Water Companies: Failure
Lord Sikka Excerpts(7 months ago)
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Lord Douglas-Miller (Con)
I do not actually agree with the noble Lord fully. I accept that a number of the water companies are not performing to the right standard. The Government have been very clear that what is going on is unacceptable, but there is a huge legacy issue here. Simply renationalising water companies or stopping their chief executives from getting their pay, bonuses and all the other things—as is now in place—is not going to solve that problem straightaway. It is a long-term legacy issue which the Government have a fully funded plan to address.
Lord Sikka (Lab)
My Lords, in 1990, Thames Water had net assets of £1,329 million. By 2023, they had increased to £1,435 million, which is a paltry increase of 8%, or a total of £106 million, mostly due to accounting abuses. This means that, over 33 years, Thames Water shareholders have provided little or no new equity at all, which is a major reason for its financial instability. Everyone knows that Ofwat is negligent and incompetent; what is the Government’s excuse?
Lord Douglas-Miller (Con)
The noble Lord cited a number of very detailed figures, which I know he is prone to doing, so forgive me if I do not know the detail on that. Since privatisation, the private water sector model has unlocked about £215 billion of investment. This is the equivalent of around £6 billion annually in investment—almost double the pre-privatisation level. This has delivered a range of benefits. Our bathing waters continue to improve—in 2023, almost 90% were classified as good or excellent. Water companies have invested £25 billion to reduce pollution from sewage and water company investment in environmental improvements has been scaled up to over £7 billion since 2020.
Fly-tipping
Lord Sikka Excerpts(7 months, 1 week ago)
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Lord Douglas-Miller (Con)
My noble friend makes an extremely good point and, under the new regulations that we are just about to bring out, we are looking at exactly how those permitted to use these regulations have to display the relevant permit, where they display it and how they advertise it, to make it much more clear to those using these facilities whether they are acting legally.
Lord Sikka (Lab)
My Lords, fly-tipping has increased because many councils do not have weekly refuse collection and charge people for taking items to the local refuse collection centres. A major reason behind this is that council spending power as funded by the Government fell in real terms by more than 50% between 2010-11 and 2020-21, and this has not been restored. What responsibility does the Minister accept for creating an environment for fly-tipping?
Lord Douglas-Miller (Con)
No, I do not recognise that at all. Defra grants have helped over 30 councils across the country to tackle fly-tipping at hotspots, such as by installing CCTV and putting up fencing. Further grants to support even more councils are due this summer. Furthermore, councils retain all income from fixed-penalty notices, the upper limit for which has recently been increased to £1,000, and this is ring- fenced for local enforcement and clean-up.
Water Companies: Licence Conditions
Lord Sikka Excerpts(7 months, 3 weeks ago)
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Lord Sikka
To ask His Majesty’s Government what estimates have been made of the distributable reserves of each water company now that OFWAT has taken powers under the Environment Act 2021 to change their licence conditions, including whether they can pay dividends.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Douglas-Miller) (Con)
My Lords, I declare my interests as set out in the register. The best proxy for distributable reserves is retained profits. This is the profit and loss reserve on a company’s balance sheet. Company boards are responsible for determining how much of their profit and loss reserves is distributed. The Government have not carried out an exercise to calculate each company’s distributable reserves. Where a company in cash lock-up breaches its licence by paying a dividend, Ofwat will take enforcement action.
Lord Sikka (Lab)
My Lords, as I have previously pointed out in this House, water company accounts are not only massaged but cooked and roasted with abusive accounting practices. Ofwat and the Government have said that under certain circumstances they will block the payment of dividends, which presupposes that they know what the legally defined distributable profits of each company are. The Minister has just said that the Government have not got a clue; therefore, there is no way of knowing whether any of those dividend payments is actually lawful. Can the Minister explain why the Government announce policies when they do not have the basic data to implement them?
Lord Douglas-Miller (Con)
The Government have a very clear idea about the information that they are reviewing because every single water company, like every other public company, has its accounts audited. That information is publicly available, and I refer the noble Lord to the public audited accounts of all those water companies.
Pollution in Rivers and Regulation of Private Water Companies
Lord Sikka Excerpts(9 months, 3 weeks ago)
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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.
Water and Sewage Companies: Directors’ Remuneration
Lord Sikka Excerpts(10 months ago)
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Lord Sikka
To ask His Majesty’s Government what plans they have for reforming remuneration of the directors of water and sewage companies operating in England.
