Lords debate on Water and Sewage Regulation (Industry and Regulators Committee Report) - Oct 16

Moved by

Lord Hollick

That this House takes note of the Report from the Industry and Regulators Committee The affluent and the effluent: cleaning up failures in water and sewage regulation (1st Report, HL Paper 166).

Lord Hollick (Lab)

My Lords, I am pleased to introduce this debate on the affluent and the effluent. I thank our staff for their valuable contributions to the committee’s work, and the many contributors who gave evidence to the inquiry.

In May last year, we launched our inquiry into water and sewage regulation following a public outcry at the discharge of sewage into our waters. We published our report this March, which received a response from the Government that was curt and dismissive and implied that the committee had gone beyond its remit in questioning matters of public water policy. It was a clear attempt by the Government to dodge parliamentary scrutiny of their record.

In April, the Government published their Plan for Water. In May, England’s water companies issued an apology for sewage discharges and announced a recovery plan. We then launched a follow-up inquiry in June focusing on the role of Defra, which concluded with a letter to the Secretary of State last month; a response to that letter is expected on 27 October, this month. In our report, we found that, after privatisation, pressures on the water and sewerage network increased due to climate change and population growth; but the levels of investment fail to match that, leading to a serious deterioration in water quality and a network struggling to cope. Storm overflows are supposed to provide a safety valve during periods of heavy rainfall, but they are now used as a matter of routine.

According to Environment Agency figures, there were more than 300,000 monitored sewage spills in 2022 and 75% of all rivers are polluted. The Environment Agency itself has struggled to monitor or enforce against water companies due to budget cuts. There has been a growing pressure on our water supply itself, meaning that England will require an initial 4 billion litres of water a day by 2050, an increase of 41%. Taps will run dry with increasing frequency unless new water supplies can be established and more measures are introduced to reduce demand. The last reservoir built was in 1991. The Government’s plans for storm overflows estimates that £56 billion of investment will be needed by 2050 to clear up this mess. To this end, water companies have proposed investing £11 billion before 2030. Further billions of pounds will be needed to maintain the existing infrastructure.

Water companies recently published their business plans for the next five-year price review, proposing to invest £96 billion between 2025 and 2030—a 90% increase on the current period and a very welcome acknowledgement of the need for action. It is clear that investment over the last decade in our water system fell far short of what was needed—a casualty of weak regulation and incompetent government leadership. The opportunity to invest when interest rates were historically low and before prices surged with inflation was squandered. Now, a much higher level of investment is needed to remedy this neglect, and that burden will fall heavily on household bills.

Ofwat has the powers to regulate the price water companies can charge, the level of their capital investments and the size of returns they can make to their investors, but it has failed to ensure that companies invest sufficiently in water infrastructure, thus creating a backlog. Ofwat has been cautious about raising customer bills to finance long-term investment without the determined political backing of the Government. Decisions about the level of what people pay is, in the end, the responsibility of the elected Government, who must give regulators clear guidance on how to strike the right balance between investment and affordability.

The Government’s 2022 strategic policy statement for Ofwat gives no sense of priority—in effect, ducking this key decision. Will the Government provide further guidance on pricing ahead of the next price review? Underinvestment means that customer bills have been flat or falling for 15 years, but it is now inevitable that they will have to increase from 2025, when Ofwat’s next price review comes into effect. Company business plans published recently are proposing an average increase of 28.6% by 2030, even before inflation is taken into account. Including inflation, Thames Water has proposed a sharp 61% increase on today’s bills by 2030.

In the face of these rises, the Government must ensure that consistent support nationwide is offered to households struggling with their bills during a cost of living crisis. The Government initially committed to consult on a single nationwide social tariff to end the current postcode lottery, but then dropped the proposal. Water companies are now trying to help by more than doubling the number of households eligible to receive support, but the Government should have stepped in to ensure consistency. They urgently need to set out their approach.

Water companies have been assiduous in maximising their returns from their monopolies. It has been estimated that their dividends extracted since privatisations have exceeded £50 billion, while the debt of water companies has increased to over £60 billion, partly as a result of private equity owners loading the companies up with debt to help to pay themselves larger returns. All this has been in plain sight of a dozing regulator and an unconcerned Defra. This debt mountain has left companies vulnerable to higher interest rates. Ofwat now has stronger powers to control dividends and has set out a more determined approach, but this cannot recoup what has already been lost. The regulator now faces the challenge of requiring companies to boost significantly their level of investment just when they are facing rising costs, financial strains and uncertainty over government and regulatory actions, all of which is making water companies much less attractive to investors.

It is not clear to us that the water companies are capable of delivering investment at the level that is required. This is why we have called on the Government to increase the use of competition in delivering major water infrastructure. With this approach, specialist infrastructure companies, rather than the water companies themselves, can build the infrastructure that we urgently need. This approach has reduced the costs of the Thames Tideway tunnel project from an expected £80 per customer per year to around £25. Specialist infrastructure companies without the financial baggage of water companies can be an efficient and cost-effective solution for large projects. We recommend that the Government legislate to make it easier for more infrastructure to be built in this way. We await their response.

We noted in our recent report that some progress has been made. We called for the Government to provide a national water strategy, to look at the water system holistically, which they have done through the Plan for Water. The Government have also designated a National Policy Statement for Water Resources Infrastructure, as we recommended, to help water infrastructure to proceed more smoothly through planning. Funding has also been made available to monitor storm overflows. Ofwat has tightened its controls on the sector’s finances and, together with the Environment Agency, is investigating the water companies’ role in sewage discharges. All essential funding was previously cut by the Government.

However, major challenges remain. Can the Minister explain what action will be taken to reduce water demand? Why has mandatory water metering not been introduced? Concerns remain about the capacity of water companies and their supply chains to carry out projects at the necessary scale proposed. To ensure that infrastructure plans are independently assessed and their progress professionally reviewed, we recommend that consideration be given to granting the National Infrastructure Commission a statutory role to carry out these duties.
We remain concerned at the Government’s deep-rooted complacency. They have failed to set out how customers will be supported to pay rising bills. They have failed to provide Ofwat with any guidance on how to balance investment and bills. They have shown an almost casual confidence in the task of funding a huge investment programme in very challenging times. Nowhere is this complacency clearer than in relation to wet wipes. In 2021, a consultation found that 96% of respondents supported a ban on wet wipes containing plastic. The Government’s response was to bring forward yet another consultation—which was published only this weekend, after two years. Can the Government tell us when the ban is expected to take effect? This is an easy win. Its delay is unnecessary and deeply damaging to the environment.

