System of regulating water firms needs complete overhaul, MPs warn in damning report
A damning assessment of the water industry has been made by MPs, saying a poor regulatory regime and “a culture of excessive dividends and borrowing” has precipitated a significant rise in bills over the next five years.
The influential Public Accounts Committee, which scrutinises public spending, has today published a major report, which urges the Government to strengthen oversight of the sector.
“The environmental performance of companies is woeful,” the report said.
“Ofwat and the EA (Environment Agency) have failed to secure industry compliance.”
It comes at a time when there is a hosepipe ban in Yorkshire and much of the country, with bills expected to rise by, on average, £31 a year over the next five years.
MPs warned that based on current usage rates, England faces a daily shortfall of five billion litres of water by 2050.
At the same time, the PAC said, there are too many pollution offences for the EA, one of several regulators of the water industry, to prosecute them all.
Sewage spills have contributed to a situation in which no single river in Yorkshire is considered to be in good overall health, while Ilkley Beach is the most polluted waterway in the country.
The PAC has called for regulators to work urgently to ensure that money raised from
fines are rapidly reinvested into improving the system.
Committee chair Sir Geoffrey Clifton-Brown said: “The monumental scale of work required to reverse the fortunes of failing water companies is rivalled only in difficulty by the efforts needed to repair customers' faith in the sector.
“In the face of looming water shortages, steps must be taken immediately if the Government is to set the sector back on the right path.
“Customers are being expected to shoulder the burden of water companies’ failings, without being told why or on what their money will be spent.
“It is past time that we had a low risk, low return water sector, from its current farcical state of overly complex, sometimes unregulated companies, and a culture of excessive dividends and borrowing.
“There is also a lot to be done in the regulatory sphere, with a pressing need to improve and streamline the existing regulatory regime.”
In March, Yorkshire Water agreed to pay regulator Ofwat a £40m fine, and now, as a result, chief executive Nicola Shaw and chief financial officer Paul Inman will be banned from taking a bonus for the 2024-2025 financial year.
Government figures show that over the last decade Yorkshire Water’s CEO and CFO have taken almost £13m in bonuses, more even than those at under-fire Thames Water.
Yet, in the last seven years, the company’s debt has risen from £4.2bn to £6.8bn, requiring £275m to be spent each year servicing the interest.
That puts Yorkshire Water’s debt to equity ratio at 70 per cent, which Ofwat describes as unstable.
A Yorkshire Water spokesperson said: "We welcome the report from the PAC and agree that there needs to be a single guiding mind balancing the need for improvements with the impact on customers' bills.
“Of course, we are awaiting the final recommendations from the Cunliffe Commission and look forward to actively collaborating with Government to implement reform of the water sector.”
Sir Jon Cunliffe is leading the Independent Water Commission, which is the biggest review of the industry since privatisation in the 1980s.
In its interim report, it found “deep-rooted, systemic and interlocking failures” across the water sector.
It will also consider the future of the three regulators, including Ofwat.
An Ofwat spokesperson said: “We are clear that change is needed, and the Independent Water Commission is a key opportunity to help rebuild public trust, which is essential if we are to deliver our vision of a secure and sustainable water sector that acts in the best interests of customers, communities and the environment.”
An Environment Agency spokesperson said: "We take our role in protecting environment and regulating the water sector very seriously. Environment Agency monitoring, planning and regulation has driven the welcome increase in water infrastructure investment in the next five years.
“Our enforcement action has led to over £151m in fines since 2015 and we are conducting the largest ever criminal investigation into potential widespread non-compliance by water companies at thousands of sewage treatment works.
"We’re also modernising our approach to regulating the water sector, with more regulation and enforcement officers, better data and are on track to carry out 10,000 inspections this year."
The Environment Department (Defra) added: “The Government inherited a broken water system. But in just one year, we have put down the building blocks to clean up England’s rivers, lakes and seas. We have reset regulation to restore accountability and fairness through the Water Act banning unfair bonuses for polluting water bosses.
“In one of the largest infrastructure projects in this country’s history, £104bn is being invested to upgrade crumbling sewage pipes to clean up rivers in our communities.