Lord Sikka (Lab)
My Lords, it is a pleasure to open this debate. Privatisation of water in England has not yielded the promised benefits to the people, but directors of these companies are highly rewarded for inflicting at least five major harms to customers, the environment, taxpayers and society generally. First, in pursuit of private profits, more than 1 trillion litres of water are lost to leaks from crumbling infrastructure each year. Secondly, tons of sewage are dumped in rivers and seas, threatening human health, marine life and biodiversity; only 14% of rivers in England have a good ecological status, and no rivers have a good chemical status. Thirdly, customer bills in England have risen in real terms without commensurate increase in quality of service. Fourthly, investment in infrastructure has been very low. Fifthly, companies are habitual tax avoiders. In the words of a man called Michael Gove, who gave a speech on 1 March 2018:
“Last year Anglian, Southern and Thames paid no corporation tax. Indeed Thames has paid no corporation tax for a decade. Ten years of shareholders getting millions, the chief executive getting hundreds of thousands, and the public purse getting nothing”.
Little has changed since 2018. It is more of the same. England’s nine major water and sewage companies are more than 90% owned by overseas investors scattered across China, Hong Kong, Singapore, the Caymans, Qatar, the UAE and elsewhere. They have little or no physical contact with polluted rivers and crumbling infrastructure and have done absolutely nothing to curb undeserved executive pay. Their main concerns are returns and dividends. Since privatisation, around £75 billion has been paid in dividends, funded by debt and squeezes on investment.
Puny fines have not curbed the lust for bigger profits, pay packets and bonuses. Since 2010, Anglian Water has been sanctioned 74 times and fined £6.2 million. Thames Water has been sanctioned 98 times and fined £175 million. Yorkshire Water has been sanctioned 94 times and fined £109 million. Severn Trent has been sanctioned 82 times and fined £8 million. United Utilities has been sanctioned 215 times and fined £6.6 million. Despite these offences, the directors are rewarded and their pay packets keep getting bigger. According to data published by the Liberal Democrats—I must give credit where it is due—in 2021, 2022 and 2023 executives of water companies in England collected remuneration of £70 million, including nearly £41 million in bonuses. Why are these bonuses paid? Is it not the duty of directors to provide clean water, plug leaks, ensure water security and the proper disposal of wastewater, and renew infrastructure? If it is, there is no case whatever for giving them bonuses.
People are concerned about undeserved rewards at water companies, so the Government periodically soothe public anxieties with promised reforms. For example, on 1 March 2018 the then Environment Secretary, Michael Gove, lamented excessive executive pay at water companies, but absolutely nothing changed. On 3 July 2018, in a paper titled Consultation on Revised Board Leadership, Transparency and Governance Principles, Ofwat promised greater transparency over executive pay, but it remains elusive. In June 2023, Ofwat said that it would review bonus payments, and it repeated that on 8 November, but nothing changed.
On 11 February 2024, the Government announced they are considering banning bonuses for directors
“if a company has committed serious criminal breaches … That could include successful prosecution for a Category 1 or 2 pollution incident—such as causing significant pollution at a bathing site or conservation area—or where a company has been found guilty of serious management failings”.
Those words are quite interesting. Words such as “could” are vague—not “will” or “must”—and the emphasis is on multiple breaches and failings. How many do there need to be before the Government think that something needs to be done? Ripping off customers and taxpayers is simply not considered a failing in the Government’s thinking, although most people absolutely are concerned about it. I am sure the Minister will tell us more about it.
What if pollution is deadly but not criminal as defined by law? After all, the Government have authorised these companies to continue polluting rivers until 2050. I hope the Minister will tell us why, after 14 years of doing nothing, the Government are now making some vague gestures in the year of a general election.
Ofwat, which has presided over degradation, is somehow now expected to enforce curbs on bonuses. Ofwat is a failed and conflicted regulator. Two-thirds of England’s biggest water companies employ key executives who previously worked at Ofwat. In a letter to the Ofwat CEO, dated 21 February 2024, the Environment, Food and Rural Affairs Committee expressed strong concerns that Ofwat cannot exercise its full range of powers as they are now, because that might affect the stability of the sector and upset water companies. How do the Government expect it to deal with bonuses and executive pay? I hope the Minister will expand on that.
The Government have done nothing to create pressure points for honest, ethical practices by addressing the shortcomings of the shareholder-centric model of corporate governance, enhancing democracy or empowering long-suffering stakeholders in water companies. I will sketch out what I think needs to be done.
Whether water is owned privately or through a not-for-profit company, we need durable reforms grounded in democracy and public accountability. First, remuneration contracts of water company directors should be publicly available so that everyone has a clear idea of what they are getting. The sanitised snippets in the annual accounts—which I have read—are very economical with information and rarely mention that chauffeur-driven cars and private school and medical fees also form part of executive pay packages. There is complete silence on these things. I have this from an insider, by the way.
Secondly, all customers should be empowered to vote on executive remuneration policy and amounts. A 51% vote should be needed to approve directors’ basic pay. If directors have polluted rivers, did not plug leaks, did not invest adequately or exploited customers, it is extremely unlikely that they will get their pay. Customers will simply not reward them for it. This is a powerful pressure point for securing socially responsible practices.
