top government priority. We want to get this sorted. The 2024 price review package that I mentioned earlier will include funding for improvement projects at priority sites and we are also working closely with the Welsh Government, particularly on the issues around the River Wye.

I am just about out of time. If I have missed anything that I should have answered, we will of course check Hansard and I will get back to people in writing, but once again I thank all noble Lords who have spoken today for their valuable contributions. It is clear that we agree on the importance of addressing issues in the water sector swiftly and decisively and that there is a consensus on the core aims of the Bill. The water industry really does need an overhaul, so I look forward to continuing constructive engagement with noble Lords. My door is always open. I commend the Water (Special Measures) Bill to the House and beg to move.

Bill read a second time and committed to a Committee of the Whole House.