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.