Water Industry: Financial Resilience

Jim McMahon Excerpts

Wednesday 28th June 2023 Commons Chamber

[Jim McMahon (Oldham West and Royton) (Lab/Co-op)]

(Urgent Question): To ask the Secretary of State for Environment, Food and Rural Affairs if she will make a statement on the financial resilience of the water industry.

[The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)]

Water is what makes life possible on our planet, and it is essential for our health and wellbeing, as well as for our economy, including the production of food and clean energy. The Government are taking significant steps to ensure that the water industry is delivering the outcomes that bill payers expect and deserve. Water companies have invested £190 billion since privatisation in 1989. In April, the Government published the plan for water, bringing together more investment, stronger regulation and tougher enforcement capacity for regulators in relation to those who pollute.

Ofwat and the Government take the financial resilience of the water sector very seriously. Ofwat is the independent economic regulator for the water sector and has responsibility for its financial resilience. The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and waste water companies. Ofwat reports annually on the sector’s financial resilience, and Ofwat’s latest annual monitoring financial resilience report shows that the water sector is financially resilient.

Market confidence in the sector is demonstrated by new acquisitions, such as Pennon’s purchase of Bristol Water, and by shareholders being willing to inject new capital. Ofwat has taken steps in recent years to strengthen the sector’s position. That includes action to update the ringfencing provisions in water company licences to better safeguard the interests of customers, and barring water companies from making payouts to shareholders and removing money or assets from the business if they lose their investment grade credit rating. Ofwat has outlined that water companies must be transparent about how executive pay and dividends align to the delivery of services to customers, including environmental performance. Since privatisation, total capital investment has outstripped dividends by 250%.

On 20 March 2023, Ofwat announced new powers that will enable it to take enforcement action against water companies that do not link dividend payments to performance for both customers and the environment. In December 2022, Ofwat strengthened its powers on executive pay awards by setting out that shareholders, and not customers, will fund pay awards where companies do not demonstrate that their decisions or pay awards reflect overall performance. We support Ofwat’s work, and we urge all water companies to take this opportunity to review their policies.

The scale of Government commitment to the water industry is highlighted by the integrated plan for water, and by our commitment to the financial resilience of the sector in delivering for customers and the environment.

[Jim McMahon]

Thank you, Mr Speaker, for granting the urgent question, but it is a concern that the Secretary of State did not proactively make a statement to the House on an issue of such importance. Indeed, where is the Secretary of State? One of the largest water companies in Britain is potentially going to go to the wall, and the Secretary of State is missing in action.

It was clear to anyone looking on that a culture that allowed vital investment in ending the sewage scandal and tackling water leaks to be sacrificed in favour of a goldrush for shareholders was never sustainable. Just last year, as raw human sewage was being pumped out across the country, £1.4 billion was paid out to shareholders. Now, all that was warned about is coming to pass: leaks are leading to water shortages; sewage dumping pollutes our rivers, lakes and seas; and the only thing on the up is debt, at £60 billion. The Conservative party’s cycle of privatising profit, usually for multibillion-pound foreign sovereign wealth funds, and nationalising risk is not sustainable, and neither is it a fair deal for working people.

The news we are seeing is the result of the Conservative party’s failed “profit above public interest” experiment, in which it handed over the water industry at a knock-down price to private enterprise, together with the entire infrastructure serving the nation. That was almost unique to water. For instance, when rail was privatised, the tracks were not sold off. With water, however, the lot was handed over, with few safeguards for our national interest, our national security or bill payers.

When was the Minister’s Department first made aware of the financial situation at Thames Water? Has her Department had any reason to believe that those responsible at Thames Water would not be able to meet their licence conditions or legal obligations? If this means a taxpayer-funded bail-out, how much will that cost and how will it be paid for? What assessment has she made of the liability of UK pension funds that are invested in Thames Water, and in other water companies considered to be at risk? Given where we are, will she confirm her confidence in the financial regulator? Finally, given what we see with Thames Water today, does she have concerns about any other water companies, or does she consider this to be an isolated case?

[Rebecca Pow]

In the Department for Environment, Food and Rural Affairs, we have our individual portfolios, and I am the water Minister. The Secretary of State has full confidence in her Ministers when sending them to the Dispatch Box.

The shadow Minister raised the issue of debt. For information, debt to equity fell last year by 4% in the water industry, actually making it more resilient. Since privatisation, capital investment in the water industry has been 84% higher than it was pre-privatisation—we need to get that out there and on the table.

In terms of Thames Water, it is not for me to comment on the individual financial position of a water company. We have an independent regulator that is doing that; indeed, that is what the regulator, Ofwat, is for. Water companies are commercial entities, and it is for the company and its investors to resolve any issues. The Government, of course, are confident that Ofwat, as the economic regulator of the water industry, is working closely with any company that is facing financial stress.