Water Industry: Financial Resilience Commons Urgent Question The
following Answer to an Urgent Question was given in the House of
Commons on Wednesday 28 June. “Water is what makes life possible on
our planet, and it is essential for our health and well-being, as
well as for our economy, including the production of food and clean
energy. The Government are taking significant steps to ensure that
the water industry is delivering the outcomes that bill payers
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Water Industry:
Financial Resilience
Commons Urgent Question
The following Answer to an Urgent Question was given in the House
of Commons on Wednesday 28 June.
“Water is what makes life possible on our planet, and it is
essential for our health and well-being, as well as for our
economy, including the production of food and clean energy. The
Government are taking significant steps to ensure that the water
industry is delivering the outcomes that bill payers expect and
deserve. Water companies have invested £190 billion since
privatisation in 1989. In April, the Government published the
Plan for Water, bringing together more investment, stronger
regulation and tougher enforcement capacity for regulators in
relation to those who pollute.
Ofwat and the Government take the financial resilience of the
water sector very seriously. Ofwat is the independent economic
regulator for the water sector and has responsibility for its
financial resilience. The sector as a whole is financially
resilient. Ofwat continues to monitor the financial position of
all the key water and waste water companies. Ofwat reports
annually on the sector’s financial resilience, and Ofwat’s latest
annual monitoring financial resilience report shows that the
water sector is financially resilient.
Market confidence in the sector is demonstrated by new
acquisitions, such as Pennon’s purchase of Bristol Water, and by
shareholders being willing to inject new capital. Ofwat has taken
steps in recent years to strengthen the sector’s position. That
includes action to update the ring-fencing provisions in water
company licences to better safeguard the interests of customers,
and barring water companies from making payouts to shareholders
and removing money or assets from the business if they lose their
investment-grade credit rating. Ofwat has outlined that water
companies must be transparent about how executive pay and
dividends align with the delivery of services to customers,
including environmental performance. Since privatisation, total
capital investment has outstripped dividends by 250%.
On 20 March 2023, Ofwat announced new powers that will enable it
to take enforcement action against water companies that do not
link dividend payments to performance for both customers and the
environment. In December 2022, Ofwat strengthened its powers on
executive pay awards by setting out that shareholders, and not
customers, will fund pay awards where companies do not
demonstrate that their decisions or pay awards reflect overall
performance. We support Ofwat’s work, and we urge all water
companies to take this opportunity to review their policies.
The scale of the Government’s commitment to the water industry is
highlighted by the integrated plan for water, and by our
commitment to the financial resilience of the sector in
delivering for customers and the environment.”
6.23pm
of Ullock (Lab)
My Lords, back in December last year, Ofwat outlined concerns
about the financial resilience of several water companies, and
now we see that the ratings agency S&P has negative outlooks
for two-thirds of the UK water companies that it rates because
they are overleveraged and beholden to too much debt that was
taken on in an era of low interest. How does the Government’s
assessment of the overall resilience of water companies compare
with that analysis? Have the Government looked at the impact on
customers of these financial deficits, and how will they
encourage investment into much-needed infrastructure in order to
secure reliable and sustainable water supplies for the
future?
The Minister of State, Department for Environment, Food and Rural
Affairs () (Con)
I thank the noble Baroness for her questions. First, this will
not impact on customers. Their bills are regulated by agreement
with the regulator, Ofwat, and we do not expect any reduction in
service—that is also strictly monitored. We think that investment
by water companies into our water sector infrastructure is
important, which is why we have agreed that there will be the
largest-ever investment—£56 billion—to see our infrastructure
further improve.
Since privatisation, £190 billion of capital investment has been
made. In real terms, that is twice what was happening at the same
rate prior to privatisation. We have also seen improvements in
the provision of water for customers, and we want to see that
continue. We look very carefully at, and work with, Ofwat and the
water sector on concerns about leverage—I share the noble
Baroness’s concern about some of the companies’ degree of
leverage. It is interesting that the level dropped last year from
72%, where it was in 2021, to 68%, which was roughly the same as
it was in 2005, having risen from 37% when the previous
Government were in position. However, Thames Water in particular
has a much higher leverage rate, which has rightly caused concern
for the Government and the regulator. That is why we are working
with it to make sure that it is viable. We believe that with £4.4
billion of liquidity in its business, it can trade through
this.
of Hardington Mandeville
(LD)
My Lords, Thames Water is not the only company causing concern:
Southern Water, Yorkshire Water and South West Water were
mentioned in the other place. Last year, £1.4 billion was paid
out in dividends. Meanwhile, sewage poured into waterways,
flooding affected many areas, and others had their water
delivered in bottles. Ofwat cannot solve these problems. Surely
it is time for the Government to take back control and sort out
this essential service.
