An independent commission into the English and Welsh water sector would have been an excellent idea about 20 years ago. It is hard to pinpoint precisely when the industry went seriously off the rails but Ofwat’s infamous price review of 2004 is one starting point. That is when the undoubted gains from higher investment in the decade after privatisation in 1989 started to evaporate and the story turned into one of financial engineering and grossly inadequate regulation.
The 2004 settlement was wildly generous to the companies and kickstarted the disastrous take-private buyout boom by private equity and global infrastructure funds. Dividend extraction and “whole business securitisations” followed, tolerated by an economic regulator that, absurdly, took the view that sky-high debt levels and Cayman Islands financing vehicles were not its job to worry about.
Meanwhile, enforcement at the Environment Agency (EA) was stripped to the bone with inevitable consequences. A few high-profile pollution cases – usually involving Thames Water and Southern Water – did reach the courts, but campaigners and citizen scientists were correct when they said the rottenness went deeper. In 2021, when new data provided shocking evidence of mass non-compliance with wastewater permits, the EA and Ofwat finally had to confront the reality of the scale of illegal spills. That saga is still playing out in the form of fines.
So welcome to the show, Sir Jon Cunliffe, former deputy governor of the Bank of England, who will now lead a Water Commission with a sweeping brief to “strengthen regulation, boost investment and inform further reform”. Yes, it’s about time an independent big brain was deployed to dive into the mess.
The history of the past 20 years points to two areas for Cunliffe’s commission to start inquiries. The first is the regulatory setup, where the division of responsibilities between Ofwat (the economic regulator), the EA (part of the environment department) and the lesser-spotted Drinking Water Inspectorate simply hasn’t worked.
There is a fair argument that a better model would create a whole-system regulator, as happens in electricity. Such a body would set the long-term direction on new reservoirs, and so on, and provide a joined-up strategy beyond the five-yearly cycle of setting bills. That would help to counter the companies’ constant bleat that Ofwat never gives them enough money to build: an oversight regulator would say what’s needed.
Should Ofwat itself be abolished? It’s a popular cry but half the fury over pollution should be aimed at the EA, the folk in charge of enforcement. Lest we forget, the EA’s chief executive was claiming as late as 2019 that “water quality is now better than at any time since the Industrial Revolution”. That was only two years before the great 2021 stink.
Yes, the EA was underfunded, but one can equally say it doesn’t have the business mindset to sniff out corporate miscreants and should concentrate on its other tasks, such as flood defences, where it has performed better. That, conceivably, is an argument for putting environmental enforcement and economic regulation under a reformed Ofwat – whether it sits inside a whole-system regulator or separate from it. Whatever the architecture, Cunliffe should aim to create an environmental enforcement body that is feared. That is the top priority.
As for ownership, the commission has been told to rule out nationalisation. Good: it really isn’t an easy answer, as the HS2 debacle, overseen by a government department, a changing cast of ministers and an arm’s length state-owned body, should demonstrate.
There seems to be a political flirtation with the not-for-profit idea but, again, there are strong reasons to hesitate. Welsh Water’s two decades under such a regime has produced only a middle-of-the-pack environmental performance. In any case, converting to not-for-profit would surely mean paying the current owners, which is Labour’s objection to nationalisation.
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Instead, this column’s long-held view is that, under a privatised system, water companies belong on the stock market. Only three of the 10 that were privatised still have a listing, and nobody pretends they are all models of virtue (United Utilities’ woes at Windermere being the latest example). But, in the round, environmental performance has been better at quoted companies – boardroom accountability is easier to enforce, financial reporting is more transparent and borrowing is lower. Thames went wrong under Macquarie’s private equity leverage lash-up and then was holed under a slow-moving consortium of faraway funds that overpaid for the assets and attempted to manage by committee.
If Cunliffe can find a way to turn back the clock and prod companies back to the stock market, he’d provide a useful service.