A recent Parliamentary debate in the House of Commons on the future of the UK water sector saw calls for the water companies in England to be based on the Scottish Water public sector model or the Welsh Water ownership model with “democratic public ownership” via new consumer and employee trusts.

Gareth Thomas (Harrow West) (Lab/Co-op) who launched the debate, said although Welsh Water did not pay dividends to shareholders it operated in the private sector, with an ownership model that forced it “always to operate in the interest of its customers.”

He told MPs the water company had changed the way in which it raised finance in order to reduce the cost of credit, pointing out that Welsh Water now has the strongest credit ratings in the water industry, thereby reducing its financing costs and enabling even more future investment in its infrastructure and services.

Changing the private ownership model and the potential renationalisation of the water companies were among the key issues discussed in the debate which took place in the House of Commons on 22^nd January.

Opening the debate on 22nd January on the future of the water industry in England and Wales, Gareth Thomas said:

“Margaret Thatcher’s decision 30 years ago to privatise our water industry has created an expensive, unaccountable and unfair system. No other country has a fully privatised system of water and sewage services with so little competition. The resulting monopoly businesses are overseen by a woefully weak water regulator. Unsurprisingly, the consumer voice in England carries little weight against the interests of distant investors, whose decisions have seen water bills rise by 40% above inflation since privatisation.”

He told MPs that water companies have become “a desirable global financial commodity, bought and sold by big banks, international infrastructure investors, pensions and sovereign wealth funds. “

It was “striking” that total payments to shareholders were very similar to the total outstanding debt burden of privatised water companies, he added, with at least £48 billion in payments in the past 30 years and at least £51 billion in total debt.

“In the past Ofwat has not demanded enough investment from water companies”

During the wide-ranging discussion, Gareth Thomas commented:

“Much tougher regulation by Ofwat in particular, and ultimately an increase in the regulator’s powers, are required to bear down on the shocking levels of leakage, not least because the Environment Agency has said publicly that England and Wales could suffer major water shortages by 2030.”

He told MPs that ”in the past Ofwat has not demanded enough investment from water companies, given the scale of the rise in customer bills. It appears to have been asleep at the wheel under various leadership teams.”

The regulator should be given new powers to ensure that water companies encourage employee and customer participation in the democratic process, he said. The new employee and consumer trusts should also have a role in the scrutiny and decision making of Ofwat, with a scrutiny panel that reviews the operations of the regulator, led by consumers, and also playing a role in Ofwat’s appointments to its board.

2019 Price Review should “herald the beginning of the transformation to new not-for-profit owners”

Gareth Thomas said the current 2019 Price Review should “herald the beginning of the transformation to new not-for-profit owners.” In addition, legislation should be passed to embed the not-for-profit principle in the new not-for-profit water companies, with an asset lock to prevent demutualisation in the future.

“Wrong to turn clock back and pretend that there was some halcyon era of cheap water”

Acknowledging that there are good players and bad players in every sector, former water Minister Richard Benyon (Newbury) (Con) put up a robust defence of the private water sector, saying:

“It is easy to …give a malign picture of the whole operation of our water sector. …I am absolutely certain that we have benefited from privatisation. It is wrong to turn the clock back and pretend that there was some halcyon era of cheap water, exemplary customer service, massive investment and great environmental activity by companies in the days when they were publicly owned.”

“Those years of bad service, under-investment and environmental degradation must not happen again.”

He went on to warn about the potential scenario of a renationalised industry:

“I think about the head of a nationalised utility company going to see the Chancellor to plead for more infrastructure investment funds, only to be told, “Get in the queue behind the NHS, welfare, policing and schools”—the long list of public spending priorities that come before something that is now funded privately and by institutional investors.“…

“ Since privatisation, water companies in England and Wales have spent about £150 billion on improvements to the water service. That is infrastructure that had been absolutely ignored by public expenditure before it was put into the private sector. The companies now spend about £8 billion a year continuing with those improvements.”