In addition, if bonuses are to be awarded for what I call extraordinary performance, there needs to be extraordinary approval for those bonuses. That would mean that at least 90% of customers must approve the bonus. This is a fairly common standard for approving bonuses in places such as Sweden. They are not simply handed out willy-nilly because somebody thinks they deserve it.
I am sure the Minister will oppose my suggestions—I am quite prepared for that—but for the last 35 years, Ofwat and Governments have failed to tackle the scandal of excessive pay for the poor performance of water companies. We need to empower and trust the people. If the Minister disagrees with empowering people, I hope he will tell the House why people cannot be trusted but some administrator at Ofwat can be, even though it has failed ever since privatisation.
Water and Sewage Regulation (Industry and Regulators Committee Report)
Lord Sikka Excerpts(1 year, 2 months ago)
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Lord Sikka (Lab)
My Lords, I thank my noble friend Lord Hollick and the members of the Industry and Regulators Committee for their excellent report. In common with many previous speakers, I have no confidence in Ofwat; it needs to be replaced by a body which is independent of the industry and has a majority of customer-elected representatives on its board.
Can the Minister explain what justifies the 35% operating profit margins for water companies? I have not come across anywhere else in the private sector that competes having that kind of margin. High profit margins have not been accompanied by high levels of investment—indeed, others have commented on how low and how poor it is.
The investment picture is muddled by financial engineering. Let me give noble Lords some examples. On 28 June 2023, in the other place, the Minister responsible for the environment said:
“Water companies have invested £190 billion since privatisation”.—[Official Report, Commons, 28/6/23; col. 281.]
This amount does not appear to be right at all. Let me flag up some reasons for this. One example is on page 134 of Thames Water’s 2022-23 financial statement. It states that the company
“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”.
A translation of that is that the amounts which are capitalised for maintenance cannot be independently corroborated at all. Will the Minister return to the House and make a statement explaining how much of the maintenance expenditure has been capitalised by water companies so far?
I turn to my second example. Water companies have the same policy as Carillion, which was destroyed by it; namely, they are capitalising interest payments on their debt, which is utterly imprudent. This overstates their investments and distributable reserves, and it understates their leverage. In the last two years alone, Thames Water has capitalised £330 million of interest payments, which increases its capacity to pay dividends. So will the Minister return to the House and make a statement explaining how much of the interest has been capitalised by water companies and what the related risks to them are?
Water company dividends, which a number of speakers have referred to, are also understated. On 28 June, the Minister in the other place said that Thames Water
“has not paid any dividends for the last six years”,—[Official Report, Commons, 28/6/23; col. 287.]
but that is not what the company’s accounts say at all. Page 43 of its 2022-23 financial statement describes a £45 million payment to its immediate parent company, and the word “dividend” is used. Thames Water Utilities Holdings Limited received that and then forwarded it to another company, whose accounts also say that it is a dividend. So, just in the last two years, Thames Water has paid its parent company £82 million. If it is spelled “dividend” and if directors and auditors say it is a dividend, it must be one—the Minister cannot deny that in any way. A wholly owned subsidiary has only one shareholder—the parent company—and, if the subsidiary is paying a dividend, it is a dividend. I hope the Minister will be able to clarify that.
Strangely, page 43 of Thames Water’s accounts also says that this dividend is not really a dividend because the purpose is
“solely to service debt obligations and group related costs of other companies within the wider Kemble Water Group”.
If there is any substance to that claim, Thames Water is saying, “We are understating our leverage”. What the hell is Ofwat doing? It is utterly out of its depth in trying to read the accounts and make sense of financial engineering. So will the Minister return to the House and make a statement on how much has been extracted from water companies in the form of dividends that are not really dividends?
Finally, the committee’s report raises questions about executive remuneration and, in a sense, it welcomes that Ofwat might have a say in that. I do not want Ofwat to have any such powers to influence executive remuneration at water companies. These must go to the customers, who must vote every year on executive pay. If they think they got a good enough service from water companies, they will approve directors’ remuneration. Let there be a bit of democracy; how could the Minister oppose that?
The Minister of State, Department for Environment, Food and Rural Affairs (Lord Benyon) (Con)
My Lords, I refer noble Lords to my entry in the register and start by thanking the noble Lord, Lord Hollick, and the members of the Industry and Regulators Committee, for the report. This has been a thorough and wide-ranging inquiry and, as the noble Baroness, Lady Hayman, showed, it was extremely timely, given the current focus on the water industry and the role of government. I also thank the committee for the recommendations from its follow-up inquiry, to which the Secretary of State will respond very shortly.
If the noble Lord or any member of the committee feels that our response was terse, I deeply regret that. If Defra had a fault, it was that in the past it used to indulge in reams of replies on this. We have tried to condense the points. Where something is in another document—for example, the Plan for Water—we have referred committees, individuals and others in our responses to those documents. That is perhaps a more economical way of doing this, but if people have confused it with a lack of respect for the work that has been done, I regret that.
