I find myself in the slightly unusual position of agreeing almost completely with the hon. Lady. Leakage is a huge problem. Much tougher regulation by Ofwat in particular, and ultimately an increase in the regulator’s powers, are required to bear down on
the shocking levels of leakage, not least because the Environment Agency has said publicly that England and Wales could suffer major water shortages by 2030. The agency also noted that enough water to meet the needs of 20 million people is lost every day through leakage, which surely further supports her significant point.
To be frank, in the past Ofwat has not demanded enough investment from water companies, given the scale of the rise in customer bills. It appears to have been asleep at the wheel under various leadership teams. The Public Accounts Committee, which looked at regulation of the water industry as far back as 2015, criticised Ofwat for overestimating costs and poor benchmarking of efficiency, resulting in higher bills for customers.
The hon. Lady also made the point that even the Secretary of State for Environment, Food and Rural Affairs suggested in March last year that water companies have not been acting in the public interest. Granted, the Secretary of State’s criticism came a month after a detailed critique of the water industry by the shadow Chancellor; nevertheless, the Secretary of State’s criticism is welcome.
As I indicated earlier, the latest price review is under way and already the Consumer Council for Water is concerned that Ofwat’s grand promises are unlikely to be met, with
“companies bidding for significant rewards for performance levels that aren’t particularly stretching”.
In part, prices are decided by the cost of equity and the cost of debt, plus investors’ expected UK tax burden. In my view, Ofwat should reduce the cost of equity in its calculations while maintaining fair treatment on debt finance for genuine capital investment. In short, Ofwat should drive down the profit that the owners of water companies make. It should also scrutinise the tax behaviour of those owners, to crack down on tax avoidance, and demand that owners do not use tax havens to receive the profits from our water companies. Lastly, every English water customer should see their bills reduced after 30 years of being used as cash cows by the owners of water companies. It is time that consumers and their pockets were treated better.
In October last year, the Select Committee on Environment, Food and Rural Affairs suggested that an independent review to determine whether the water industry was fit for purpose was required. The Chartered Institution of Water and Environmental Management went further, suggesting that such a review needed to examine the ownership of water companies. The Select Committee also raised concerns about the powers available to Ministers and Ofwat to improve governance and prevent pollution. With climate change approaching and a creaking infrastructure, the Committee argued that the need for change was urgent.
For some of the reasons that I have set out, there is growing concern about the ownership model in the water industry, and there are alternatives to the current privatised system. Long-term alternatives that the Government should consider include, in particular, a mutual approach, with democratic public ownership by consumers and employees, modelled on the success of Welsh Water and inspired by other similar success stories. Welsh Water, or Glas Cymru, does not pay dividends to shareholders, and yet it operates in the private sector. It
has an ownership model that forces it always to operate in the interest of its customers and it has changed the way in which it raises finance, in order to reduce the cost of credit.
Welsh Water now has the strongest credit ratings in the water industry, which reduces its financing costs and allows for even more future investment in its infrastructure and services. Customer bills have been reduced steadily in real terms and so far it has returned about £180 million to customers in the form of customer dividends. In addition, it has provided some £10 million of support for vulnerable and low-income customers, through social tariffs and an assistance fund.
The first step on that path for the water industry in England, so that it can match and then go further than Welsh Water, would be the formation of consumer and employee trusts. These trusts would have the power to appoint non-executive directors to water company boards, and they would have access to independent advice from management, so that they can make well-informed and independent decisions.
Ofwat should discourage investment in the water industry that requires a fast return to the owners of expensive equity. Instead, it should steer water companies towards the lower-cost debt market, with responsible investors such as public sector pension funds, whose interests are aligned with those of the water sector and whose investment could help to ensure that there is a modern, resilient water infrastructure.
Over the longer term, as equity investors seek to sell up because they recognise that they can no longer make a fast buck, consumer and employee trusts could use bond issues to buy those equity investors’ stakes in the business. These trusts would need to be underwritten by a buffer, or internal equity reserves, to borrow against. That could be achieved through a Government guarantee on loans or debt, to ensure that any large unexpected investment needs will be met, and to ensure that if anything should go awry, lenders are in a first loss position. Similar initiatives already take place in other areas of Government policy. Government guarantees could be replaced over time through the accumulation of non-distributed reserves, or of retained profit, by the trusts.
As the ownership of water companies changes, legislation should be passed to embed the not-for-profit principle. The new not-for-profit water companies would also require protection, with an asset lock to prevent demutualisation in the future. Consumer and employee trusts—like those at Nationwide, John Lewis and other mutuals—would enable customers and the workforce to have an active role in the key decisions taken by their organisation. The board would include employee and customer directors, and the trust membership would enable members—including consumers—to vote for board members, and to agree audit, remuneration and company governance decisions, as well as how profits are invested or distributed.
Ofwat should be given new powers to ensure that water companies encourage employee and customer participation in the democratic process. The new employee and consumer trusts should also have a role in the scrutiny and decision making of Ofwat, with a scrutiny panel that reviews the operations of the regulator, led by consumers, and also playing a role in Ofwat’s appointments to its board.
In conclusion, comparisons of public ownership and private ownership of the water industry do not come out favourably for England’s privatised water companies. They do not look like they are committed to environmental investment and the other challenges facing the water industry. The latest price review should herald the beginning of the transformation to new not-for-profit owners—the very consumers and employees who depend on the services of the water industry. Public ownership works in Scotland and the model for mutual transformation of the rest of the water industry works in Wales. It is time that there was new ownership of the water companies in England, and I commend the mutual model to the House.
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