Too often in the water sector, government, regulators and water companies have shown themselves to be poor stewards of an essential public service by preferring the easy, short-term option to prioritising the long-term well-being of the system, the quality of water and the environment. We need the Government to take responsibility to ensure a clean, plentiful water system free of sewage. The public deserves better. I beg to move.

3.40pm
Lord Agnew of Oulton (Con)

My Lords, I am grateful to the noble Lord, Lord Hollick, for precipitating this debate. I declare an interest as a member of the Industry and Regulators Committee and as a farmer who holds some irrigation licences.

As you will see from the report our committee published on 23 September, to any objective eye we are in a very poor place, be it by security of additional supplies, through population growth, behavioural habits or hotter weather; poorly maintained infrastructure, perhaps best and most recently illustrated through Thames Water’s failure to bring the only significant desalination plant on stream during one of the hottest summers on record; or the financial health of the sector, which has been consistently raided for dividends and executive bonuses, while racking up ever-higher levels of debt. Thames Water alone has a whopping £14 billion of debt; it was debt free when it was privatised.

Meanwhile, sewage releases, politely called storm overflows, are running at extraordinary levels because the sector has failed to invest in adequate mitigation. According to the Defra consultation document published in March last year, in 2020 there were 400,000 sewage discharges, totalling over 3 million hours of sewage flow. Some 10% of those overflow points pumped out raw sewage more than 100 times each. All of this was under the supposedly beady eye of two large regulators, Ofwat and the Environment Agency. Even the regulators’ regulator, the Office for Environmental Protection, as recently as five weeks ago announced

“possible failures to comply with environmental law … in relation to … sewer overflows”.

It is interesting that, in the Government’s response to an Urgent Question triggered by the OEP’s intervention, they said that they started monitoring sewage overflow 10 years ago. If that is the case, what has this monitoring achieved when, in 2020, there were still 400,000 discharge events?

It is my contention that buried in this ocean of complacency is the more disingenuous excuse that it is all too expensive to deal with. In 2020, the Government optimistically created a thing called the Storm Overflows Taskforce. In November 2021, it reported that it would cost between £350 billion and £600 billion to solve the problem. This is equivalent, at the bottom end, to 15 more Elizabeth lines or—dare I say it?—at the top end, to six more full-fat HS2s. This is ludicrous, because numbers like this attempt to shut down the debate, as they are utterly unaffordable. The reality is that so much could be done affordably.

At its simplest, a sewage overflow is activated when the volume of water is more than can be handled by the sewage treatment plant, into which the water flows. Our infrastructure has been and continues to be built to comingle sewage and rainwater, so this is a constant problem. The solution is to reduce the amount of rainwater that hits the sewage plant in a concentrated period of time. There are at least two effective and simple solutions to help achieve this, and one alternative to expensive, hard-infrastructure treatment plants.

First, in a pilot scheme on the Isle of Wight, households were given water butts with slow-release valves, enabling water to be held in the butt until after the storm and then released, in a measured way, over hours and days. As of this month, Southern Water had agreed to extend the pilot to the whole of Cowes. This tiny intervention has, so far, delivered a 70% reduction in sewage releases. In a year, this could be rolled out across the whole of England and Wales at minimal cost. Perhaps the Minister could explain why his department is not pushing this small and elegant solution far harder.

Secondly, certain areas of farmland could be designated to be inundated during heavy storms. With an increasing trend for environmentally led farming, such as overwintered stubbles, this is becoming more and more viable. The Government were considering this in 2016; perhaps the Minister could update us but, rather than giving us a cursory reply today, I ask him to write with some detail. Over 50 million gallons of water flow through my own farm a year, ultimately ending up in the sea, in a system that cannot cope with inundation. It would be perfectly feasible for me to hold areas of land under water for a week or two, while the local drainage system recovers. To put this volume of water into perspective, it is equivalent to about half the annual drinking water requirement of Norwich. So one farm, of a couple of thousand acres, could make a real difference. It would require lateral thinking and proper co-ordination between the regulators and water companies. Perhaps the Minister could tell us if such dexterity of mind exists inside the bureaucratic machine.

The third solution, which now has credible pilot sites, is the use of wetlands in place of hard infrastructure. I recently visited a site in north Norfolk where the cost of construction was £250,000 and the annual running cost £10,000, against a treatment plant of £1 million with running costs of £100,000 a year. With the imminent arrival of biodiversity net gain regulations next year, the opportunity to incorporate more wetlands, and pay for it, becomes possible.

I have tried to show that there are innovative but proven ways to solve these problems without breaking the bank. Lastly, I ask the Minister whether his department is on target to provide a full and unambiguous response to our committee’s letter, due a reply on 27 October, covering this and other issues.

3.45pm
Baroness Taylor of Bolton (Lab)

My Lords, it is a pleasure to follow the noble Lord, Lord Agnew, who in the committee gave us many examples of practical things that could be done. I am glad he has had the opportunity to raise them in the House today.

To say that the investigation into the water companies was timely is a great understatement. There has been a great deal of public concern about the performance of the industry, the profits taken out and the state of our rivers and beaches. The early response to our report shows the great contribution that House of Lords committees can make to debates on wider issues. The immediate response from the press—from the Times to Feargal Sharkey and experts—has been very positive in welcoming the recommendations in the report. The water companies seem to have regarded it slightly as a wake-up call and to have understood that they cannot get away with the kind of approach they had in the past—although part of their approach was to give an apology and say, “But it wasn’t really us; it was all the people who went before us”.

On the other hand, the Government’s response, as my noble friend said, was curt and dismissive. The Secretary of State, in particular, thinks she has immunity to every problem that has ever arisen in her department.

I have to admit that I never wanted privatisation in the first place, and I was part of the Front-Bench team in the Commons opposing it. I recently saw the figures I used during the wind-up there, which showed that the Labour Government from 1974 to 1979 invested £1,254 million in the water industry per year, but that from 1979 onwards, when the Conservatives came in, there was a sudden drop. Investment went down to £926 million, then £899 million, then £818 million. In other words, there was deliberate underinvestment to try to make a case for privatisation, because we were told that was the only way the investment would come.

We had big promises from the water companies—they were going to solve the problems of leaking pipes and everything else—and we were promised that Ofwat would be the great guardian of the consumer and the taxpayer. It has been very different in reality. Investors have done very well; the rest of us have had serious problems and been left with a situation in which we now need many critical improvements, because those promises were not fulfilled. The water companies have done well, but everybody else, as my noble friend pointed out, has been left with considerable problems. This industry has not invested, and very big figures are needed in investment for the future.

We have seen the dividends taken out of water companies and the big salaries paid to many executives working there. While the companies may say that they recognise the problems, there is no guarantee that they will be easily able to provide the investment that is now needed. Therefore, we now face a very significant and serious dilemma.

