Water Companies: Financial Resilience

Question

15:09:00

Asked by

To ask His Majesty’s Government what assessment they have made of the financial resilience of England’s water companies.

My Lords, Ofwat monitors the financial position of water companies, taking action when companies need to strengthen financial resilience. Ofwat has strengthened its powers to improve financial resilience, including requiring water companies to stop paying dividends where that is compromised and preventing customers funding executive bonuses where companies do not meet performance expectations. Our water Bill will put water companies under tough special measures by strengthening regulation, as a first legislative step towards improving the sector.

My Lords, I welcome the Minister to her post but let me illustrate the problems by referring to Thames Water. Its shares are worthless and its bonds are close to junk status, while 38% of its revenues service £18 billion of its debt. Based on the debt to asset ratio, Thames Water has a gearing of 80.6%; Ofwat’s target is 55%. The debt to equity ratio used by credit rating agencies gives it a gearing ratio of 1,000%. No amount of regulatory tinkering can change the fundamentals here. The Government need to create some certainty by nationalising it, so can the Minister tell us when that will happen, please?

I thank my noble friend for his very warm welcome. However, the Government have no plans to nationalise Thames Water. It would cost billions of pounds and take years to unpick the current ownership model, during which time underinvestment in infrastructure and sewage pollution would only get worse. We want to improve the situation in the water industry that we find ourselves in as quickly as possible.

My Lords, I welcome the noble Baroness to the Front Bench, but does she accept that simply fining the water companies for not meeting their obligations just adds to the costs of the consumer? Until we do as we have done with health and safety, which is to make the directors personally liable, we will make no progress. Have the Government any plans to do this?

The water special measures Bill that we will bring in front of your Lordships shortly is going to deliver on our manifesto commitment. As well as strengthening regulation, it is designed to make sure that the water industry will be fundamentally changed and transformed. It will ensure that water company bosses are not rewarded with bonuses if a serious environmental breach is committed. It will strengthen and enhance the ability of regulators to bring robust charges against water companies and executives when they have committed offences, including through automatic and severe fines. It will also require that water companies install real-time monitors, so that we can actually see what is going on. I also reassure the noble Lord that this is just a start.

The Ofwat website refers to an £88 billion programme of investment that will go into the infrastructure, and describes this as “initially … funded by shareholders or through borrowing, with these costs then recovered” from consumers over five years “and beyond”. Does the Minister have any concern as to whether that money will actually be raised, and does she share my concern about the financial resilience of consumers to pay for it over time?

As the noble Lord quite rightly says, Ofwat has set out a record £88 billion upgrade so that we can deliver the cleaner rivers and seas, and better services for customers, that we need. It is absolutely not right that the public should pay the price for years of mismanagement in the water sector. Any water bill rises are the result of these years of failure, but it is important that we do not put too much on to vulnerable customers, so officials are exploring options for improving affordability measures in the sector.

My Lords, is Ofwat fit for purpose?

At the moment we are working closely with the regulators, including Ofwat, to ensure that they are fit for purpose and can deliver what is needed in the sector.

My Lords, further to the question of the noble Earl, Lord Attlee, I speak as a former non-executive director of Ofwat for a few months, and as a former non-executive director of the Environment Agency for a few years. Ofwat was always feeble. The Environment Agency has been rendered feeble by a cut in resources and asking the companies to report on their own homework. What is needed is a new and powerful single regulator for the water sector. Do the Government have plans, at least in the medium term, to move to that?

My Lords, we are working with Ofwat and the water companies to deliver change as quickly as possible. As I mentioned, the first thing we are doing is bringing in the water special measures Bill to try to change the culture within the water companies. We will work on another water Bill that will come forward, and I look forward to working with all noble Lords, including my noble friends, on what that could contain in order to make the biggest difference to the current situation.

My Lords, Thames Water is in a precarious state due not only to its financial position but to the poor quality of drinking water and sewage treatment facilities. Are the Government taking action to ensure that those living in the Thames Water area will have access to adequate and safe drinking water now and into the future while they sort out the financial issues?

There is no way we would allow there not to be safe drinking water during the current financial situation. The drinking water directive works extremely hard to ensure that we have safe water in this country. Although Thames Water clearly has financial issues, that should not be affected.

I too welcome the noble Baroness to her new post; I am sure she will be superb. How many water companies are currently financially resilient?

I thank the noble Baroness for her welcome. I am sure she has seen the environmental performance assessment that came out today. It reports that most companies continue to underperform and there continue to be a lot of concerns in this area. On the specific question she asked, I will write to her with the proper information so I know I am accurate.

My Lords, I also welcome the noble Baroness to her place. In response to the question of the noble Lord, Lord Sikka, she was very clear that the Government did not intend to nationalise Thames Water. However, can she clarify whether she is ruling out, or admitting the possibility of, special administration, which is contained in the current arrangements and is a means by which the shareholders and the debt holders who lost money would be cleared out and the company cleaned up, so to speak, for onward sale on a more robust financial basis? Is that contemplated by the Government as a possible route?

Currently, the regulator is working with the company to look at the best way forward, and the company is looking for further investment.

My Lords, speaking as a Thames Water customer who is not very confident or happy, I was pleased to hear that I might at least have drinking water going forward. All water companies are using financial engineering to overstate their investment and capacity to pay dividends. They all capitalise part of their interest payments, which is, frankly, a highly imprudent policy and was a major reason for the collapse of Carillion. Are the Government content with that?

There are clearly serious problems in the water industry that have been building up for a number of years. We are looking at all options and ways forward to improve the situation, and, clearly, modelling of how companies operate will be part of those discussions.

I join in congratulating the noble Baroness on her appointment. Picking up on the previous question, which is very much the point, is it not true that the shareholders of Thames Water and others have made extraordinary returns by financial engineering, well in excess of what one would expect to make from a utility, which should be low risk and low reward? In looking at the future structure, will the Government put in place measures to prevent the over-return to shareholders by means of financial engineering, and limit the upside so that utilities are run basically for their customers and not simply for the short-term gain of those who have them?

That is an extremely good point, and very well made. The problem is that we should have had firm action from government to ensure that action was taken much earlier so that money was spent properly on fixing the system, rather than paying dividends and bonuses to company shareholders and not looking at how the company was being financially operated in a way that worked for both customers and the environment.