(Con)
We think that the model that operates at the moment is the right
one. We have seen more investment, but if the Government took
back control, that would, in effect, put the onus back on the
taxpayer. That would mean that I or the Secretary of State would
have to get in the queue behind the health service, pensions, and
all other areas of government spending to get the right levels of
capital investment we need in the water industry.
We think that the £56 billion can be afforded at a relatively
modest increase of around £12 per household. For roughly £1.20 a
day, households receive the water they need and sewage and dirty
water are removed from their homes, and there has been a massive
increase in spending on the infrastructure we need, some of which
is still in need of changes. Through this model, we have
delivered a better outcome for the consumer and for the taxpayer.
We have concerns, and I share the noble Baroness’s concerns,
certainly about the issues relating to Thames Water and one or
two other companies. Ofwat has been proactive in trying to
resolve the concerns with those companies, and we are watching
the situation very closely.
(Con)
My Lords, I declare my interest as co-chair of the APPG on Water.
My noble friend will recall that alarm bells rang some years ago
when a number of water companies were based offshore in places
such as the Cayman Islands, which seems singularly inappropriate.
I congratulate my noble friend on putting in the statutory and
legal effect that dividends and bonuses must now be linked to
environmental performance. Does he imagine that that will have an
immediate effect or will it take some weeks and years before it
comes into force?
(Con)
I welcome the fact that overseas investors want to invest in our
regulated utilities sector. We must remember that actions that
Governments take on one element of the regulated utilities sector
can have impacts right across it, but I appreciate the comments
from my noble friend. We have introduced new legislation to
support our ambitions to bring into force stronger powers for our
regulators to tackle pollution and improve transparency with the
public so we can hold water companies and polluters to account.
Through the Environment Act 2021, we have also introduced a
statutory duty for water companies to achieve a progressive
reduction in the adverse impacts of discharges from storm
overflows. This is in addition to new, legally binding targets to
significantly reduce pollution from farming, wastewater and
abandoned metal mines; and the water demand target to reduce
leakage, increase the resilience of supplies and leave more water
in the environment.
(Lab)
My Lords, I should be grateful if the Minister can clarify two
points for me. In the other place, the Minister mentioned £190
billion of investment by water companies. That does not seem
right, because it appears to me that companies are capitalising
repair and maintenance costs, which is contrary to good
accounting practice. Could the Minister check on that? Secondly,
looking at the last two years’ accounts of Thames Water
Utilities’ holding company, I see dividends of £70 million, plus
£452 million interest paid on loans from other group
undertakings. That sounds incredibly suspicious and is a form of
profit-shifting and tax abuse. Please can the Minister get his
colleagues, or his own department, to look at those things and
report to the House.
(Con)
The £190 billion is the amount water companies, with regulator
approval, have invested in our water infrastructure. Thames Water
has not paid out any dividends to its investors, but it has paid
out dividends to its holding company to finance its borrowings.
In 2017-18, it was £55 million; in 2021-22, it was £37 million;
and it has since been, roughly speaking, around and between that.
The figure is lower this year than it has been in the past. It
has also recently secured from investors a further £500 million,
and, as I said earlier, its liquidity, at about £4.4 billion,
means that it is a viable trading company.
(LD)
My Lords, it seems to me that there is a real cultural arrogance
within the management of water companies, and a feeling that
however fast and loose they play with financial engineering, they
are too important to fail. Does the Minister agree?
(Con)
I can speak only across the whole range, and there are some very
good, well-run water companies and some to which, in the past, I
would have applied some of the words that the noble Lord used. I
think the message has really come home to roost, not least from
this place and the other place, but also from a general feeling
of anger among the wider population about the degree of
pollution. One reason for that anger is that we have provided the
public with the information, and I am extremely proud that we
did. We used to know about 5% of the sewage outflows; we now know
about nearly 95%, and by the end of this year it will be 100%. We
have made that information public—you can see it on Twitter
almost every day—and I am really pleased that people can hold
their water companies to account. I have certainly questioned
some of the practices of certain water companies, but I think the
model is right and we need to get behind it, as did the previous
Labour Government. I hope that all future Governments of any
persuasion will recognise that this is the best way to get
significant investment into protecting our environment for the
future.
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