Investment is needed—my noble friend pointed out the scale—but who will pay for it? Those who ripped us off are long gone. Many of those companies have been sold on and assets have changed. Water companies maximised their returns but many debt issues remain. We as consumers and taxpayers will not get the money back from the investments that were promised; we paid our water rates and so on. The big question still remains as to how these issues will be dealt with and who is to pay.

There is another very big issue: the nature of regulation. Is Ofwat fit for purpose? It has been too weak. Has it not had enough powers? Has it chosen not to use those powers? Has it lacked government support, or has it just been outsmarted by the water companies? Whatever the fact of how this has happened, we are in a situation where regulation of the water industry, and probably a whole range of industries, needs to be completely overhauled. These companies, and the people regulating them, need to act in a totally different way in future.

3.51pm
Lord Cromwell (CB)

My Lords, I had the privilege of being a member of the committee that produced this report under the incisive chairmanship of the noble Lord, Lord Hollick. At the start of our inquiry I actually had some sympathy with the regulators and the water companies. The regulator, Ofwat, had been left by government to take what amounted to controversial decisions about the prioritisation between its objectives and those of the water companies. The water companies were primarily tasked with providing clean, cheap water, and to a great extent they have done so. If noble Lords need proof of that, please consider that, every weekend, millions of people in this country wash their cars and water their gardens with what amounts to pure, purified drinking water. Rightly or wrongly, environmental issues have been moved up the list of priorities only more recently.

However, this pool of sympathy dried up during the course of our inquiry. As the noble Lord, Lord Hollick, referred to, we uncovered financial engineering being used to take advantage of regional monopolies, including debt loading and opaque dividend extraction. This was at the expense of much-needed—now frighteningly overdue—investment into the very infrastructure on which our water and sewerage system depends.

How did we get here? As regards the regulators, the committee was far from convinced that Ofwat had the business savvy to spot what was going on and act early enough to stop it. By its own admission, it took only a light-touch approach to regulating the industry. The Environment Agency—demoralised and lacking the resources it needed to hold the water companies to account—has also not kept water companies up to the mark on their environmental performance. Indeed, civil society organisations called out the issues of pollution long before the regulators did. The committee’s very timely report also helped to bring the issue to prominence, as the noble Baroness, Lady Taylor, mentioned. Finally, Defra, the department with overall responsibility, appears to have been far too complacent in looking into what was going on. It left the regulators and water companies themselves to make decisions about the competing demands of sewage and water management, and profit.

Where does this leave us? The regulators have taken some steps, at least latterly, but Ofwat’s Water Company Performance Report 2022-23 makes for depressing reading. Performance has fallen short for the majority of companies. Seven of the water companies are described as “lagging”, the report’s lowest categorisation, while fewer than half achieved their performance target on reducing pollution incidents.

We now have a water and sewerage industry desperately in need of a massive catch-up on spending, with numbers ranging from the Government’s quotation of £56 billion—noble Lords should remember that that will be spent over 25 years—to the hundreds of billions cited by the water companies, and the almost fantasy figures that the noble Lord, Lord Agnew, quoted from the task force.

Long-term money for infrastructure needs to be raised and sustained, not just in the short term but over the years and decades ahead. A crucial question therefore is how to raise the necessary investment funds. First, there is currently no suggestion that the money extracted by private equity investors will ever be recovered. Secondly, we have a number of water companies that have themselves been teetering on the brink of being washed over the financial weir into bankruptcy. Thirdly, we were told initially that the water companies would raise this money in the City or from their existing investors, but the talk now is of putting up customer bills. At a time of economic uncertainty and a cost of living crisis, when the benefits of investment might take 25 or more years to be felt, that is an extremely challenging proposition to put forward.

So we seem to be up sewage creek without an affordable paddle—but this is not just about money. The committee had severe doubts about the capability of some water companies, even if the necessary billions of pounds were made available to them, to manage the very substantial infrastructure projects that are required. Ofwat, when asked about this, appears to be crossing its fingers and hoping for the best.

To conclude, solving the problems highlighted in this report is going to be a long haul, and for that reason I hope that the current and future Governments will take note of it. I will pose four questions to the Minister and look forward to his responses when he winds up. How much money is needed to modernise our water and sewerage systems? How is that money going to be raised? How will this massive infrastructure renewal be competently delivered? Finally, are Defra, the regulators and the water companies really up to the job of getting these matters right?

3.57pm
Baroness Bowles of Berkhamsted (LD)

My Lords, I have been on the Industry and Regulators Committee since its inception and I am pleased that, before my time to rotate off, we will be looking at the issue, among other things, of whether regulators have the right kinds of remits, overlaps and priorities and whether the government/regulator relationship is right. It is my view that our Ofwat inquiry highlights well areas for improvement in those matters and, in the important case of utilities, whether privatisation has made things far too private—by which I mean lacking in transparency and in action.

One of the conclusions of our report deals with this by suggesting that utility companies should be subject to the same kinds of transparency requirements as publicly listed companies. There has clearly been failure. Water companies have got away with sweating the assets for far too long, to pay out large dividends instead of properly providing for future infrastructure, and have turned emergency sewage discharge into a routine way of operation.

Regulators focused too much on bills as their yardstick, were dozy about future water security and complacent about discharges, while Governments—always suspect in the short-term electoral cycle—have set meagre targets and inadequate Environment Agency budgets and have been held in thrall to the construction industry when it comes to changing planning laws in necessary ways. It is a catalogue of failure, leaving a dire situation for both finance and infrastructure.

A fundamental requirement throughout the company and regulator chain must be to ensure investment sufficient to match demand caused by population growth, property development and climate change. That has fallen a long way behind and there is no way to claw back the money that has gone to private pockets, leaving consumers to foot the bill in future. I doubt there is going to be any other way.

Behavioural change in water consumption has a part, and it will now have to be more draconian than it need be, and so too does banning harmful products such as wet wipes that cause environmental damage and cost. Why is it that the pleas of the wet wipe industry to government have overturned the needs of the sewage industry? The Environment Agency has found that last year the environmental performance of water companies was at its lowest ever, so what are it and the Government doing about it, other than monitoring decline?

Ofwat says that 14 of the 17 water companies have not spent the funds they have been granted to invest in the network, with some spending less than half. So what is happening, other than knowing the bad statistics? In recent times, there have been more fines levied for pollution, but that is not getting at those responsible; it has to come back to the boards and executives of the water companies. Whether it is sewage or lack of investment, these are things that affect the health and well-being of everyone. I am just as worried about a pathogen in waterways as I am about a dodgy financial product. The first might kill me, the latter might fleece me—so why do we closely regulate only the latter?