However, I do not share the committee’s conclusion that there has been complacency or a lack of leadership from the Government on the topic of water regulation. No Government have done more to tackle the pressing issues facing the water industry. Back in 2013, as Minister for the Natural Environment and Fisheries, I set out that water companies should introduce monitoring for the vast majority of combined sewer outflows by 2020. This will be at 100% by the end of this year. The fact that we did not know where these outflows were is an example of complacency and one that we have set about dealing with. The increase in monitoring has meant that the Government and regulators better understand the scale of combined sewer outflow discharges, so that we can take stronger action to improve the situation.
I am delighted that this information is available not only to informed and determined Members of this House but to the wider public. A very good point was made by the noble Lord, Lord Cameron, on monitoring. A wonderful citizen science project has been launched called the Riverfly project, which encourages people to assist the Environment Agency in monitoring. However, technology is moving very fast in our favour. It is now possible to put telemetry in our rivers that can give us, on our phones, real-time information on pollutants. We can then work with statutory bodies such as the Environment Agency to improve and deal with particular sources of pollution.
Just last month, we expanded our Storm Overflows Discharge Reduction Plan, first published in 2022, to cover all overflows. We also added marine protected areas and shellfish water protected areas to the sites that are prioritised for early action. This is the largest infrastructure programme in water company history, with £60 billion of capital investment by 2050.
We have also requested action plans from water and sewerage companies on how they will improve every storm overflow in England. These will be published shortly. In April 2023, we published the Plan for Water, our comprehensive strategy to transform the water environment. The plan contains all the actions we must take to meet our water goals and transform the water system, and provides the leadership and long-term thinking that the noble Lord’s committee and others in this debate say is required. These are but a few examples of the comprehensive action that this Government have taken on water, and I will take the opportunity to address some of the specific points raised by noble Lords.
First, the committee raised crucial points about investment in the sector and the impact on consumers. This October, the water industry announced a planned £96 billion of investment between 2025 and 2030. This represents the largest investment in infrastructure ever made by our water industry, and an 88% increase in investment compared with the current five-year price review period. It shows that the sector is responding to the actions of this Government to clean up our rivers and seas, drive more investment and jobs in the UK, and ensure stronger regulation and tougher enforcement to achieve a step change in the water industry.
This investment comes at a cost. Noble Lords will have seen estimates from the water sector suggesting that water bills will rise by an average of £156 a year by 2030 to fund the increased investment. It is important to stress that these are not final figures; they are an opening pitch. It is important to remember that the current average water bill in England is lower than that in many European countries such as Spain, France and Norway.
For many years I have been talking to members of environmental NGOs and to parliamentarians from all sides who have told me that water bills need to rise. I have said to them, “By how much?”—and I get a prominent, audible silence from them, because nobody is prepared to say how much water bills should be. For just over £1 a day, households in this country receive all the water they need and have all their dirty water taken away. I know that all Members of this House are very mindful of the cost of living crisis for some communities. We have to balance that with our bills. But, if people are to tell Ministers and policymakers privately that bills should rise, they need to say by how much and show how they are going to reduce the impact on hard-pressed families.
Examples of the kinds of support and innovations that my noble friend Lord Agnew raised are there to be seen. I do understand the points he made; there are some wonderful schemes that are now receiving Ofwat’s approval and driving innovation in the sector. For example, Southern Water has £35 million to explore innovative options and pilot sustainable interventions to reduce storm overflow spills by, for example, building and constructing wetlands. I will come on to talk about that key point, which was made by the noble Baroness, Lady Bakewell.
Ofwat will now undertake a robust scrutiny process to ensure that these plans meet statutory requirements and government targets, to check that families are not paying for what companies should already have done and to give customers the best value for money. The Government are mindful that this announcement will raise concerns from consumers about their bills. In developing their business plans for 2025 to 2030, water companies have considered the impact of increased investment on customer bills and developed schemes that best suit the needs of local customers.
I was pleased to see Anglian Water proposing a new medical needs discount to provide direct financial aid to those whose medical needs require more water. This will be funded by the company owners and will help to support the most in need without adding to customers’ bills.
Therefore, while I note the committee’s disappointment in the Government’s decision not to proceed with a single social tariff scheme, it should be confident that this Government continue to work with industry and consumer groups to protect those struggling to pay.
Moving on to the topic of securing the investment needed to deliver our plans, I would gently challenge the committee’s view that the water sector will not be able to raise the required investment to meet our ambitious targets—a point raised by the noble Baroness, Lady Taylor, and others. The water sector continues to attract international capital and there are examples of companies that have already secured additional finance to deliver their 2024 price review business plan. For example, Severn Trent Water announced on 29 September it had raised £1 billion of new equity from its investors. Investors have made clear that a reset is needed in the water sector, and the proposed £96 billion investment presents a clear step forward in that direction. It is now for Ofwat to review plans to ensure they strike the right balance of pace, while protecting customer bills. Companies must deliver value for money. Any increase in customer bills must be justified, efficient and deliver significant improvements in river quality and water resilience. Customers should only pay for new investment, not for companies’ past failings.