“I welcome the fact that sovereign wealth funds and overseas investors want to invest in the United Kingdom. They do so because it is a stable and relatively low-yielding but relatively secure investment.”

Commenting on leakage levels, the former water Minister said the water companies had reduced leakage by a third since the 1990s.

“We are about to see an incredible increase in innovative methods of detecting leakage, and it is right that in the current price review round there is an enormous driver on those companies to crack down on it further.” he added.

On the environment, standards had dramatically risen, with the welcome return of wildlife to rivers that had been biologically dead since the industrial revolution.

The average domestic water bill of just over £1 a day was enough to get all the water required into the household, and all the sewage and waste water out.

“Bills went up immediately after privatisation to help deal with decades of under-investment” under public ownership

According to Richard Beynon, although bills went up immediately after privatisation to help deal with decades of under-investment when the industry was owned and run by the Government, bills had stayed “pretty much the same in real terms since 1994 after inflation” and were set to fall in real terms over the next few years. By 2025, bills would have fallen in real terms for a decade, he said.

Commenting on Gareth Thomas’ suggestion that “people are terribly dissatisfied with their water companies, he said that customer satisfaction levels for water and sewerage services currently stand at around 90%.

On financing, he agreed that “we should encourage companies to look at employee share ownership schemes, saying that the “whole concept of finding ways to democratise capital is a huge, rich seam that we could collectively work on.”

Nationalisation “could seriously damage service and quality of water in England”

However, he expressed concern about Labour’s proposals for nationalisation right across the sector, saying the party’s recently published plans in a publication called “Clear Water” stopped short of explaining how the big challenges faced by the water industry, such as climate change and an increasing population, would be addressed by its substantial re-organisation of structures and ownerships.

Richard Beynon warned MPS:

“If water is nationalised, it could seriously damage the service and quality of water in England. It could create a future in which decisions are driven primarily by short-term political expediency rather than the needs of customers, and in which the high levels of investment needed to improve services are not sustained. The result would be bad for customers, bad for the environment, and bad for the economy.”

Luke Pollard (Plymouth, Sutton and Devonport) (Lab/Co-op) said more debates were needed about the structure and operation of the UK water industry - latest statistics showed that there will be 4.1 million more people in the south-east by 2045 and by 2080 there could be an extra 10 million, saying:

“I do not think that Ministers are cranking the handle sufficiently to achieve the change that could be delivered to our water industry if we showed greater concern about pricing and about investment in climate change, flood and drought mitigation. Labour’s water proposals are pretty clear—and pretty popular, as it happens.”….

“I absolutely agree with the right hon. Member for Newbury that we need to guarantee the investment stream. There is a role for investment in our water companies, but our proposal is that the role of private ownership should come to an end.”

“Government supports private water sector model underpinned by strong, independent economic regulation”

In her concluding remarks in the debate, Dr Thérèse Coffey, the Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs said:

“The Government support a private water sector model, underpinned by strong, independent economic regulation.

“The industry plans to reduce leakage by 16% by 2025 and has set the ambitious target of a 50% reduction by 2050. Companies also plan to reduce individual water use by 2045, targeting 83% metering penetration and a per capita consumption of 123 litres, which would be a significant improvement on today’s average of 141 litres in England. We will hold them to account on those plans and we will take action ourselves. “

“Even though we expect that leakage will fall and demand will drop, water supply still needs to be increased. To ensure key infrastructure can be delivered on time, we are consulting on a draft national policy statement for water resources infrastructure, which will streamline the planning process for new large water infrastructure projects, such as reservoirs, desalination plants and water transfers. We expect companies to collaborate with one another on regional water resource plans that transcend company boundaries, to identify the most cost-effective solutions for each region and for the nation.“

Click here to read this week’s keynote Expert Focus article for Waterbriefing on how the renationalisation debate has set the mood music for PR19 by Colm Gibson, M.D. of Berkeley Research Group's London-based economic regulation practice.

Click here to read the House of Commons debate in full.