The former Ofwat chair Jonson Cox said in a letter to the committee that the sector had “lost public legitimacy”. He said it was

“tempting to lay the blame at the doors of regulators. But these are FTSE 100/250 scale companies and need to take responsibility, as the regulatory regime requires them to do”.
He went on to say:

“The CEOs and shareholders of these large-scale companies need publicly to face into their performance shortfalls, and not hide behind their trade association, Water UK, or regulators”.

Well, I agree with that, as did the committee, but surely as utilities they have responsibilities beyond that of top-end listed companies and must be held accountable accordingly—not, as seems currently the case, having health and safety cop-outs and being treated more leniently than others who released pathogens into public places would be. If water companies do not perform, responsible people should be banned from the sector, and indeed from other utilities—end of. Regulators need to be more joined up, cover more and be more active. Utilities are special and special provisions must apply, and that should apply to underspending on investment as well as to illegal discharges.

4.03pm
Baroness Jones of Moulsecoomb (GP)

My Lords, I congratulate the noble Lord, Lord Hollick, and the members of his committee on the most fantastic report. I have really enjoyed this debate so far and I look forward to the Minister’s replies on all these crucial issues of public health and the health of nature and the environment. It has been quite a slog to get this issue on to the agenda, but finally it is on the agenda and the public know about it. They are fully aware of it. I do not want to give any hints to the current Government on how to perhaps claw back some of the votes they have lost so far, but this is going to be an issue on doorsteps for the general election, so the faster the Government act, the better for them. Obviously they are going to lose big time, but we do not have to worry about that too much at the moment.

Ofwat, the water regulator, has said repeatedly over the years that water companies have had all the money they needed to do the necessary investment—so we have to ask where it has gone. Ofwat allowed our bills to rise by more than 40% in recent decades in order to fund investment, but the investment largely did not happen. Most of it went to shareholders at the average rate of £2 billion a year for the past 27 years. That money is our money; it is taxpayers’ money. I do not want to pay higher bills; I want a refund, and I think a lot of people will agree with me.

We are all fed up with pollution in our rivers and on our coastlines, with sewage floating past swimmers and surfers, and with businesses suffering when signs are put up saying, “Please don’t swim here”—not to mention environmentalists despairing at the loss of ecosystems because of the filthy rivers. We have to ask what the regulators have actually been doing over the last three decades, and whether it is possible to create an enforcement regime that will hold a private monopoly to account. I suspect that many of the public are no longer asking about regulations and regulators; they are probably asking about the prison sentences that ought to be given out. I am not a big fan of increasing the prison population, particularly at the moment, so if we are to penalise the people who have put us in this position—for example, the CEOs who are personally responsible for polluting our rivers—we should issue community service orders so that they can work on the ground to fix the pollution that they have created.
Water companies themselves should be fined if they dump sewage. Instead of those fines adding to the water bill, the money should be found by selling shares to the Government. If they keep getting fined, the public will get their water companies back into public ownership at no extra cost. Certainly, no water bill should go up until there is a guarantee that no money will go into shareholder bank accounts, be siphoned off to parent companies or be taken out by CEO or senior staff bonuses. I want the CEOs of these water companies put on notice that they will be taken to court if the problems are not fixed.

There are a lot of options for cleaning up this mess but they all involve a lot of money and some understanding from the Government that this is an urgent situation that has to be fixed. I very much look forward to the Minister telling us what the Government are going to do. Quite honestly, the petty, rather dismissive response from the Government to the report from the noble Lord, Lord Hollick, is shameful. I do not understand how any Government could be so petty and almost vindictive.

4.07pm
Lord Whitty (Lab)

My Lords, I thank my noble friend Lord Hollick for his cogent introduction, and thank the committee for what is a trenchant, highly critical report with very interesting recommendations and conclusions. This is a complete failure of the system of regulation, post-privatisation. I would also like to thank whoever invented the title of the report because it most succinctly expresses the outrage at the pollution that is caused by these water companies and the affluence with which they have treated their shareholders, investors and those who bankroll them. It is a disgrace, and one which this House and the Government need to face up to.

I have to first make a confession. I was a small cog in the structure of regulation of this industry, for a few months at Ofwat and for several years at the Environment Agency. That was more than 10 years ago. I clearly remember thinking and arguing at that time that the system was inadequate and that we had failed to use the powers that we already had, particularly in Ofwat but occasionally in the Environment Agency as well. In those days, the Environment Agency had more resources for monitoring, but we did not always use our powers to their full extent—and we see the results.

It is possible to argue that, in the early years of privatisation, more resources were brought to much-needed investment, technology and management improvement. But after that first period, this has not been the case. We now need to face up to the fact that the major political parties are not prepared to commit themselves to renationalisation. Like the noble Baroness, Lady Jones, I would prefer that solution. If it is not possible, we need to start again on the system of regulation, not only of the areas covered by Ofwat, the Environment Agency and the Drinking Water Inspectorate but of the wider aspects of the water system. These broader aspects include taking account of the growth in population and the pressures from housing and from business, of the fact that water usage in this country is one of the highest in Europe, and of the fact that we completely fail to address water efficiency in appliances for industry, agriculture and domestic households.

We need a new start. In my view, if we are not to go for renationalisation then we need to establish a single and very powerful regulator for the water sector as a whole—one which subsumes all these interests and puts water centrally, as it should be, in the management of the resources of this country. It is not only about the dangers that the sewage overflows and discharges cause to our rivers and fisheries, and their threat to human health; it is also about the complete and utter failure to recognise that, as climate change progresses, water will become scarcer and less predictable, and so we need a much more effective system of management and a much stronger regulator.

We need a regulator if we are to keep the present system of ownership because these are regional monopolies, untroubled by competition. Unlike some privatised industries, there is no competition. They are also untroubled by requirements to review the franchise periodically, as exist in some privatised industries. That means they are almost free to make as much money as they like. If we add to that the complete failure of co-ordination and of clear strategies by the regulators and Defra, then we are heading for catastrophe unless we start again.

I ask the Minister to recognise that the list of failures spelled out by my noble friend and his committee in the report need a new approach. If we are not going for renationalisation, can all parties commit to a much more effective system of regulation and to starting again? I agree with the noble Baroness, Lady Jones, that sanctions need to be placed on these companies. I would hope that those sanctions were effective and would eventually lead to the sector being brought back into public ownership. But in the meantime, we need a much more effective and co-ordinated—and much more environmentally sensitive—system of regulation, which recognises and addresses the problems of this sector, and we need to start now.

4.12pm
Lord Cameron of Dillington (CB)

My Lords, I must first declare my interests as a farmer and chair of the UK Centre for Ecology & Hydrology.

