Good morning. Thank you very much for coming, and on a personal note thank you to the Greater Manchester Authority for hosting us. It is very good to be back in Manchester.
I spent four happy and formative years here as a student, half a century ago. Manchester was a lively, energetic, and forward-looking place, and that has not changed. I have come back to visit in various roles and whenever I have, I am struck by how much the city has changed, how much it has regenerated itself and how much it has developed and grown in every sense of the word
And, in the same way as I have come back to Manchester, I find myself returning, after 45 years, to issues of water and the environment. The Secretary of State for Defra and Welsh Ministers asked me to lead an Independent Commission to recommend changes to reset the water sector and its regulation.
I should say at the outset, it’s a hugely important task and I am privileged to be asked to do it. The provision of water, and the quality of our natural water environment matters deeply to millions of people, many of whom marched in London for clean water last year and the organisers are here today. The organisers gave me this sample containing river waters collected from across all parts of Great Britain to remind me of the task and I have done that. I am very aware of the significance of this work.
My first job in the civil service, 45 years ago at the old Department of the Environment, involved working on the initial EU legislation on bathing water and industrial pollution of water – a time when the UK was generally regarded as the ‘dirty man of Europe’.
As with Manchester, much has changed since then. And we should start by recognising what has been achieved.
The UK has world-leading drinking water. We can drink from our taps without a second thought, 365 days of the year. That is not the case in many other developed countries. The UK ranks among the best countries in the world for sanitation related health.
In infrastructure terms, leakage is down by over a third since privatisation, 85% of bathing waters – the legislation that I worked on – in England are rated as good or excellent (compared to 28% in the 1990s), and there has been over £220 billion of capital investment in real terms in the system Environmental monitoring and transparency have also increased.
And, viewed over the last 40 years, these changes have not come with huge increase in costs to the public. Since 2014, water bills have actually fallen in real terms most years. It is difficult to think of many other things that you can say that for. For 2024 – 25 the average bill is estimated to be around £1.20 a day for both water and sanitation services – although, as we know, bills are due to rise more sharply and I will come to that in a moment.
But, those achievements notwithstanding, it would be very difficult to say now that we have a water sector, and regulation of water in general, in which the public have trust and with which the public is satisfied.
Or that we have sector that has kept pace with the increasing need to invest or kept pace with the public’s increasing expectations around the protection of our natural environment.
Or indeed, a sector in which investors, who need to finance the huge investment need, see as a stable and predictable long-term investment.
And of course not all water companies are the same, but something has clearly gone wrong when the largest water company in England is struggling close to insolvency, when there are criminal enforcement cases in train against pretty much all water companies, when a number of companies’ debt is rated at below investment grade, and when over a third of water companies are formally challenging the economic regulator’s decisions.
Over the last few months, since taking on the Independent Commission, I and the team here have engaged extensively with stakeholders on all sides of the debate about the water sector – with environmental NGOs, consumers, investors, water companies, regulators and Parliamentarians among others. There is, rightly, a great deal of anger with where the system is.
I have met no-one who is happy with the current system.
Of course, to paraphrase Leo Tolstoy, while all are unhappy, everyone is unhappy in their own way. But there is no lack of recognition that change is needed.
And, although there are different views on why the current system is not working – and, look, while I recognise that not all I have spoken with would choose the current model of a regulated private industry – I do think there is strong and widespread support for the proposition that the current model can be made to work better than it is working today. And there are no shortage of ideas as to how that might be done.
The Call for Evidence that the Commission is launching today reflects what we have heard in this initial period of engagement.
The Commission’s Terms of Reference are very broad and very detailed. Consequently, the Call for Evidence is both comprehensive and substantive (it runs to over 200 pages – although you will be relieved to hear that there is an Executive Summary).
The call for evidence is intended to do three things.
First, to set out the history and map the current arrangements. Second, to set out, as comprehensively as we can, all the issues that have been raised regarding the water sector – on all sides of the debate. And third, to set out the areas of possible change that we want to explore further and on which we would like to hear views and evidence.
And, because the Call is intended to be the foundation for our further work, it is the opportunity for all concerned to tell us if we have misunderstood, or if we have omitted, issues or that we should be exploring areas and ideas that we have not identified.
I should make one caveat very clear: the Call for Evidence is not a consultation on the Commission’s recommendations. Nor should you infer – or try to infer – from the Call what the Commission’s recommendations will be. We are, bluntly, not at the recommendations stage and we will not be there for some months.
Rather, you should treat the Call for Evidence as the opportunity to input your views – on the issues, on the areas for change and, indeed, on anything else – to give us a broad and deep foundation for the next stage of our work. And the Call will not be the end of our engagement. We will continue to engage and to test ideas with a range of stakeholders, and test our thinking as it develops, with support from an expert Advisory Group which the Commission has appointed, some of whom are here today.
