In an Expert Focus article for WaterBriefing, Alastair Chisholm, Policy Director at the Chartered Institution of Water and Environmental Management (CIWEM) takes a look at why Ofwat’s draft determination drowns out early policy signals from Labour Government on water.

Alastair Chisholm: “Change has begun”, new Environment Secretary Steve Reed was at pains to stress after he met with water company bosses last Thursday (11 July) before Ofwat’s draft determination on water company business plans for 2025-30 was announced. He said increases in water bills allowed by the economic regulator were the “unacceptable result of years of failure”.

Four “initial” measures mark the start of a longer-term programme of reform for water. For now, and unsurprising given the proximity of the draft determination to Labour taking office, they focus on water and sewerage. They were somewhat overshadowed by the focus on campaigner and public outrage at the likely water bill increases, so are worth digging into a little more.

First moves

Funding for infrastructure delivery and upgrade is to be ringfenced so that it benefits customers and the environment. One of the sources of most outrage amongst the public and campaigners is the ongoing payment of bonuses and dividends whilst infrastructure upgrades lagged behind what was needed. This is clearly a policy designed to signal an end to any undue syphoning-off of money to investors.

If allowed (ringfenced) expenditure isn’t spent, then it will have to be refunded back to customers, presumably at the end of the spending period. This will need scrutiny by the regulator to ensure it is adhered to, as that back door was never intended to be open anyway. Perhaps some clearer rules on corporate structures might accompany this in due course.

Water companies will be required to change their constitutions – through their articles of association – to put customers and the environment central in their objectives. This – something already implemented by Anglian Water and recommended by the CIWEM-facilitated A Fresh Water Future review published in January – will need further clarity to ensure it actually translates into tangible action.

Ofwat should now work with the companies to develop bespoke purpose statements within their licences, making the commitments into regulatory requirements. These should reflect particular geographic, economic and demographic characteristics of companies’ regions.

They should also reflect a foundation of common principles, including a fair price for water, resilience, service reliability, customer and employee engagement and involvement in strategic decision-making, sustainability and environmental performance, and corporate structure and transparency.

Companies should be required to report annually on how this is driving change and outcomes in the company and the approach should be independently audited and considered annually as part of Ofwat’s annual performance assessment.

There has been much concern expressed over the fiduciary duties of private companies – primarily to their shareholders under company law – and how these align with the interests of the public and the environment. These duties have to consider the articles of association so this change, allied to regulatory purpose statements could, if properly implemented, represent the most pragmatic step in shifting corporate culture given a more radical overhaul of the industry (whether renationalisation or a move to not-for-profit) is far from on the Government’s agenda.

“Powerful” customer panels will be created, with the ability to summon water company board members and hold them to account on performance. Reed claims this is a historical first. The nature of this power needs clarity and there is no little scepticism amongst experienced industry figures who remember water consumer committees from pre-privatisation regional water board days, describing them talking shop disasters. The distinction between these panels and the current customer challenge groups will need to be clear and considerable.

Longer-term reform

The detail of what is to follow these first steps remains to be seen, but we must remember that the problem is bigger than just the water companies. Our infrastructure was simply not built for today’s population of 67 million. Without transformational change across the board, the decline in the health and resilience of water for our economy, society and nature seen over recent decades will not just continue, but also accelerate in the face of growing pressures.

So, reform must span the water sector, agriculture and land management, housing and urban water management, as well as infrastructure including the management of polluted runoff water from highways and other hard surfaces. It should enable delivery that incorporates wherever possible multi-functional, nature-based solutions into infrastructure delivery and land management, and it should be informed by a national land-use framework.

Invest in the skills to deliver

At the heart of this investment should be skills. Unless we invest in a bigger and more diverse profession, we will not be able to deliver transformation after years of under-investment, inadequate regulation and progressive decline in the health and resilience of our water environment. 

CIWEM’s members are extensively unhappy with the regulation and performance of the water sector, yet never before has their expertise been so critical to society and a fresh water future. Updated policy and regulation must be partnered with investment in skills to enable the effective delivery of such major infrastructure upgrades, unlock green growth as well as increased levels of green finance.