Rivers are an important source of life. They host a huge range of species, both above and below the waterline—too many to list in a five-minute speech. They also have a life force of their own, having run through our landscapes for millennia. We are here today and gone tomorrow compared to these moving symbols of what should be our national pride. They are also a force for cohesion. The early Babylonian and Egyptian empires, for instance, were founded on their management of water. Even today—this is a topical point—with all the violence in Israel, there is a movement there called the Blue Peace, the theory being that the management of water is too serious an issue to be disturbed by nationalistic politics. People from all sides have indeed kept talking, whatever the extremists are up to.
I mention all that because I am trying to emphasise a point, well made in the report and by other speakers today. As a nation, we are currently failing our rivers and must now make more effort to all work together to ensure they are restored to the historic institutions they should be: places as sacred as our cathedrals, where nature and mankind should thrive together. It is obvious, as others have said, that we are currently failing to achieve that end. It is also obvious that any campaign for instant renewal of our rivers is way beyond the current resources of this nation or its water consumers, but we have to start now to turn the situation around.

First—this is a practical point—in order to make a realistically costed plan, which sorts out the essential from the merely good to have, we need a map of the detailed condition of all our rivers, from headwaters to estuaries. The only way we will achieve that is by testing all the waters on a more regular basis. Where possible, we should have remote electronic monitors up and down all our rivers. I know these monitors are costly at the moment, and slightly limited in the information they provide, but their efficiency will improve, and their price will drop if the quantity is guaranteed. I believe we need thousands of them.

Sampling by staff is an extremely skilled job and takes time. It is therefore expensive, so random sampling is rare. I have heard stories from farmers—possibly exaggerated—that the chance of their bit of river being randomly tested is less than once in 100 years. We need to know on a daily basis what is happening to our rivers so that we can decide what our financial priorities ought to be. Sampling by staff, for instance, does not happen at night, nor usually at that vital time when it is raining.

With money short and rivers below par, we need to know what our priorities should be. For example, are the phosphates too high in the night or the day, or before or after rain? Is it the nitrates or the microplastics, nanoplastics, chemicals or a lack of oxygen that is the more pressing problem in each river? You can find out more from continuous monitoring in two weeks than you will probably find after many years of random sampling. We need to know how and where to spend our money.

I will touch quickly on a couple more points. I strongly support the report’s emphasis on building up more water supplies through new reservoirs and water transfers. The less water we take out of our headwaters and iconic rivers such as chalk streams, the less will be the effects of whatever pollution is seeping into system.

Finally, we need everyone, led by the Government, to come together—it is that cohesion agenda again—to promote better behaviour by water users. Thames Water has said that 85% of the 75,000 blockages it clears annually are caused by things that should go in the bin. We all know about wet wipes, but the public also need to know about the dangers of antibiotics, medicines and other no-nos getting into the system. We need a campaign to educate the public about not using the sewage system as an alternative to rubbish collection. I can see it being quite an amusing and imaginative campaign.
It is going to take a lot of work, money and time to get our rivers right again, but that work has to start now. I thoroughly commend this report.

4.17pm
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?

4.23pm
The Duke of Wellington (CB)

My Lords, I declare my registered interests that are relevant to this debate. I welcome the Industry and Regulators Committee’s report and congratulate its members, particularly the chairman, the noble Lord, Lord Hollick.

When the water companies were privatised in 1989, I cannot imagine that Ministers then thought that so many of them would pass into the hands of private equity groups, many of them based outside the United Kingdom. As the water companies are monopoly suppliers of essential water services to households and businesses, it is clear that they must be regulated. Regulation is divided between the Water Services Regulation Authority, known as Ofwat, and the Environment Agency. In paragraphs 2 and 3 of its recommendations, the committee suggests that there should be much closer co-operation between the two agencies. I ask the Minister whether it might not be more effective to merge into Ofwat the parts of the Environment Agency that currently regulate the water companies.

There have clearly been failings over the past 34 years in how the water companies have been regulated. The Environment Agency, for its part, pleads lack of resources. I am not convinced by that, although the committee appears to accept the argument. The problem has been that addressing the discharge of sewage into rivers and on to beaches has not been a high enough priority for the Environment Agency and, therefore, not enough of its extensive resources have been directed to oversight and monitoring of these monopolies. If all along there had been a department within Ofwat responsible for environmental regulation, in addition to financial regulation, for which it is responsible, the growing problem of sewage discharges would have been detected and understood much earlier and corrective action could therefore have been taken some decades ago. Will the Minister and his colleagues give serious consideration to whether the structure of the regulation of water companies is correct, and whether there should not in future be a single regulator?

There are several other recommendations in the report which I completely support. Paragraph 24 recommends banning the sale of non-biodegradable wet wipes. I was pleased to see that, finally, the Government on Saturday launched their latest consultation on this, but I am not sure why they think that further consultation is necessary, as the overwhelming majority of this House and the other place, and of members of the public, are in favour of banning those products.

I also welcome paragraph 35, in which the committee questions whether the 2050 targets in the storm overflows discharge reduction plan are sufficiently ambitious. I hope that, when that plan is reviewed in 2027, the then Ministers will be more ambitious.

I support paragraph 47, in which the committee recommends that it should be part of water company licences that bonuses and performance-related pay of executives be linked to environmental performance. I also support paragraph 49, requiring that water companies, even though they may now be owned by private equity groups, should still be subject to the same level of transparency as they were originally, when they were publicly listed companies. This must surely be right for monopolies formerly owned by the state.

There are two final recommendations of the committee that I strongly support. Water metering should be compulsory for all households and businesses where possible. For households, the cost of meter installation must be borne by the water company. This will clearly help many consumers to reduce their water consumption.

The last recommendation of the committee is that there should be more stretching targets for reduction of water leaks. A few months ago, I asked the Minister why the Government’s target was to reduce leaks only by 50% by 2050. That does not seem sufficiently ambitious. Ofwat currently estimates that leaks amount to 51 litres per person every day. The idea that in 27 years’ time, the companies will still be leaking 25 litres per person per day does not seem in any way justifiable.

I very much hope that this excellently titled, excellently written report will cause Ministers seriously to review how the water companies are regulated.

4.29pm
Viscount Chandos (Lab)

My Lords, as a newly appointed member of the Industry and Regulators Committee, I am privileged to have my name attached to this report, although I did not participate in the earlier evidence session. As chair, my noble friend Lord Hollick skilfully led the committee to its unanimous and deeply but constructively critical conclusions and has delivered a compelling introduction this afternoon. I pay tribute to him, the other committee members and the staff, who did the really hard work. Coincidentally, important work was done by the committee in pushing the boundaries on parliamentary language and the titling of reports, as should be the case with a former tabloid proprietor as chair.

