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The writer chairs the Independent Water Commission and is a former Bank of England deputy governor
“All happy families are alike; each unhappy family is unhappy in its own way.” The opening of Tolstoy’s Anna Karenina is how one might describe Britain’s water system.
Four months ago, I was appointed by the UK and Welsh governments to chair the Independent Water Commission, looking at reforms to the system. Each of the stakeholders I have met since is unhappy in their own way. But there is also a common and a powerful desire for change. Today, our commission launches an eight-week call for evidence. Aside from nationalisation, which governments have ruled out, everything is on the table.
In the current context it is easy to forget the achievements of the sector since privatisation, but it does matter. No longer the “dirty man of Europe”, the UK’s environmental standards have improved. We are a world leader in the safety and purity of our drinking water and sanitation. Water bills have been held down in real terms for many years.
But we face a major task. The public is rightly angry about the condition of many of our rivers and coasts. Investors increasingly view the sector as high risk. Companies struggle with the complexity of the regulatory system. Economic growth is held back because the system lacks capacity. And as the costs of providing safe water and sanitation inevitably rises with climate change, higher environmental standards and replacement of ageing infrastructure, the public, faced with higher bills, need to know they will get what they pay for.
Regulation is key to balancing the different demands on the water system and the commission is seeking views as to how it can be improved. This includes the responsibilities of the regulators — Ofwat, the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate — and how they interact. The system has increasingly become a maze as new regulations, planning frameworks and legal requirements have been introduced over time.
Economic regulation is essential for a natural monopoly like water. But economic regulation (based on industry-wide benchmarking and price reviews every five years) is now having to do much more to deliver public policy objectives than was originally envisaged.
There are questions, too, about environmental regulation: whether, for example, it is flexible enough to allow innovative solutions to improving water quality, and how to find ways to strengthen public confidence that the law will be enforced.
We are also exploring ways to resolve tensions and overlaps between regulatory structures. Lessons can be learnt from other sectors — the Prudential Regulation Authority and the Financial Conduct Authority, for example where two regulators work closely together. Or where a number of functions have been combined in a single regulator such as Ofcom or the Civil Aviation Authority. We are seeking evidence on all options to improve and clarify responsibilities.
The water industry needs to be investable to deliver the resilient infrastructure we need for the future. We know that there will be a quadrupling of new investment from 2025 to 2030 relative to previous levels. We need to restore the sector’s low-risk status, increase the stability and predictability of investing in water and rebuild confidence in a fair return on investment.
Investors and the public alike need to know that the financial problems we see today at some water companies will not be repeated. So we are looking at the relationship between ownership models and investor types, as well as between company performance and resilience.
Given historical decisions that have left some companies badly exposed, we are seeking views on how to assure the financial resilience of water companies, which is in the public as well as the private interest.
Finally, we need to look at strategic planning and management of water. Our water system has a great many demands upon it — the water industry, agriculture, industry and housing, to name but a few. We are seeking views on what role government should play in this. And, given that our rivers and catchments are regional and local, on how much should be determined at a more local level.
The commission’s challenge is to look beyond short-term fixes. It is to make recommendations that will equip a system for the future and, crucially, restore over time the trust that has been lost.
