Water (Special Measures) Bill [HL]

Lord Sikka Excerpts

Committee stage
Wednesday 30th October 2024 Lords Chamber

Moved by

[Lord Sikka]

29: After Clause 1, insert the following new Clause—
“Prohibition of possible conflicts of interest(1) The Water Industry Act 1991 is amended as follows.(2) After section 35D (inserted by section 1 of this Act), insert—“35E Prohibition of possible conflicts of interest(1) An employee, director or advisor of the Authority, or the Secretary of State, may not—(a) take any employment, directorship, commercial opportunity, or other significant transactional relationship with any regulated water company, or connected party, or(b) accept gifts of any amount, that could produce the appearance of a conflict of interest.(2) A connected party under subsection (1)(a) includes a shareholder, significant creditor, or other entity with a significant transactional relationship with a regulated water company.””Member's explanatory statement
The amendment seeks to enhance independence of the regulator.

[Lord Sikka (Lab)]

My Lords, I should like to introduce the amendments in this group. They all seek to create, strengthen or delete regulations. Amendment 56 tabled by the noble Baroness, Lady Bakewell of Hardington Mandeville, seeks review of the environmental permits. Amendment 78 tabled by the noble Baronesses, Lady Parminter, Lady Bakewell of Hardington Mandeville and Lady Jones of Moulsecoomb, and the noble Lord, Lord Randall of Uxbridge, seeks to impose duties on the regulator to provide clean water. Through Amendments 79 and 80, the noble Baroness, Lady Bakewell, of Hardington Mandeville, and the noble Earl, Lord Russell, seek to abolish the water authority and create a clean water authority. Through Amendment 81, the noble Earl seeks a regulatory review of the water industry. Through Amendments 84 and 85, the noble Baroness, Lady Jones of Moulsecoomb, seeks to remove the regulator’s growth objectives and make environmental protection a statutory duty. I am sure that they will have plenty to add when they speak.

Meanwhile, I should like to speak to Amendment 29, which is about the prohibition of possible conflicts of interests. The key principle is that regulators must not only be independent of the regulated entities and personnel but be seen to be independent and free from any conflicts of interests. They must avoid cognitive capture. Individuals from regulatory bodies are in demand by the regulated entities because they can open doors and help to secure favours, and enable water companies to game the regulatory system.

No matter how vehemently such charges are denied, that is how it will always appear to the public at large, and public perceptions matter. Thanks to the wage freeze and the real wage cuts over the past 14 years, too many regulators are poorly paid. While in regulatory positions, they begin to look for greener pastures or are targeted by water companies for enrolment. In fact, every interaction they have with a water company is a potential job interview. There is always a temptation to go easy and be extra helpful to a potential employer, as that can help to land a much better-paid job. No one wants to sour that potential by being tough, awkward or robust with their potential employer. That applies to the regulators’ employees too.

There is plenty of evidence about the merry-go-round between the core regulators and water companies. A report last year noted that at least 27 former Ofwat directors, managers and consultants working in the industry, which they helped to regulate, subsequently began to work for water companies, mostly in senior positions. Six water and sewerage companies in England have hired directors of corporate strategy or heads of regulation from Ofwat. They were the insiders. One celebrated name, Cathryn Ross, at one time interim joint chief executive of Thames Water, was a former head of Ofwat. Several former Ofwat senior people now work at Thames Water. In addition to Ross, there is Jonathan Read, who is a director of regulatory policy and investigations. There is also Giles Stevens, director of regulatory strategy and innovation. Another executive from a regulator was recruited by Thames Water as recently as March last year as a “regulatory engagement lead”. At Severn Trent Water, there are at least nine employees who were previously at Ofwat. They include Shane Anderson, director of strategy and regulation, and Jonathan Ashley, head of economic regulation. Both previously worked as directors at the regulator that oversees water and sewerage firms in England and Wales.

I add for clarity that none of these people has broken any rules; I am not accusing them of doing so. It is simply that the rules are inadequate or, if they exist, incredibly poorly applied and permit this merry-go-round.

