My Lords, I think this is the last business of tonight for us. Amendment 78 deals with an area which has overshadowed the debate on the Bill and the public commentary on the water industry. It is concern about the overall structure of the industry as it stands, and is likely broadly to stand for a considerable time, despite the attempt to introduce a degree of competition in a small sector of the market.
Nearly 30 years after privatisation, the water industry consists primarily of huge private regional monopolies whose public reputation is variable, according to area, but in some cases is pretty low. Relatively recently, commentaries on the totality of the way in which the water industry operates have been pretty scathing.
I am the first to acknowledge that since privatisation we have achieved a very significant amount of investment in the water industry, and much of it has been very effective in delivering the service. In that context, there have been some investments that it would have been sensible to pursue that, because of the combination of company interests and boundaries and Ofwat’s priorities, have not been made, including interconnection between the various water areas; nevertheless, there has been very substantial investment. It has been in a context where company behaviour and the regulatory structure have focused primarily on capital investment in large-scale improvements and maintenance and relatively little on water efficiency matters and related subjects.
In terms of the finances of the companies, we have seen very substantial increases in their capital value. In some cases, they have gone dramatically through successive changes of ownership to the benefit of their past and present shareholders, but not noticeably to that of British consumers and British business. We have seen very substantial payouts of dividends to those successive owners. Indeed, in the last full financial year, more than 90% of profit was paid out in dividends. We see very low levels of UK taxation, partly because of the structure, and that is again anomalous in the eyes of many commentators and the public. This results, in most cases, from a very high level of gearing. The investment has been largely paid for, and is increasingly largely paid for, out of money raised on the markets.
At the point of privatisation—the noble Lord, Lord Moynihan, is no longer in his place, but he was there at the time—I do not think that that was envisaged by its proponents. I was not one of them, but nevertheless I do not think it was what they envisaged would happen. It was envisaged that there would be a series of UK companies, probably financed by the Stock
Exchange, whose investment would largely be funded through equity off the balance sheet rather than through going to the market, whose ownership structures would be based primarily in Britain and would be transparent and open and which would therefore pay UK taxes proportionate to their turnover and profits.
Instead, we have ownership which is, in many cases, overseas, which is not a problem in itself depending on the behaviour of the companies which are so owned. Dividends, to which I have referred, are paid, and UK taxes are going downwards. Largely, the investment the companies have benefited from has been financed from international markets. Issues arise, the most obvious being that if money is being financed through the markets, you have to cost it in the price reviews. The biggest failure of regulation in the past two or, perhaps, three price reviews has been that the regulator allowed a significantly higher level of capital cost than actually applied in the markets. That enhanced profits, at no great expense to the company, and allowed for dividends to be paid in the way I have described.
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In the normal price review, these broader aspects of corporate behaviour are very difficult to fit into Ofwat’s assessment of an appropriate price rise. At an earlier stage, I argued that Ofwat should have the right to reopen price reviews if large changes to the environment, such as the changing cost of capital, happen. I have been told that Ofwat thinks it has that right, but it has never been exerted, unless the companies have previously reopened the case on their own behalf, as happened recently with Thames Water. Ofwat has that right—I have checked on it—but only when such changes are equivalent to 10% of the turnover or, in other circumstances, 20% of the turnover of the company. In other words, there have to be pretty big changes before Ofwat has the right to do so, and the fact is that it has not done so, although companies have frequently reopened price reviews.
This amendment would allow Ofwat to have systematic information on those broader issues and to take them into account, if necessary, in the context of the price review or of a decision to reopen the price review. I am told that some of that information used to be routinely given to Ofwat in the June review. I understand that that is no longer systemically continued. It seems to me that Ofwat needs that kind of information, at least as far as this amendment provides, so that it can judge the total context of the regional monopolies with which it is dealing. Ofwat should have the ability to request that information, whether it does so in a reinstated annual review or otherwise.
There is a pretty substantial public interest in the totality of the behaviour, financing and structure of the water companies. It attracts particular attention around the time of the price review, but it is there the whole time, and it is not currently reflected in the regulatory framework and practices. This amendment would allow issues such as dividend policy, the structure of decision-making within the companies and their taxation requirements, as well as broader corporate social responsibility, to be taken into account by Ofwat when setting the price review. Ofwat would probably
rarely use that power significantly to change the price review, but if it needed to, it could. At the moment, I do not see that it can. The public, certain elements of the media and consumers in general all have an interest in this, and I think Parliament should too. I do not think that water companies have yet been effectively called to account, by either the parliamentary process or the regulatory process. This relatively straightforward amendment would at least allow Ofwat the possibility of so doing. I beg to move.