I strongly endorse the report as a whole and will speak briefly on a couple of themes. I declare my interests as a trustee of the Esmée Fairbairn Foundation, a major funder of freshwater causes in the UK and, through its endowment, an investor in the Robeco sustainable water equities fund, and as a trustee of the Ernest Kleinwort Charitable Trust, a funder of the Chichester Harbour Trust.

I start with that last organisation, about which its chair, John Nelson, wrote in the Observer in July:

“one of the most beautiful and important natural harbours in the UK, I witness on a daily basis its now-rapid destruction, caused in large part by an extraordinary deterioration in water quality—thanks largely, in our case, to Southern Water”.

Mr Nelson is not a diehard environmental campaigner but an experienced former investment banker and, for full disclosure, a friend and erstwhile colleague of mine. He worked on the privatisation of utilities in the 1980s and 1990s. I may disagree with his contention that, even as originally devised, the privatisation of the water industry had anything to recommend it, but his analysis of the disaster arising from the combination of aggressive capital structuring by private equity and infrastructure owners that acquired many water companies, weak regulation and complacent government policy is devastating. He wrote:

“we now have a water industry that is probably 15 to 20 years behind in terms of infrastructure investment … We can all, of course, blame the water companies, but at the heart of this is the failure by the government to recognise the long-term issues, and to act”.

My noble friend Lord Sikka and I do not agree entirely about private equity’s impact on the general economy, but if in this case its behaviour has been unacceptably aggressive, government policy and regulatory enforcement should be and have been robust enough to counter this. The Government and Ofwat have prioritised holding down consumer prices over the maintenance and enhancement of quality. The consumer interest is not solely about price. Swimming in rivers and by beaches that are not polluted by sewage or other toxic substances should, for instance, be a universal right. Recognising that many families, most of all those on lower incomes, are hurting from the cost of living crisis, it is all the more regrettable, as other noble Lords have noted, that the Government have not honoured their promise to introduce a single social tariff rather than the postcode lottery under which support can vary between £70 and more than £250 per household.

I strongly endorse the report’s advocacy of nature-based solutions as a cost-effective and environmentally friendly form of delivery. Ofwat must act to make these easier to adopt.

I end with one of the most depressing pieces of evidence given in our follow-up sessions this summer, by David Black, chief executive of Ofwat. As the noble Lord, Lord Hollick, wrote in his letter to the Secretary of State,
“David Black raised a different concern around water companies’ capacity to deliver major projects … the sector … has … little experience in taking major projects forward and has low public standing”.

What an abject failure Conservative government policies over 40 years have been, starting with the doctrinaire privatisation of the industry. How feeble Ofwat’s regulation of the sector has been, even within those failed policies.

4.34pm
Baroness Bakewell of Hardington Mandeville (LD)

My Lords, I congratulate the noble Lord, Lord Hollick, on his excellent introduction to this brilliant report. All contributors to the debate have raised the worrying operational methods of the water companies. The noble Lord, Lord Cameron of Dillington, raised the absence of water testing.

Water is a resource we have taken for granted for far too long. We assume there will always be a sufficient supply for our needs: we turn on our taps and are able to drink clean water, we can shower whenever we wish, and we assume that when we flush our toilets, the system will deal with it and all will be well. Sadly, those days are gone, and everyone has a part to play in ensuring that our water supply is plentiful and fit for purpose and that our streams, waterways and coastlines are not stinking and polluted.

Primarily, it is the role of the water authorities to ensure that water supply and sewage disposal are fit for purpose. However, there has been little infrastructure investment over a long period. No new reservoirs have been built since 1991 and are not likely to be before 2029. The population of this country, however, has increased dramatically over this period. Water authorities appear not to have taken any of this into account in their business plans or strategies. The noble Lord, Lord Whitty, referred to this absence.

There have been failures on all sides: Governments have not provided sufficient funding for enforcement or set a central direction, and Ofwat has not required water companies to provide sufficient investment in infrastructure but has encouraged keeping consumers’ bills low. The Minister has, in the past, raised the difficulty of increasing water bills. During a cost of living crisis, care is needed to protect the vulnerable to ensure that water supplies are not cut off due to inability to pay water and sewage charges—the noble Lord, Lord Hollick, referred to unaffordable bills.

It will be a challenge but there must be more investment in solutions. There do not need to be costly concrete constructions, which Defra seems to prefer; the lower-cost, nature-based solutions are much preferable. NBS help with restoring habitats, storing water, creating new woodlands and rewetting bogs. However, when such solutions are put before government, they are rejected in favour of costly concrete solutions, with technical specifications cited as a reason. In a time when water is seen as a finite resource, it is not reasonable to apply the same technical specification to nature-based solutions as apply to concrete ones. A quite different approach is needed, and the noble Lord, Lord Agnew, gave an excellent example. Ofwat, the Environment Agency and Defra need to encourage nature-based solutions and, together, provide new guidance to make this happen. Reaching net zero is vital and if it is possible to assist in this process, then this should be a priority.

Nutrients are polluting our waterways due to runoff from both farming and housing developments. Developers have been dragging their feet on this issue. Due to the right to connect, they have failed to separate surface water runoff from foul water discharge. This has, in part, led to the current scandal of increased sewage overflows, especially when there has been no rain. Instead, developers should be encouraged to ensure that all new buildings have rainwater harvesting capabilities. It is time the right to connect was repealed.

I was dismayed to find that despite the vote in the Chamber banning nutrient discharge from housing developments, the Government are delaying the implementation of this measure, which would assist in improving countryside and wildlife habitats. Biodiversity net gain would have been mandatory in planning from November—that is, next month—but the Government have told developers that this will now not be implemented until sometime next year. Can the Minister say when exactly this law will be implemented and what the Government are doing to ensure that developers take rainwater harvesting seriously?

In April this year, the Government produced a plan for water: their integrated plan for developing clean and plentiful water. This was a step in the right direction but does not go far enough. An effective national water strategy is needed. Recently, the Secretary of State for Environment wrote to water companies via the Environment Agency, suggesting investment plans should be slowed down in order to keep water bills at a low level. This is a false economy. We need a water and sewerage infrastructure that is fit for purpose and can meet its current demands, not one that is antiquated, creaking at the knees and crumbling.

The Environment Agency has seen its budget cut drastically, from £170 million in 2009-10 to £76 million in 2019-20. Some increases have been made to its budget since then, but nothing takes it back to its original level and it does not account for intervening inflation. Underfunding has led a to lack of enforcement action, which is no longer a deterrent. The polluter pays principle is not taken seriously. Fines have been derisory compared to the profits which water companies have made.

