The Sainsbury Review of Science and Innovation has concluded the water companies have been forced to reduce investment in new technologies as a result of delivering price cuts.

The year-long review of the Government’s science and energy policies by former science minister Lord Sainsbury published on Friday has concluded that while  R&D spending by water companies remained relatively stable throughout the 1990s, after the end of the decade it has declined ‘sharply and continuously’.

The review attributes the decline to two main reasons:

I.  implementation of EU directives on water quality boosted R&D spending in the 1990s

ii.  the price regulation imposed by the regulator resulted in a 12 per cent drop in consumer charges in 1999 with water companies driven to reduce R&D spending in order to maintain profit margins.

Lord Sainsbury argued that the most effective way for Ofwat to stimulate an appropriate level of innovation and protect consumer interests in the long term would be ‘to introduce competition and withdraw regulation’.  The Review also expressed concern that ‘Ofwat, in particular, do not give sufficient consideration to innovation, and that in the long term this could impact on services to future consumers.’ The Review recommends that regulators like Ofwat and Ofgem should review their policies on innovation in their decision-making processes and that consideration should be given to how innovation could be incorporated into their duties.

The Prime Minister has said he will act immediately on a number of recommendations in the Report.