Priorities for Water Sector Reform

We grilled the boss of Southern Water, Lawrence Gosden, about major incidents in my own constituency, when residents in Hastings and Rye were left without water for up to eight days. Proper provisions were not made during that time for residents, and communication was seriously lacking. In the Hastings water outage, Southern Water initially refused to cough up any compensation. After I grilled him about it in Committee, the chief executive agreed to reverse the decision and pay compensation. Our Committee has taken the learnings from such incidents to recommend that we have a clear set of guidelines to say what people can reasonably expect from the water companies during a major water outage—such as providing portaloos, showering facilities or food provision as the crisis goes on.

One water boss after another justified taking an eye-watering bonus while presiding over serious failure. They were always quick to justify the need for bonus cheques to deliver good performance, but had no answers for us about why their bonuses were 150%, while the lowest-paid frontline workers out repairing pipes and leaky mains got just 3% or 5%. Bonuses going up while sewage pollution incidents increase—the Committee is not sure how that meets the definition of performance-related pay.

At the heart of the issue is a perception that the water companies are prioritising profits over people and the planet. We found that the current structure of these companies is dominated by private equity and opaque financial arrangements that have been used to take debt to unsustainable levels. Some companies have clearly been bought by irresponsible owners who have prioritised shareholder returns over long-term investment and environmental stewardship.

We were also disturbed by how much of our water industry—a whopping 70%—is in foreign ownership, often that of countries regarded as hostile to the UK. Is it really in the UK’s national interest to have water, a critical piece of infrastructure, in the hands of our adversaries? Major changes are needed to bring about a fundamental shift in leadership. The sector is deaf to the crisis it faces. Vetting or vetoing of owners could be a first step.

We also believe that the commission and the Government should be open-minded about different ownership models. As well as publicly and privately owned businesses, options include not-for-profit enterprises, community interest companies, co-operatives and hybrid approaches. Regardless of the approach taken, other factors may need to be considered, such as the power to vet owners—a power that Ofwat does not currently hold. The commission should conduct a serious analysis of whether alternatives could bring about a culture that is better focused on public service, transparency and accountability.

We know that there is also a need for other changes. The report calls for tighter regulation of financial practices, including limits on debt gearing levels, better oversight over complex business structures and greater scrutiny of dividend policies. We also want to see changes in the regulatory environment, which is too complex and too ineffective. Regulators such as Ofwat have been found asleep at the wheel during the crisis, too often focused on processes instead of outcomes. The rise in pollution incidents shows that regulators need better resources and powers to properly monitor the environment and enforce environmental protections.

The price review process is not working either. Our Committee found that it must be reformed or replaced to better serve the interests of customers and the environment. It has failed to support the necessary investment in the sector and to maintain or improve the resilience of assets, and has allowed money to be siphoned off into bonuses and dividends instead of spent fixing broken infrastructure.

The sector and the regulators have woken up too late to the need for investment in that broken infrastructure, and customers are now bearing the brunt of a huge increase in bills that should have been spread over a longer period. It is the most vulnerable households that will suffer. We welcome the Government’s commitment to introduce a better single social tariff to protect those households and urge them to move quickly in introducing it.

This week, we took evidence from Sir Jon Cunliffe, and impressed on him the importance of seeking fundamental reform of a sector that is failing. This is a time not for tinkering around the edges, but for bold action to meet the expectations of people across this country. This report should serve as a wake-up call and a stark reminder of the challenges in our water sector. It is the first step in a long-term inquiry, but our message is clear: the water sector must change.

We welcome the efforts recently made by the Government and Ofwat to tackle some of the problems of governance, bonuses and financial mismanagement, including the recent announcement of a ban on bonuses for overseeing failure thanks to the new powers introduced in the recent Water (Special Measures) Act 2025. However, we urge the Government to go further. We need a system that puts people before profits, protects our rivers and seas and earns the trust of the public. Let us not waste this opportunity—let us build a water sector that is transparent, accountable and fit for the future.