Privatisation has led some water companies to put share dividends and directors’ bonuses before infrastructure investment. I noted in the report that it was suggested that no reward payments should be made when a water company did not meet its water quality targets. I fully support this view. The noble Baroness, Lady Jones of Moulsecoomb, has spoken eloquently on this.

In 2021, storm overflows, referred to by the noble Lord, Lord Agnew, were used 325,533 times for 2.6 million hours. Given that polluted water is a human health risk, I support the view that individual CEOs and directors should be held personally accountable for failures, with the penalties increased dramatically for them. I fully support paragraphs 252 to 256 of the report. It is time the softly, softly approach was abandoned altogether. The mechanism is there in the Environment Act for this to happen. The Office for Environmental Protection has a critical role to play and has already demonstrated that it is up for the challenge.

As I said at the beginning, this is a problem where we all have to play a part. I turn to wet wipes. The vast majority of packaged wet wipes indicate that they are not flushable, but this is in ridiculously small print. It is time the consumer realised that by flushing wet wipes and other plastic items down the toilet, they are responsible for helping to create fatbergs which are clogging up our sewerage system. It is time to ban plastic in wet wipes, but do we really need consultation, as the noble Duke, the Duke of Wellington, indicated? Manufacturers should move away from plastics. The information on flushability must be on the front of the package and in a minimum of 10-point characters, so that a magnifying glass is not needed to read it. Consumer awareness should be raised via advertising.

My noble friend Lady Bowles of Berkhamsted raised the issue of water usage by householders, including watering their gardens and washing their cars—which, as the noble Lord, Lord Cromwell, indicated, should be minimised. Use by farmers, horticulturists and manufacturing industry must be minimised where possible. This must be coupled with a programme of reservoir provision, both small local and larger regional provision. Not to do so is to adopt the attitude of the ostrich. The water and sewerage system must meet the demands of the current population, which is not predicted to decrease: quite the opposite. I know the Minister is aware of the difficulties surrounding the water industry and I look forward to his response to the many justified questions raised in this debate, especially those from the noble Duke, the Duke of Wellington.

4.44pm
Baroness Hayman of Ullock (Lab)

My Lords, I thank my noble friend Lord Hollick for his introduction to our debate on this excellent report. He laid out the recommendations that the report makes to the Government, which have been discussed by noble Lords today.

I will pick up a few of the recommendations in particular, looking first at water demand and reservoirs. A lot of concerns have been raised about our water for the future and the infrastructure required to manage it, so I would be interested to hear from the Minister what action the Government intend to take to reduce water demand and to increase consumer awareness about this issue.

On reservoirs, the report confirms in paragraph 308 that,

“despite the need for reservoirs … under current plans, not a single major one will have been built in the UK between 1991 and 2029”.

As my noble friend Lord Chandos mentioned, this is a failure of infrastructure and planning. One of the pieces of evidence taken from Professor Barker was about the Cheddar reservoir and the fact that Ofwat refused to fund it on the basis that the case had not been made—but it was subsequently recognised that it was actually really important. We also know about the issues with the inability to construct the reservoir in Abingdon, which has been going on for years. Mr Black of Ofwat told the committee that

“the planning process will need to align with the needs of water resource management”.

I would be interested to hear the Minister’s response to that. I had a meeting with Mr Black some time ago, and he seemed surprised to hear that in Cumbria they are closing reservoirs. There does not seem to be any joined-up thinking about our future water use, so I would be interested to hear the Minister’s response on our future ability to supply the country with the water that it needs.

One of the issues that my noble friend Lady Taylor raised was about the Government’s response to the report; she said that it was pretty dismissive, and other noble Lords have said similar. The Government seem to be saying, “Well, we don’t need to do that because we are already making plans for water, storm overflow action plans, legislative initiatives and so on”. But the point we are trying to make here is that, although that may be very well, it does not seem to be working. What will the Government do to ensure that it will make a difference?

Let us look at the Government’s Storm Overflows Discharge Reduction Plan. I am aware that, following consultation, the Government have published an expanded plan to extend the targets of the plan to coastal and estuarine storm overflows, for example, but the extended new plan does not answer the criticisms in the report. For example, it is criticised for not setting environmental targets and ambitions at an outcome level. Other criticisms are that there is

“a disconnect between DEFRA and regulators … that ‘DEFRA targets are about the number of sites that are improved, while Ofwat has a proposal … for the number of events per storm overflow’”,

and that the plan

“is very focused on just the water industry and fails to grasp the holistic approach”

needed across all sectors. Can the Minister explain how the Government intend to manage those criticisms and to improve the situation?

In Ofwat’s response to the report, it welcomed the awarding of extra funding for the next two years; we welcome that as well. It also points to the water companies’ commitment of £10 billion of extra investment by 2030. But, as has come out in this debate, how will that be paid for and who will pay for it? Will it land on the taxpayers—the people already paying a lot for their bills? As we have heard, people are not well off at the moment. We have heard again about the dividends given to directors, so whose shoulders should this cost fall on?

Ofwat also claims that companies have pledged to reduce storm overflows by 25% by the 2024 price review. If it is so straightforward for them to say that they can reduce them by a quarter, why has progress not already been made on this? Also, does that mean the reduction or eradication costs regularly cited by the Government are accurate? It does not make sense to me that they can suddenly say that they will reduce them by 25% when it has been, to be blunt, such a pickle.
Back in June the committee launched a follow-up inquiry into Ofwat, the water industry and the role of government, with oral evidence sessions in June and July, including with the Minister, Rebecca Pow MP. I am concerned that the committee’s work on this is ongoing, because that suggests that it was not convinced by the Government’s current approach and response. Why does the Minister think the committee feels it has to continue with this work?

The noble Lord, Lord Cromwell, spoke about his concerns about the ability of the regulators and the department to deliver what is required. This was clearly demonstrated by the Environment Agency’s 2022 performance assessment and the diabolical rating of almost every water company, bar Severn Trent. My noble friend Lady Anderson took some SIs in September on broadening Ofwat’s powers, including allowing the regulator to impose unlimited fines on failing water companies. As this change was announced some time ago, and improved in the Commons prior to the Summer Recess, I ask the Minister when we will see the power used. Does he genuinely believe it will lead to different outcomes? We need different outcomes from what has been happening to date.

Also in September, we had the news that the OEP was looking at whether Defra, the Environment Agency and Ofwat acted unlawfully in failing to prevent water companies’ sewage discharges. The Environmental Audit Committee and its chair, Philip Dunne MP, have expressed concerns around this as well.

Ofwat published its latest annual water company performance report in September, which seems to be quite a busy month for the water industry. The report found that fewer than half of companies met targets in relation to sewage, which triggered a requirement for money to be returned to bill payers. Many noble Lords have talked about the fact that if bill payers are not being served properly, they should have some money returned to them. Does the Minister agree that the Government are at fault and that responsibility lies at the Government’s door for that situation? The Government cut back enforcement and monitoring of water companies releasing into rivers and the sea, and they are now not properly being prosecuted when they are blatantly breaking the law.