I will address very quickly some of the points raised in this debate. The noble Lord, Lord Hollick, in moving this debate, talked about dividends, as did others. The average dividend payment represents 3% to 4% of the gearing and I think that is not exceptional—that is why it is attractive to pension funds—and I welcome the investment of organisations like international sovereign wealth funds and others. A dividend rate of 3% to 4% is not the kind of figure that many would see as greedy, or usury, in terms of the investment.
The noble Lord, Lord Hollick, also raised the issue of water demand, as did others. Current water usage is around 145 litres per person. In the environmental improvement plan, we have a target of 122 litres per person by 2037 and 110 litres by 2050. Those are tough targets to hit, but we have set out a process, working with the regulators and water companies, to hit them.
The noble Lord, Lord Agnew, spoke about the figure of £350 billion to £600 billion—a very wide bracket—which he said is the required investment to solve the problem of pollution. It is actually the cost of separating clean and dirty water and retrofitting that into the millions of houses in this country. That is, frankly, not feasible or possible to do. I like his scheme of water butts, and other schemes, and there are plenty that are working, and we want to see them rolled out. There are agri-environment schemes that are taking on flood management and using farmland to store water.
We are seeing a massive increase in interest in the creation of new wetlands, and I challenge the noble Baroness, Lady Bakewell, who said that the Government are obsessed with concrete and steel. That was the case when I was Minister for water in the coalition Government and I found that Ofwat was sceptical of nature-based solutions, because it could not measure them. It liked concrete and steel because it could measure the quality of the water coming in and out and see whether the asset was working. Nature-based solutions are more complicated, but we managed to convince Ofwat to let a thousand flowers bloom. Some of them might not work, but to say the Government do not like it is 180 degrees in the wrong direction; we love nature-based solutions, we want to see more of them, we are funding them through our natural environment investment readiness fund, we want to see biodiversity net gain and private sector ESG green finance being used for this, and we want to make sure that happens soon.
I would love to debate longer and harder about whether we should renationalise our water industry. It is a very dated and slightly binary argument, but I just feel that it is fundamentally yesterday’s argument. I hope we can move forward and see that the model has been independently assessed as having seen water bills less than they would have been if it had not happened, and investment greater. The Social Market Foundation believes nationalisation would cost £90 billion, and I think there are better uses for that money. I want to see it ploughed into out natural environment and water companies investing in—
Lord Sikka (Lab)
I am grateful to the Minister. Since he referred to nationalisation, could he explain why is it acceptable to the Government that entities owned by foreign Governments can own utilities here, while there is no government-owned entity here that owns the utility? In other words, the privatisation that he referred to is a bit of a sham, is it not?
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 Benyon (Con)
We make sure that the money comes not from customers but from shareholders so that it is fair.
Lord Sikka (Lab)
Further to the noble Baroness’s point, since 2010 Thames Water has been sanctioned 92 times and fined £163 million, yet it remains a leader in unplugged leaks, sewage dumping and financial engineering. What did that fine actually achieve?
Water Industry: Financial Resilience
Lord Sikka Excerpts(1 year, 5 months ago)
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Lord Benyon (Con)
I welcome the fact that overseas investors want to invest in our regulated utilities sector. We must remember that actions that Governments take on one element of the regulated utilities sector can have impacts right across it, but I appreciate the comments from my noble friend. We have introduced new legislation to support our ambitions to bring into force stronger powers for our regulators to tackle pollution and improve transparency with the public so we can hold water companies and polluters to account. Through the Environment Act 2021, we have also introduced a statutory duty for water companies to achieve a progressive reduction in the adverse impacts of discharges from storm overflows. This is in addition to new, legally binding targets to significantly reduce pollution from farming, wastewater and abandoned metal mines; and the water demand target to reduce leakage, increase the resilience of supplies and leave more water in the environment.
Lord Sikka (Lab)
My Lords, I should be grateful if the Minister can clarify two points for me. In the other place, the Minister mentioned £190 billion of investment by water companies. That does not seem right, because it appears to me that companies are capitalising repair and maintenance costs, which is contrary to good accounting practice. Could the Minister check on that? Secondly, looking at the last two years’ accounts of Thames Water Utilities’ holding company, I see dividends of £70 million, plus £452 million interest paid on loans from other group undertakings. That sounds incredibly suspicious and is a form of profit-shifting and tax abuse. Please can the Minister get his colleagues, or his own department, to look at those things and report to the House.