I cannot, as I say, give you the Commission’s recommendations. What I can do today, however, is to set out the key areas we are exploring and where we think change is likely to be needed.
First, I have talked primarily about the water sector and the water industry. But the Commission’s terms of reference go wider than that. One very important task we have been set is to look at the strategic management of water in England and in Wales.
And we have one water system made up of river basins, aquifers, coasts. And there are many demands upon it: demands by the water industry, by the industry generally, by agriculture and by development, to take water out of the system and to put wastewater back; demands from the public to use that same water system for recreational purposes and to enjoy the natural environment; and the demands of the plant and wildlife that depend upon it for their very existence.
These demands often have to be balanced against each other and balanced against the costs they entail. Looking forward, climate change, population and economic growth and rising environmental standards will increase those pressures and make them more expensive to meet.
A very strong and consistent message that the Commission has heard is that there needs to be a better strategic framework to provide guidance at the national level for balancing competing pressures. At the highest level, this is a task only Government can do. And to be clear, this is not just about the setting of objectives – indeed the setting of objectives is the easier task compared to the much thornier job of providing guidance on how objectives that may not align should be reconciled.
Comparison has been made to us with energy, and the role that could be played by national ‘systems operator’ – an organisation responsible for managing and overseeing the entire system. However, I should say to a much greater extent than energy, our water system is made up of regional systems and local catchment areas. Water is just more local — and much more difficult to move around than electrons or gas molecules.
So, while many have commented on the need for a better framework at the national level, many have also argued on the need for stronger regional and local management of the demands on water. Under the Mayor’s leadership, Greater Manchester, where we are today, has pioneered a more integrated, holistic approach to the management of water at the regional level, and I think has highlighted the potential for such approaches.
The question of how these gaps in national and regional management of water should be addressed is not an easy one but is an important element in our thinking and one on which we very keen to hear views and ideas.
The second area I would like to highlight is the regulatory system for the water industry. You will not be surprised that this has been an area that has attracted major comment in the Commission’s engagement with stakeholders again from all sides of the debate.
Regulation of private firms exists in our economy and society to ensure that firms do not pursue their internal objectives at the cost of external, public policy objectives.
In the case of the private water companies, which are effectively monopolies, regulation has to encompass not only environmental protection and public health objectives but must also include economic regulation to prevent abuse of monopoly power.
As the private water system has developed since privatisation, and frankly as the expectations of the sector have increased, new regulatory and planning mechanisms have been added. These have aimed, rightly, to incentivise water companies to improve customer service and to improve environmental performance and to ensure that companies plan to invest – in the public interest – in necessary environmental improvements, future water resources, and better waste-water management and drainage.
Many have commented to the Commission on the complexity of the system that has resulted in a duplication between regulators and on a lack of responsiveness to regional and local priorities (I note in passing that that there were 93 separate statutory and non-statutory requirements driving water company investment in the recent Price Review, amounting to 18,000 individual actions for water companies).
In the absence of competition, economic regulation by Ofwat relies on ‘comparability’ to establish the industry wide benchmarks for efficiency and for performance that an efficient company should meet and uses that to set the amount customers should pay.
It is crucial, when customers cannot switch to other providers, to have an objective framework for incentivising efficiency and good service. But as the regulatory framework has grown, and as that has happened, increasing weight has been put on developing the comparability approach to set targets for an increasing range of outcomes. This, it has been argued, has not only increased complexity, but failed sufficiently to acknowledge the very real differences – differences of geography, demography, infrastructure – between water companies.
And many have also commented to the Commission on the tensions that can result when one authority is responsible for setting requirements for water company expenditure in line with public health or environmental standards and another is charged with responsibility for determining cost-efficiency with a view to protecting customer bills.
So, we’re very keen to hear further views and evidence on whether and how the system can be simplified, whether comparability mechanisms for setting benchmarks and targets could be supported by more company specific and regional approaches and how costs and benefits could be more closely integrated in the assessment of water company plans.
And on the environmental side we are also keen to hear views on the environmental regulation of water and how it is implemented, how it is monitored, and how it is enforced.
The Water Framework Directive, which is a successor of the legislation that I worked on all those years ago, inherited from the EU, sets a target to achieve good ecological status of water bodies by 2027. While this target looks likely to be missed by a large margin in England and Wales, it should not be forgotten how significant this legislation has been in driving improvements to our rivers, lakes and seas.
As we approach its target date, Government will, at minimum, need to consider whether a new, post 2027, target should be set and what it should encompass. The Commission has heard a range of views on whether the approach to water body quality should be widened to include public policy objectives beyond ecological condition, such as public health.
Stakeholders have also commented on the perceived lack of flexibility in the legislation which, it is argued, prevents nature-based solutions to improve water quality. There have also been extensive comments on the lack of mechanisms and resources to implement the Water Framework Directive, including how to ensure there is the necessary action from other sectors like agriculture and transport that have a major role to play in improving the condition of the water environment.
