Water Industry: Financial Resilience

(Urgent Question): To ask the Secretary of State for Environment, Food and Rural Affairs if she will make a statement on the financial resilience of the water industry.

Water is what makes life possible on our planet, and it is essential for our health and wellbeing, as well as for our economy, including the production of food and clean energy. The Government are taking significant steps to ensure that the water industry is delivering the outcomes that bill payers expect and deserve. Water companies have invested £190 billion since privatisation in 1989. In April, the Government published the plan for water, bringing together more investment, stronger regulation and tougher enforcement capacity for regulators in relation to those who pollute.

Ofwat and the Government take the financial resilience of the water sector very seriously. Ofwat is the independent economic regulator for the water sector and has responsibility for its financial resilience. The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and waste water companies. Ofwat reports annually on the sector’s financial resilience, and Ofwat’s latest annual monitoring financial resilience report shows that the water sector is financially resilient.

Market confidence in the sector is demonstrated by new acquisitions, such as Pennon’s purchase of Bristol Water, and by shareholders being willing to inject new capital. Ofwat has taken steps in recent years to strengthen the sector’s position. That includes action to update the ringfencing provisions in water company licences to better safeguard the interests of customers, and barring water companies from making payouts to shareholders and removing money or assets from the business if they lose their investment grade credit rating. Ofwat has outlined that water companies must be transparent about how executive pay and dividends align to the delivery of services to customers, including environmental performance. Since privatisation, total capital investment has outstripped dividends by 250%.

Thank you, Mr Speaker, for granting the urgent question, but it is a concern that the Secretary of State did not proactively make a statement to the House on an issue of such importance. Indeed, where is the Secretary of State? One of the largest water companies in Britain is potentially going to go to the wall, and the Secretary of State is missing in action.

It was clear to anyone looking on that a culture that allowed vital investment in ending the sewage scandal and tackling water leaks to be sacrificed in favour of a goldrush for shareholders was never sustainable. Just last year, as raw human sewage was being pumped out across the country, £1.4 billion was paid out to shareholders. Now, all that was warned about is coming to pass: leaks are leading to water shortages; sewage dumping pollutes our rivers, lakes and seas; and the only thing on the up is debt, at £60 billion. The Conservative party’s cycle of privatising profit, usually for multibillion-pound foreign sovereign wealth funds, and nationalising risk is not sustainable, and neither is it a fair deal for working people.

The news we are seeing is the result of the Conservative party’s failed “profit above public interest” experiment, in which it handed over the water industry at a knock-down price to private enterprise, together with the entire infrastructure serving the nation. That was almost unique to water. For instance, when rail was privatised, the tracks were not sold off. With water, however, the lot was handed over, with few safeguards for our national interest, our national security or bill payers.

When was the Minister’s Department first made aware of the financial situation at Thames Water? Has her Department had any reason to believe that those responsible at Thames Water would not be able to meet their licence conditions or legal obligations? If this means a taxpayer-funded bail-out, how much will that cost and how will it be paid for? What assessment has she made of the liability of UK pension funds that are invested in Thames Water, and in other water companies considered to be at risk? Given where we are, will she confirm her confidence in the financial regulator? Finally, given what we see with Thames Water today, does she have concerns about any other water companies, or does she consider this to be an isolated case?

In the Department for Environment, Food and Rural Affairs, we have our individual portfolios, and I am the water Minister. The Secretary of State has full confidence in her Ministers when sending them to the Dispatch Box.

The shadow Minister raised the issue of debt. For information, debt to equity fell last year by 4% in the water industry, actually making it more resilient. Since privatisation, capital investment in the water industry has been 84% higher than it was pre-privatisation—we need to get that out there and on the table.

In terms of Thames Water, it is not for me to comment on the individual financial position of a water company. We have an independent regulator that is doing that; indeed, that is what the regulator, Ofwat, is for. Water companies are commercial entities, and it is for the company and its investors to resolve any issues. The Government, of course, are confident that Ofwat, as the economic regulator of the water industry, is working closely with any company that is facing financial stress.

I call the Chair of the Select Committee.