Lord Benyon (Con)
The £190 billion is the amount water companies, with regulator approval, have invested in our water infrastructure. Thames Water has not paid out any dividends to its investors, but it has paid out dividends to its holding company to finance its borrowings. In 2017-18, it was £55 million; in 2021-22, it was £37 million; and it has since been, roughly speaking, around and between that. The figure is lower this year than it has been in the past. It has also recently secured from investors a further £500 million, and, as I said earlier, its liquidity, at about £4.4 billion, means that it is a viable trading company.
Water Companies: Customer Bills
Lord Sikka Excerpts(1 year, 7 months ago)
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Lord Sikka
To ask His Majesty’s Government what assessment they have made of water companies’ plans to increase customer bills to fund investment.
The Minister of State, Department for Environment, Food and Rural Affairs (Lord Benyon) (Con)
My Lords, it is Ofwat, the independent regulator, and not the Government that assesses water companies’ business plans and sets the overall price cap that each company may recover from its customers. As part of that process, Ofwat balances the interests of consumers with the ability of companies to fund their services. Companies are preparing their plans for 2025 to 2030, which will be submitted to Ofwat in October 2023. Ofwat will make final decisions on investment and bills by December 2024.
Lord Sikka (Lab)
My Lords, the Minister sidestepped the issues here, so let me lay down some facts for him. Since the water companies were privatised, water bills have soared by 40% in real terms, investment has declined by 17% and £72 billion has been paid in dividends, with another £15 billion possibly by the end this decade. Now, the companies are saying that they will make investment if they can increase water bills by another £100. I hope that the Minister will exercise his considerable powers of persuasion on the water industry and insist that shareholders fund the investment and not customers, who have already been fleeced for the last 34 years.
Lord Benyon (Con)
I fear the noble Lord and I are working off different facts. Capital investment by water companies is 84% higher than it was before the sector was privatised. I have seen independently assessed evidence that water bills would have been higher if we had not privatised the industry. Some £190 billion has been spent by water companies, paid for out of customers’ bills, for investment in water. My noble friend Lady Vere said earlier that nationalisation was a soundbite, not a solution. I could not agree more.
Water Companies: Environmental Pollution
Lord Sikka Excerpts(2 years, 5 months ago)
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Lord Benyon (Con)
I will have a look at the lexicon we use. The real problem is illegal storm overflows. There have been overflows from our sewage systems into our rivers for centuries. It has reached an unacceptable level, which is why we have set out a clear plan for dealing with it. Perhaps we need to use better terminology. There are permitted storm overflows and there are illegal storm overflows.
Lord Sikka (Lab)
My Lords, Section 172 of the Companies Act 2006 requires directors to have regard to the interests of customers, the community and the environment. The UK does not have a central enforcer of company law, and Ofwat is not concerned with compliance with company law, so the buck must stop with the Government. Can the Minister explain when his department last investigated the conduct of water company directors and what the conclusions were?
Lord Benyon (Con)
Ofwat is the main regulator in this area, as well as the Environment Agency. The Government give very clear directions to Ofwat. In our strategic policy statement for Ofwat, we set out an expectation on water companies, including making
“a progressive reduction in the adverse impact of discharges from storm overflows”
including reducing their frequency and volume. The noble Lord made a point about the existing sanctions. We recently saw a fine of £90 million against one water company. We want to make sure that continued sanctions are going to bear down on this problem. That is why we have asked the Sentencing Council to carry out this work.
Sewage Disposal in Rivers and Coastal Waters
Lord Sikka Excerpts(2 years, 5 months ago)
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Lord Sikka (Lab)
My Lords, I thank the noble Lord, Lord Oates, for this vital debate. It is a pleasure to follow so many other knowledgeable speakers.
The water industry has been a serial offender for far too long. On 1 March 2018, the then Environment Secretary, Michael Gove, said that
“water companies … have not been acting … in the public interest”
and
“have been playing the system for the benefit of wealthy managers and owners, at the expense of consumers and the environment.”
He added that the water companies have,
“shielded themselves from scrutiny, hidden behind complex financial structures, avoided paying taxes, have rewarded the already well-off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist for far too long.”
The privatisation of water has been a disaster. It is now a monopoly owned mostly by organisations from overseas, including the super-rich, banks, hedge funds, private equity, foreign Governments and businesses based in tax havens who have little or no experience of the daily hazards inflicted by the industry upon the people in this country.
The water companies have collected over £60 billion in dividends since 1989. In addition, untold billions have been sucked out through intra-group transactions and interest payments on loans from affiliates. Hopefully, the Minister will be able to tell us exactly how much has been taken out by the water companies. As an accountant, I struggle to understand their accounts—I hope the Minister has advisers who can help him to unravel these things. If the industry was in public ownership, all the money that has been extracted could have been used to build better infrastructure, but the Government’s fetish about privatisation has landed us with all these problems.