We have seen evidence that is in the Call for Evidence that the fragmented, sectoral approach to impacts on water body quality and the siloing of funding streams often results in interventions that are sub-optimal in terms of value for money and sub-optimal cost effectiveness. We are interested in views on how this could be improved and, in particular, the role that might be played by that local regional level of water management that I referred to earlier.
Finally, and really importantly, confidence that regulation – be it environmental, health or economic – will be enforced where necessary is a crucial key element to achieving and maintaining public trust in the system.
There has been a lot of action in that area. Strong and robust enforcement is needed to deter and punish but we have also heard of the need to ensure that enforcement and sanctions are not self-defeating but rather provide, as well, a route to redemption. The Commission is very interested in how the necessary level of public confidence in enforcement can be achieved going forward.
Turning to companies and investors, there has been significant change in the ownership of companies since privatisation, with a transition for many firms from publicly listed companies with ownership by retail and institutional investors to unlisted ‘private’ companies owned by private equity funds or international infrastructure companies. In Wales, reflecting a particular set of historical circumstances, a not-for-profit model was adopted in the 2000s.
There has been extensive debate on the link between ownership models and company performance. I have to say, initial analysis by the Commission has not thrown up a very clear picture of any relationship between company ownership models, including Welsh Water’s not-for-profit model, and companies’ overall performance on a range of metrics. But this is an area on which we are keen to hear more evidence and expert advice.
The possible exception is the area of financial resilience – the Commission is aware that decisions by a number of companies about structure and debt historically have left them more exposed – as we have seen in the extreme example of Thames Water.
Financial resilience in general is an area we want to explore further.
Water companies enjoy a licence to provide essential monopoly public services. They own and operate critical infrastructure. Given the importance of those services and that infrastructure, for which there are no effective substitutes, the licence comes with the obligation for companies to be resilient, financially as well as operationally.
Financial resilience is not, in my view, a matter solely for water company boards – any more than financial resilience is. In my experience, it’s not solely a matter for the boards of banks. The public interest in water company resilience must also be protected. Where there is a public interest, one hopes and trusts that the long-term resilience of the company is of as much importance to the board and owners as it is to the public. History unfortunately – in both the water and, for example, again in the banking sector – suggests that this is not always the case.
The capital structure of water companies, the amount of capital they hold that can absorb loss when risks crystallise, is therefore a matter in which there is both a private and public interest. As is the degree of flexibility and transparency that operating companies have in their financial arrangements more generally, for example in the case of very complex business structures. The regulatory system has developed new mechanisms in this area, in the light of experience in recent years.
The Commission is seeking views on whether those mechanisms provide adequate and, importantly, practical, workable means of providing assurance of financial resilience, and how account should be taken of the different risk profiles of different companies. Given that the risk profiles of companies generally is going to change as the investment in new infrastructure increases and becomes an increasing proportion of their business, this is an important area on which we need to look forward as well as learn from past experience.
There is, of course, another very important side to this coin. Water company owners need to provide the resilience to bear the risks, through time, that they can reasonably be expected to bear. But they also need to be rewarded, fairly, for bearing those risks.
And while there can never be absolute certainty and standards and society’s expectations will change, investors, in water company equity and debt, need to be able to trust that the regulatory system through time will be generally stable and predictable.
Those issues are particularly important given the very significant investment needs that have to be financed in the future.
The Commission is seeking views on how investor return should be determined, how the system can be made more stable and predictable and evidence more generally on how investment in the water sector in England and Wales compares to investment with a similar risk profile in other sectors and countries.
Finally operational resilience, which is as important as financial resilience.
We have heard a range of views on whether we have the right systems in place at both the regulators and in companies to assess the resilience of companies’ infrastructure and to fund replacement at the necessary rate over the long-term.
Questions have been raised over whether failure metrics give an accurate assessment of infrastructure resilience and more generally it is not always clear where regulatory responsibility lies. The long-term maintenance of infrastructure may not fit easily into the current planning regimes. I should note here that other countries appear to replace infrastructure at a faster rate.
The Commission would like to hear further views in this area, including on the case for setting national standards for infrastructure resilience as has been recommended by the NIC.
So, to conclude, I have been asked frequently over the last few months what outcome the Commission is seeking and whether we will be recommending evolutionary or revolutionary change.
The answer to the first question is that the outcome we need is an industry and regulatory system that is trusted by the public, by customers, and by investors to deliver world class, efficient services and the necessary quality of the water environment and that is trusted to do that sustainably into the future. And that is not going to happen overnight, of course, but I hope the Commission can provide the platform for it to happen over time.
The answer to the second question is that we will recommend whatever we think is necessary, in line with our terms of reference, to achieve that outcome.
Thank you very much.