Amendment 29 requires that senior staff who work at the regulator cannot and must not have a potential conflict of interest by being lured into a job at a regulated company. It also requires that the Secretary of State must have no conflict of interests or appearance of a conflict: for example, by accepting gifts, free tickets for football matches, or even possibly tokens to buy new suits. None of that should be permitted. All regulators must be seen to be above any reproach, and there must be no question whatever about their integrity. An enforceable statutory framework is needed, and that is what this amendment seeks. We do not need voluntary codes, because they cannot be enforced by any court of law. We need legal backing. I beg to move.

[Baroness Parminter (LD)]

My Lords, I rise to introduce Amendment 78 and to return to the issue we covered on the first day in Committee around the duty of the water regulator, Ofwat, and the fact that at the moment it does not have a core duty which comprises a public interest. I thank the noble Baroness, Lady Bakewell of Hardington Mandeville, who again is unwell and cannot be with us today, the noble Lord, Lord Randall, and the noble Baroness, Lady Jones of Moulsecoomb, for their support for this amendment.

It is quite clear that the public feel extremely strongly about how the regulator is ensuring, not ensuring or unable to ensure that companies perform their duties towards the public interest correctly. If we have any doubt of that, we saw the strength of feeling in the general election, we see it every day in the newspapers, and I am sure we will see it on the streets of London this Sunday with the March for Clean Water; I declare my interest as stated in the register.

However, if anyone were to sit down and read the Water Industry Act 1991, they would be amazed that there are no duties for Ofwat with regard to the public interest, to promote public health or to ensure the protection and conservation of our environment. They would see it as an absolutely astonishing omission. What they would see is a core duty to ensure the “long-term resilience” of water company services and sewerage systems. That is effectively a “keep the taps on” clause—which my local water company, Thames Water, seems to be unable to do on quite a regular basis, although that is beside the point. Then there is a whole swathe of legally binding economic duties which ensure that Ofwat absolutely focuses the water companies on making a profit. I am not against making a profit; of course they should make a profit. However, Amendment 78 says that we should look for a triple bottom line: for profitability, environmental returns and social outcomes.

As this returns to an issue that we looked at on Monday which is fairly similar to the amendment from the noble Baroness, Lady Willis, which talked about taking all reasonable steps to contribute to the environment and climate change targets, I made sure that I read the Minister’s reply carefully in Hansard because I thought I might get the same sort of reply myself. She made three points. She says that the amendment is not necessary because it overlaps

“with existing government requirements, Ofwat’s core duties and our ambitions for the future”.—[Official Report, 28/10/24; col. 939.]

The Government do not have of themselves the mechanisms to deliver on all these targets; they rely on other bodies to work with them. Giving Ofwat this duty would enable it to support those government requirements and targets.

Secondly, on the point about Ofwat’s core duties, I strongly but respectfully disagree with the Minister. There is no evidence in Ofwat’s existing core duty of any public interest duty. Thirdly, the Minister talks about our ambitions for the future, by which I think that, rightly, she means the water industry commission. I shall quote again from her response on Monday. With regard to the independent water commission, she said the Government would put the environment

“at the heart of what we are doing”.—[Official Report, 28/10/24; col. 939.]

Great, fantastic—but, as we discussed on Monday, once we get the commission done, we will have to wait for legislation and time is rolling on, while our environmental and climate targets are here and now. We cannot wait. We should be using this opportunity in the meantime to strengthen the duties for Ofwat to ensure that our water companies can support the Government in the very necessary task of protecting our environment and delivering clean water for the public.

--- Later in debate ---

I once again thank noble Lords for their thoughtful suggestions. I very much appreciated the words of the noble Earl, Lord Russell, about the importance of working together constructively going forward. That is the spirit in which I would like to continue working on the Bill, and I very much appreciate the constructive debate so far in Committee.

[Lord Sikka (Lab)]

My Lords, I thank the Minister for her reply and all noble Lords for their observations, comments and speeches. Amendment 29 does have implications for other sectors, because they all suffer from the same malaise—a merry-go-round of regulatory capture. The result is that regulation is not what it should be.

The Minister referred to the Civil Service code on appointments and the migration of workers to companies. That has clearly failed—otherwise, how else do you explain the Ofwat chief executive becoming the chief executive of Thames Water, given the financial mess and other problems Thames Water has? No matter how the Minister explains it, people will not accept that everything is above board with that kind of migration. However, I hear what noble Lords have said and, in light of that, I may well revise this amendment and return with it. Meanwhile, I beg leave to withdraw the amendment.

Amendment 29 withdrawn.