Pollution in Rivers and Regulation of Private Water Companies

Lord Sikka Excerpts

Thursday 29th February 2024 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank the noble Baroness, Lady Bakewell of Hardington Mandeville, for securing this debate and congratulate her on setting out the issues in her superb speech. I will concentrate on regulatory issues.

The key principles of effective regulation are that the regulator must be independent, must levy effective sanctions, must be publicly accountable and must empower stakeholders to curb abuses. Water and sewerage regulators fail these key tests. In any system of regulation, capture of the regulators by the regulated is a recurring problem. However, this is the starting position in the water industry. Two-thirds of England’s biggest water companies employ key executives who previously worked at Ofwat. Water company directors and the chairs of Ofwat and the Environment Agency regularly meet at exclusive clubs to discuss how to quell public anger over bill rises and sewage dumping. The cost of these lavish lunches and dinners is passed to customers, but no agenda papers or minutes of such meetings are made publicly available. We all know that secrecy breeds corruption and the water industry is full of that.

The revolving doors deepen cognitive capture and the cosiness is all too evident. Water companies have an operating profit margin of 35%, even though they have no competition. Water bills have risen by 363% since privatisation, and over 40% in real terms. Up to 28% of customer charges cover the interest paid on debt, which would not be necessary if Ofwat had been vigilant and curbed high leverage at water companies. It has completely failed to protect customers.

In the debate on 22 February, I drew attention to the number of times some water companies have been sanctioned since 2010. I gave the example of United Utilities, which has been sanctioned 215 times. In reply, the Minister seemed to regard that as a sign of success. Imagine an offender hauled in front of the same judge every three weeks for identical offences and given a puny fine, only to reoffend again. Nobody would consider that to be a regulatory success—but the Minister thought it was somehow a success story. I hope he will explain why the Government consider repeat offences by the water companies to be a success—that was just an easy question for him.

Despite the repeat offences, bonuses continue to flow. Again last week, in response to my suggestion that customers should elect water company directors and vote on executive pay, the Minister said:

“Remuneration committees for each water company independently determine the appropriate level of remuneration for their water company executives”.


This is simply not true. First, remuneration committees are staffed by non-executive directors who owe their position to favours from the executive board. They have absolutely no independence from the executive board and they very rarely bite the hand that feeds them. None is a substitute for direct representation of customers on company boards.

Secondly, the Minister added:

“Ofwat expects water companies to take into account the legitimate concerns of stakeholders when making decisions on the application of remuneration policies”.—[Official Report, 22/2/24; cols. 758-9.]


Every opinion poll has shown that people are concerned about high bills, pollution, lack of investment and poor regulation. Relying on failed structures and practices cannot give us effective regulation, yet the Minister was defending them, for some reason. Maybe he has had second thoughts since; I do not know.

In the debate on 22 February, the Minister defended water companies with the claim that, since privatisation, £215 billion has been invested in infrastructure. I do not have any confidence in that number because it has been manufactured by dubious accounting practices. I will give two examples, both relating to the accounts for 2022-23 published by Thames Water.

First, on page 134 of those accounts, the company states that it

“capitalises expenditure relating to water and wastewater infrastructure where such expenditure enhances assets or increases the capacity of the network. Maintenance expenditure is taken to the income statement in the period in which it is incurred. Differentiating between enhancement and maintenance works is subjective”.

What does that mean? It means that the amounts that are capitalised to show higher investment cannot be independently corroborated. It just depends on the whims of the directors; there is absolutely no solidity to it. Will the Minister write to the House after this debate and say how much of the repair and maintenance costs have been capitalised since privatisation by water companies so that we can remove it from the £215 billion?

Secondly, on page 143 of Thames Water’s annual accounts, it states that

“£215.2 million of borrowing costs were capitalised in the period”

and gives a comparison of £114.8 million for 2022. So, the investment made by Thames Water in those two years alone has been inflated by £330 million. The crazy logic of this policy is that, when a company mends leaks by borrowing money compared to one that uses retained earnings, it is somehow investing more and its assets are worth more. That simply is not true. We know a company that used such imprudent policies: Carillion. I have a slight declaration to make here in that I was an adviser to the Work and Pensions Committee for that investigation—and we know what happened to Carillion. This is where water companies are heading with the full blessing of the Government, Ofwat and all the other regulators. Again, I ask the Minister to write to the House and explain both how much interest has been capitalised by water companies since privatisation and what the consequences of such practices are. Are those companies going to go the same way as Carillion? I fear they are; Ofwat certainly has no financial nous to check these things.

After 35 years of failure, we can all see that the current regulatory structures are highly deficient. We cannot have that; we need to change it. Ofwat and the Environment Agency need to be replaced by bodies that are pluralistic, with direct representation of stakeholders on their boards. The regulators and the regulated do not need to have a hostile relationship but there must be distance between them. They cannot be in each other’s pockets or cosy. Regulators must owe a duty of care to stakeholders so that they can be sued for failing the public; that is virtually impossible at the moment. All significant board meetings must be in the open so that we can all see how appropriate evidence submitted to regulators is weighted, filtered or acted on. At the moment, there is complete secrecy. All board minutes, working and agenda papers need to be publicly available. If the Minister possibly feels uncomfortable with those suggestions, it would be helpful to know why he is afraid of openness and democracy. Why is he afraid of empowering stakeholders and the public at large? We need to bring public pressure upon the water industry and its regulators so that they clean up their act.