Regulators have failed to deliver a trusted and resilient water sector - NAO

The Department for Environment, Food and Rural Affairs (Defra) and water regulators have failed to drive necessary investment for the sector in the past and it now faces significant environmental, supply and infrastructure challenges, says the National Audit Office (NAO).  

The report audits the three water regulators (Ofwat, the Environment Agency, and the Drinking Water Inspectorate) and Defra, which sets policies for the water sector. It examines their effectiveness in driving operational improvements; ensuring the nation's future water supply and attracting necessary investments to meet government targets.  

To tackle the challenges, including an anticipated daily shortfall of 5 billion litres of water by 2050, the sector now needs to attract an unprecedented amount of investment. Ofwat anticipates a 70% increase in infrastructure spending, totalling £47 billion in the next five years. This is part of £290 billion required to meet government targets over the next 25 years. 

The need for investment coincides with a period of weakening financial performance, declining public trust and falling investor confidence. In 2023-24, Ofwat was concerned about the financial resilience of 10 of the 16 major water companies. 

Although there is no national plan, there are 30 major water supply projects in development, including nine reservoirs. Ofwat estimates these projects will cost an additional £52 billion to build. 

Over the next five years water companies must fulfil 18,000 actions to reach the Environment Agency's (EA) expectations on environmental performance – this accounts for £27 billion of the £47 billion enhancement spend. Out of the 8,780 actions completed by the water companies in the last five years EA has conducted site inspections on 1%.   

The regulators do not have a good understanding on the condition of infrastructure assets, as they do not have a set of metrics to assess their condition. On the work water companies have done, they have overspent for the last four years (some of these costs will be added to consumers bills) and moved slowly. At the current rate, it would take 700 years to replace the entire existing water network.  

The poor performance has led to a record low in consumer trust. The highest-profile cause of environmental harm is the use of storm overflows, where companies release untreated sewage into rivers and seas. 

The Environment Agency and Ofwat are taking enforcement action against every wastewater company over their management of sewage. There is no regulator responsible for proactively inspecting wastewater assets to prevent further environmental harm. 

The NAO report recommends that Defra must understand the costs and deliverability of its plans, alongside the impact they will have on customers' bills. Defra needs to address the gaps in regulatory responsibilities, and Ofwat and the other regulators need to work together to improve investor confidence and build consumer trust. 

Gareth Davies, head of the NAO, said:

"Given the unprecedented situation facing the sector, Defra and the regulators need to act urgently to address industry performance and resilience to ensure the sector can meet government targets and achieve value for money over the long term for bill payers."

ENDS
Notes to editors

1. The Department for Environment, Food and Rural Affairs (Defra) is the government department with policy responsibility for the water sector, and there are three regulators who oversee the companies. The Water Services Regulation Authority (Ofwat) is responsible for ensuring the plans are funded appropriately and offer a rate of return to investors commensurate with the risk. Ofwat sets the sector's funding envelope for every company every five years through the price review process. The Environment Agency regulates for the impact on rivers and other water bodies and oversees eight long-term plans and planning frameworks which water companies produce and work to. The Drinking Water Inspectorate regulates drinking water quality and oversees the Drinking Water Safety Plan.
2. Figures are presented in real terms in 2023-24 prices, using CPIH (Consumer Prices Index including owner occupiers' housing costs).
3. The rate of replacement of water mains has been 0.14% a year over the first four years of the PR19 control period, which – if maintained – would mean the entire network would be replaced once every 700 years. The average rate of replacement since privatisation was 0.83% or replacement once every 125 years (paragraphs 2.45 to 2.48).