Since 1989, water bills have increased by 40% above the rate of inflation. People have to pay them because there is no alternative. You cannot switch to an alternative supplier of these services, and the regulators simply wring their hands—they are very ineffective. As Michael Gove reminded us, since privatisation there has been no investment in new nationally significant supply infrastructure, such as major reservoirs. That is how bad privatisation has been. London and big cities now face a threat to their drinking water supply, as has been documented in the newspapers this week. Around 3 billion litres are lost every day due to leaks, which is further evidence that the companies are out of control and do not take their public duties very seriously.
Last year, water companies discharged raw sewage into English rivers 372,533 times, while the water companies covering England released untreated sewage for a combined total of 2.7 million hours. The Government’s storm overflows discharge reduction plan will seek to eliminate 40% of raw sewage overflows into rivers by 2040—that is not good enough. It is complacent and will wilfully inflict health hazards on people. In January 2022, the House of Commons Environmental Audit Committee Report said that,
“A ‘chemical cocktail’ of sewage, agricultural waste, and plastic is polluting the waters of many of the country’s rivers. Water companies appear to be dumping untreated or partially treated sewage in rivers on a regular basis, often breaching the terms of permits that on paper only allow them to do this in exceptional circumstances.”
Water companies, regulators and Ministers have defended the practice of allowing leaks into rivers and seas by claiming that it is better to allow the sewage to leak into waterways because otherwise it would back up into streets and homes. This is an indictment of the lack of investment and the way in which the Government and regulators indulge the water companies. Water companies have pocketed billions of pounds from sewage charges levied on customers but have not delivered the required service. This is organised fraud on a gigantic scale for which no corporate executive is called to account. The discharges kill fish and threaten biodiversity and marine life. The pollution may eventually find its way into the food chain—polio has already returned to the UK.
There are widespread illegal sewage discharges from treatment plants. On 12 May 2022, the Environment Agency said that
“Our initial analysis of the information collected to date has confirmed that there may have been widespread and serious non-compliance with the relevant regulations.”
Still, no executive is prosecuted, and there is no clawback of any executive bonus or pay. The Government continue to be complacent. Water companies face no action. There is a lack of any pressure points. Even when companies admit that they have not complied with the rules and regulations, they are still permitted to extract monopoly rents because people have nowhere else to go—they have to pay. We have no alternative infrastructure anywhere. The fines levied are puny and, so far, they have failed to bring about a desirable positive change. In a monopoly, they are simply passed on to the customers and that is why we end up paying higher and higher charges.
Profits form a key part of the executive key performance indicators in companies, and executive pay is linked to these indicators, which include profits. It is very easy for water companies to increase their profits by letting the leaks continue, which means they spend less on repair and maintenance, or by dumping raw sewage into rivers—that increases profits too. The Government continue to tell us that water companies are making huge profits, but they are doing so because they are not carrying out their obligations. Looking at profits alone does not tell us anything about the quality of their performance.
Last year, nine water industry CEOs received more than £15 million in pay and bonuses—bonuses for what? Polluting rivers? In the past, Ministers have said that shareholders can constrain these things. Well, their shareholders are abroad; are they really bothered about what goes on in this country? Many are just subsidiaries and affiliates of giant investment funds and other corporations; they have no incentive whatever to reduce these bonuses. So, the executives get fat cat pay while the public get health hazards, leaks and higher bills.
The Government can create pressure points to force companies to deliver, and I invite the Minister to consider at least the following five modest reforms. First, the directors of companies engaging in unlawful practices need to be made personally liable for the consequences. The spectre of personal liability should check predatory practices. At the very least, their bonuses and salaries should be clawed back because they have obtained them in fraudulent way.
Secondly, no dividends should be paid until the regulator certifies that water companies have met their statutory and regulatory duties.
Thirdly, customers should have direct representation on water company boards and a statutory right to vote on executive pay. With such arrangements, it is extremely unlikely that customers facing escalating charges, leaking pipes and polluted rivers would vote for a bonus or even a salary increase for any executive. Governments often talk about democracy in society. This is democratising these monopolies. Let them face the democracy of the customers.
Fourthly, the regulator itself should have direct representation of customers on its board. I am not talking about some toothless customer panels, but people actually sitting on the board and questioning the executives of the regulatory bodies about their failure to act.
Fifthly, the general public should be permitted to take legal action against negligent companies. After all, these companies are wilfully neglecting their public duty. Therefore, the public should have a right to take legal action against these companies and the regulators.
These are just some proposals for starters. As we are getting a new occupant at No. 10, maybe they will resonate with the new leader of the Conservative Party.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Benyon) (Con)
My Lords, I refer noble Lords to my entry in the register. I congratulate the noble Lord, Lord Oates, on securing this debate and thank noble Lords for their contributions.
The noble Lord, Lord Oates, was absolutely right to mention the late Lord Chidgey. I remember having a very good debate about chalk streams with him in this Chamber just before he died. He saw my passion for them and raised me his. He was a great fighter for river health in this place.