Sewage treatment plants are all too often overwhelmed at times of heavy rain. As well as installing stormwater tanks, such as the new 4 million litre stormwater tank in Scarborough, does the Minister agree that we should do more to encourage homeowners to harvest grey water, which can buffer the effects of heavy rain, and use that for such things as flushing the toilet?

I thank my right hon. Friend for broadening the scope of the debate. We are in discussions with the Department for Levelling Up, Housing and Communities—many of these issues involve working with other Departments—on grey water harvesting and better using the rain that does fall. A farmer in Devon whom I visited was collecting all the water from his farm buildings roofs to supply his animals.

In assessing, as the Minister has explained, the resilience of the water industry, what assessment is she making of the impact on UK pension funds if a major company such as Thames Water fails, as is being widely suggested in the press?

There is a structure and a process for working through this matter. It is up to the individual water companies and the regulator working with them to ensure that they are resilient. That is why Ofwat reports annually on how resilient each water company is. If that flags any issues, Ofwat works closely with them, because we need our water companies to be fully functioning. We need to attract investment—a huge sum of money has been invested since privatisation, as I mentioned earlier—in infrastructure to give our customers the kind of service they deserve. We should also be mindful that it is not all piled on to customers; we have to share the load.

It is worth making the House realise that it was the Opposition who voted against the Environment Act 2021, which gave Ofwat more powers. Can my hon. Friend assure me that the water regulator Ofwat will be able to clamp down on excessive cash payouts and ensure that water companies put their customers first?

I thank my hon. Friend for pointing that out. He is absolutely right: whatever the Opposition say today, one of the measures they did not vote for in the Environment Act 2021 was to enable Ofwat to hold water companies to account where they do not demonstrate a link between dividends and performance. They must have sound performance and be performing for their customers, otherwise they cannot pay out their dividends.

The staggering complacency we are hearing from the Minister will come as no comfort to my constituents who were flooded out three years ago in the west London floods, which were the second 100-year event in less than a decade. If Ofwat has been doing such a good job in holding the water companies to account, as she is now apparently telling us, why are we in this situation? What exactly has Ofwat been doing?

It has to be remembered that privatisation occurred in 1989. We have had a succession of different Governments during that time, and it has been this Government who have accelerated clamping down on water companies and opening up transparency. The hon. Lady asks what Ofwat has done, and I will name just a few things. Since 2020, Ofwat has updated the licences so that if a water company loses its investment credit rating, it is barred from making payouts to shareholders. In July 2022, it set out additional proposals to increase financial resilience, including companies having a stronger credit rating. In March, it announced that it would take enforcement actions against water companies that do not link dividend payments to performance. We have done more than any Government before to ensure that we have a fully functioning, strong regulator.

On financial resilience, has the Minister taken the opportunity to consider the hotchpotch of policies coming from Opposition Front Benchers on the subject? Under their prescription, they would seek to take all the profit of water companies to invest in capital expenditure. That would undermine the financial resilience of those companies that rely on private capital for investment in tackling this problem. In the one part of the country where Labour does have responsibility—Wales—has she noticed that the sewerage overflows are almost double the rate per overflow pipe as in England?

I thank my right hon. Friend for pointing that out; I cannot support more strongly what he said. We have a private system, and Ofwat says that it is financially resilient. We need investment in these companies to make them function properly. Obviously, we need to hold the companies to account, but we need to see enormous investment. Everything in the Government’s plan for water, including the storm overflow discharge reduction plan, is fully costed. We are not pulling the wool over people's eyes; we are telling them clearly what this will mean and how it will deliver the water services that we need.

Thames Water, which is on the verge of going under, provides a quarter of the population with their water supply. When was the Minister told about its financial plight? What is the plan if the worst comes to the worst and it does go under?

The hon. Member is right that Thames Water supplies an enormous part of our population. Ofwat has been working closely with Thames Water, as it does all water companies, and the Government work with Ofwat, giving it our strategic policy statement on what its priorities will be. Overall, the water companies are considered resilient, and much work is going on behind the scenes with Thames Water to ensure that customers will not be affected. If necessary, there is a process in place to move us to the next stage.