One of the committee’s recommendations was to increase the Environment Agency’s resourcing. In their response the Government noted the recommendation but argued that the inquiry was primarily focused on Ofwat, which, as I said earlier, has had extra funds. But should sewage discharge fines not be given to the Environment Agency so that it can expand its enforcement efforts? Does the Minister not agree that that would make more sense?

We believe that the right approach should be to put the water industry under special measures—basically to force it to improve its performance, as that does not seem to be happening otherwise. We believe that there should be mandatory monitoring of every water outlet. The noble Lord, Lord Cameron, talked about monitoring. The noble Baroness, Lady Jones of Moulsecoomb, talked about the importance of effective sanctions. We believe that there should be severe and instant fines for illegal sewage dumping and that the money raised should be used to fund additional enforcement measures.

We believe that Ofwat should be empowered to ban the payment of bonuses to water bosses unless their companies hit performance targets. We also believe that we should introduce criminal liability for water company directors whose companies break the law in an extreme and persistent manner. Again, this is something that I have raised with the Minister during Oral Questions.

As my noble friend Lord Whitty said, the current situation is a disgrace. I am starting to lose track of how many times we have debated this or asked Questions about this. As the noble Duke, the Duke of Wellington, said, it is time that the Government became genuinely more ambitious in this area, because it is really time that we stopped the failures of our water industry.

4.55pm
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 Cromwell (CB)

Either the Minister is agreeing with me or perhaps I was not clear. My concern is whether the water companies have the competence to implement these sorts of infrastructure projects. He has given a very fine example of a non-water company implementing the Thames Tideway. Will there be more of that? It seemed very doubtful that Ofwat had confidence in the water companies delivering these multi-billion pound infrastructure projects.

Lord Benyon (Con)

Multi-million pound infrastructure projects are being done by water companies; I will come on to talk about reservoirs. Some are doing them better than others; it would be a very strange world if they were all the same. The Government watch this matter very closely. We require investment and we want it done in the right way.

The noble Baroness, Lady Jones, who is shaking her head before I have even said anything, said that water companies should be fined; they are being fined record fines. One was fined £90 million last year.

Baroness Jones of Moulsecoomb (GP)

My Lords—

Lord Benyon (Con)

Perhaps the noble Baroness would allow me to finish. We passed more legislation in the Moses Room just the other day to ensure that unlimited fines can be imposed on water companies. I do not know where she has got the idea from that we do not.

Baroness Jones of Moulsecoomb (GP)

I thank the Minister for his response. My point was that water companies can pay those fines very easily; they just pay and they do not care. We should assess the amount of the fine and then take shares from the company to that amount. That would make much more sense.

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?
Lord Benyon (Con)

I hope the noble Lord heard me say that we have changed the rules. Fines by the Environment Agency are no longer capped at £250,000. They can be unlimited and there can be criminal sanctions for companies that break the law.

I think the noble Lord, Lord Sikka, said that £82 billion was paid. I might have misheard him. My understanding is that Thames Water paid its parent company £82 million to finance its debt, but it has not paid dividends to its shareholders in the last six years.

I will move on to the noble Duke, the Duke of Wellington. His recommendation for a changing landscape of regulation may well have its time. We need to review these things now and again. It is above my pay grade, but perhaps over time we should think about it.

To those who say that we are not resourcing the Environment Agency, I say that we have increased its annual spend by £2 million a year. That has produced nearly 50 enforcement officers looking at the quality of water. We want to see leaks reduced by 50%, which is an enormous number of litres of water, and have set out very demanding roles for that.

I come to the responses from the Front Bench. I have made my point about nature-based solutions and I hope the noble Baroness, Lady Bakewell, understood that. I say to the noble Baroness, Lady Hayman, that we will continue with this work. It is continuous; this is not an issue that is of a single moment in time. Our strategic policy statement to Ofwat showed an absolute step change in how we saw the regulatory framework for water companies. I suggest that she was slightly confusing Ofwat and the Environment Agency on enforcement. The Environment Agency is the organisation that enforces water companies; Ofwat sets the parameters and is the regulator.

Baroness Hayman of Ullock (Lab)

I was suggesting that some of the money given to Ofwat could be given to the Environment Agency for enforcement.

Lord Benyon (Con)

I will take that away. I think that they are both funded properly. I want to make sure we continue to do so and allow them to carry out the work the Government require of them.

I will just touch on the reservoir issue. The draft plans contain proposals for multiple new supply schemes, including nine new desalination schemes, nine new reservoirs including an addition to the Havant Thicket reservoir that is being built, 11 water recycling schemes, and many new internal and inter-company transfers to share resources.

It is not just water companies that need to take action to protect our water supply—it is every single one of us. That is why the Government’s Plan for Water sets out clear action to reduce demand. The game-changer in the Plan for Water makes it easier to build reservoirs. The new water resources—through the Regulators’ Alliance for Progressing Infrastructure Development, known as RAPID—and securing planning consent through the DCO process, including having water resources infrastructure as a national asset, are certainly making things better on that front. I hope we will see an easier process. The noble Baroness quite rightly raises Abingdon reservoir; that has been going on for more or less as long as I have been alive. I want to make sure that very important structures like that are built. We cannot just go through a circular process of planning inquiries, with very smart lawyers who delay getting important assets built.

With that, I think I have covered most of the points raised. In conclusion, I again thank the noble Lord and his committee for their detailed work on these important issues. I welcome the opportunity to debate these matters in the House. I have confidence that the plans that this Government have put in place will deliver the greater investment, tougher regulation and stronger enforcement needed to transform the water industry and ensure that the clean and plentiful water we need is available for generations to come.

5.19pm
Lord Hollick (Lab)

I thank all the speakers in today’s debate. The Minister can be in no doubt about the anger about what has happened in the water industry and the fury of consumers. He talked about companies not being prepared to reveal what their price increases will be. Well, they have just announced them, and they are going to be between 28% before inflation and, in the case of Thames Water, 61%. I am afraid they will fall on household bills. Nobody is hiding the cost of this neglect of investment. Since privatisation, £200 billion has been invested in the water industry, which is about £5 billion per year. I am not adjusting for inflation, but we have now gone up to £96 billion over the next five years, so we can see the sharp rise to cover the lost ground. I pointed out in my remarks that, at the time, inflation and interest rates were low and therefore the cost of repairing the roof while the sun shone was there for all to see, but I am afraid that the Government squandered that opportunity, and we all will pay the bill for that.

Motion agreed.