My wife refers to my local river as my mid-life crisis; I suppose it is better than a fast car or soaring political ambition. I share noble Lords’ indignation and frustration that our rivers are not of the quality they should be and not in the state they should be in. That 14% figure is shaming. It is a high bar to reach. One wonders how many rivers there were in the past. One fact we must always remember is that we have been putting sewage, in one form or another, into our rivers for decades—centuries, even—but it has gotten out of hand and must stop.
The noble Baroness, Lady Ludford, talked about her eponymous sewer: “Sarah’s sewer”. In my former life as the Water Minister, I remember being shown “Prescott’s sluice” in the East End of London. I am not sure that I want to have a sluice named after me; the noble Lord, Lord Prescott, who was here earlier, may be able to tell me whether it was named after him. I am trying to think of alliteration; perhaps my sewer should have been called “Dick’s drain” because, when I arrived as Water Minister in 2010, everyone was opposed to it. The chairman of Ofwat took me on to Westminster Bridge, pointed to the river and said, “It won’t be a different colour if you spend billions on a new sewer. It will look just the same but will have cost water customers an enormous amount of money”. It was opposed right across politics. The noble Baroness is right that her former colleague, Simon Hughes—the former MP for Bermondsey—fiercely opposed it. The noble Lord, Lord Berkeley, and many others used to come and see me about it. Indeed, like a student going in front of a don, I had to go right to the top of the Government to tell Oliver Letwin why his fears were not to be realised. I am glad that I now see it under construction and that this iconic river, in one of the great cities of the world, will be cleaner as a result.
A healthy water environment is fundamental to a thriving economy, to abundant biodiversity and of course to public enjoyment of our beautiful rivers, lakes and bathing waters. The noble Lord, Lord Stoneham, made the very good point that this is not subject to the four-year or five-year electoral horizons that most politicians look to; we want to see generational and multidecadal change. The Government’s 25-year environmental plan includes a commitment to restore three-quarters of our water bodies to close to their natural state, but we know that we need to do more to meet this rightly high bar. That is why we are going further and faster than any Government in protecting and enhancing the health of our rivers and seas. This has included ground-breaking action to massively reduce the harm caused by storm overflows.
The noble Lord mentioned the importance of civic society. Politicians can hold Governments to account but the public can too. A huge breadth of civil society groups stand up for their rivers, and I remember from when we ran a campaign called Love your River how important it is to give people their sense of place.
Like the noble Baroness, Lady Jones, I can admire the noble Lord, Lord Sikka, but I can disagree with his points. He talked about privatised ownership being some sort of fetish. Actually, I would say that £150 billion of investment in our water sector would not have been reached by any degree if it had still been in public ownership. The owners of those companies would have had to get in the queue behind the health service, pensions, the police, hospitals and so on. Renationalisation would require a future Government to buy out the pension funds that pay perhaps his and perhaps my pension, and perhaps the pensions of many people on low incomes. The cost of buying Thames Water was estimated a year or two ago—my figures might be out of date—at £12 billion. To buy out the entire water sector would be a terrible shame. It would be the wrong thing for investment.
Lord Sikka (Lab)
The numbers that the Minister quotes have little or no substance. If water companies had to meet their statutory obligations, the chances are that their income streams would actually be negative. They would be begging the Government to buy them out; we would not have to pay them anything.
Lord Benyon (Con)
I do not agree with that. I also believe it is good that international sovereign wealth funds want to invest in our regulated utility sector, but it has to be a regulated sector that cracks the whip when it needs to—that is, when those companies do not do what they are required to.
The noble Lord, Lord Oates, asked the House to take note of the impacts of current sewage disposal rates in UK rivers, and further noted the responsibility of water companies to alleviate these impacts. There are two main types of sewage discharges into the water environment by water companies: treated and untreated. Discharges of treated wastewater into our waterways are one of the most significant pressures on the water environment. Treated sewage is the biggest source of phosphorus within the water environment, and excess phosphorus is the most common reason a water body fails to meet good status. Water companies are required to reduce phosphorus loads into the water environment from treated sewage by 50% by 2027. We have recently consulted on a proposal for an Environment Act target to deliver even more progress and deliver an 80% reduction by 2037.
However, it is the untreated discharges that are understandably generating the most public interest. Discharges from storm overflows not only impact the ecology of the receiving water body but can also impact public health where water bodies are used for recreational activities. We have been clear that the current use of overflows is completely unacceptable. They were only ever meant to be an emergency measure but now they are seemingly part of doing business; anecdotally, it seems that only centimetres of rain can trigger them, and that is simply not good enough. We have made it crystal clear to water companies that they must massively reduce sewage discharges from storm overflows as a priority. If we do not see the change we expect, we will not hesitate to take further action.