Water (Special Measures) Bill [HL]

Report

Welsh legislative consent sought.

Clause 1: Rules about remuneration and governance

Amendment 1

1: Clause 1, page 2, line 2, after “consumers” insert “and representatives from environmental groups” Member’s explanatory statement This amendment, in conjunction with another amendment in the Duke of Wellington’s name to clause 1, seeks to ensure that undertakers take into consideration the views of environmental groups alongside the views of consumers.

My Lords, I am honoured to be the first person to speak at the Report stage of this very good Bill. As I have said, I realise that this is not Second Reading, but I repeat my support for the Bill. I have already indicated to the Minister that I wish only to try to improve it in certain small respects.

In this group I have four amendments—Amendments 1, 5, and 6—and I have added my name to Amendment 7. I have tabled Amendment 1 because the history of the last 35 years shows that the environmental voice in decision-making has been insufficient. One has to admit that considerable damage has been done, at least to the aquatic environment, in the 35 years since the water companies were privatised. Mrs Thatcher, Prime Minister at the time, believed that privatising the water companies would in fact help the environment because there would be more investment from the private sector than if they had remained in public ownership. But I have to say that in that respect, she was wrong.

It was difficult at the time to imagine quite how the water companies would structure themselves financially in order to take out of the industry much in way of high interest payments and dividends. All I seek to do in Amendment 1 is to balance the consumer voice with a stronger environmental voice. I am grateful to the Minister for the several meetings I have had with her on this matter. I think that Ministers are broadly sympathetic to what I am trying to achieve in this amendment, but as is so often the case with Ministers, they prefer their own wording to any amendment that is proposed. I would like, however, to continue this theme because it is important. Amendments 1 and 5 in effect go together. We should ensure that the environmental voice is stronger in all future decision-making.

It is worth reminding the House what the Bill says. It requires relevant undertakers—the water companies—to

That is basically my point. I almost prefer the amendment from the noble Lord, Lord Remnant, because in the end what he proposes is that it should be left up to each company to decide whether it has special representation on a board or whether it has a committee or panel. That is a very sensible way to approach it. To leave that direction to officials in Ofwat seems wrong to me. Every company is different; its circumstances and financial condition are different. Each one should decide how it is able to hear clearly the interests of the consumer and of the environment. I would almost prefer to divide the House on his amendment than my own, which takes a different approach but achieves the same result.

That is basically my proposition in this group. I have other amendments in other groups, to which I will return later. I thank the House for hearing my arguments, which I hope will gather support from all sides.

My Lords, I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years between 2014 and 2022. I chaired the board’s remuneration committee for that time.

I thank the Minister for taking the time to meet me last week to discuss my concerns about key aspects of this Bill. I am only sorry that her apparent sympathy for at least some of my arguments has not translated into accepting any of my amendments. I have three amendments in this first group. I will be as brief as I can, but each addresses a completely separate issue.

I will take them in order. My first is Amendment 4. New Section 35B(2)(a) addresses performance-related pay. The rules will set standards that companies will have to meet in a financial year in order to be able to make awards of performance-related pay to chief executives and directors for that year. However, the Bill extends the scope of this section, in new subsection (5)(c), to holders of such other description of role with the water company as Ofwat may specify.

My Amendment 4 would remove this extended application to individuals below board level. This extension will be difficult to implement in practice, as different water companies will have individuals described differently by title and role. Nor would such an extension be consistent with general remuneration under the corporate governance rules for listed companies, which do not extend to individuals below board level. If we wish to attract and support the next generation of leaders in this vital industry from middle management, this will not be achieved by extending these restrictive remuneration practices to them.

As the noble Duke, the Duke of Wellington, has just said, those in this House are better qualified than Ofwat in certain aspects, and this is one of them: to decide on how far down the management chain these rules should apply. My amendment draws the appropriate and proportionate line in balancing the objectives of the Bill with the interests of those most directly impacted by it.

I will speak to Amendment 2 in my name, and I am most grateful to the noble Baroness, Lady Jones of Moulsecoomb, and the noble Lords, Lord Roborough and Lord Sikka, for adding their names to it. I will speak also to Amendment 8 in my name, and again I am most grateful to the noble Baroness, Lady Jones of Moulsecoomb, for adding her name to this amendment. Finally, I am sincerely thankful to the Minister and her officials for discussing with me these amendments and the two other amendments in my name, which will come up later.

Probably the most fundamental failure in our water industry is that the regulator either did not understand or was unwilling to investigate sufficiently the financial structuring of the water companies: how these structures and indebtedness were altered over time beyond all recognition from the original enterprises, and what the risks and impacts would be. If anyone is in any doubt about the results, they need only look at Thames Water, which is now all but drowning in fetid pools of ever more expensive debt, adding to its existing £16 billion of net debt so as to limp along from day to day and racking up huge future interest liabilities in addition to the principal £3 billion it is seeking.

This amendment is not complex or onerous, but it is vital. It requires simply that water companies report annually on their financial structuring, debt levels and any associated risks. Experience shows that such changes need to be explicitly highlighted in plain language. This will ensure that such alterations or liabilities are surfaced in a timely way and do not slip past, as they have done hitherto, perhaps buried in the financial reporting back pages, or simply not understood by anyone other than a forensic accountant with the time and enthusiasm to unpick the details.

The Minister may say that this is going to be covered by guidance, but the evidence shows that we need more than it being subsumed in general words outside the Bill. It is central to the issue and the mess that the Bill seeks to remedy. Unless we put this specific requirement in the Bill, it will, over time—just as happened in the years post privatisation—enable similar problems to evolve: problems that are now all but overpowering some water companies. Not to do this would be irresponsible, and above all would show that we have learned nothing from the sorry tale of some water companies and the importance of regular and comprehensible reviews of the evolution, or indeed revolution, of their financial structuring. As a minimum, it is an aide-mémoire, a marker that such matters are not possible to quietly put through under the radar of the regulators, investors and consumers.

However, there is another element here. I have been given to understand, to my astonishment, that there is pressure from so-called “upstairs” not to include this because—this is the amazing part—of a fear that it might “put off” investors. The department, regulators, investors and consumers all need to be absolutely clear on what financial structuring and debt commitments are being taken on, and if they are being altered. The water companies themselves would also benefit from being up front with the regulator and other stakeholders about the direction they are taking. To suggest, as it has been to me, that these matters would be better not specifically highlighted on a regular basis is to undermine transparency and obstruct the very due diligence that all stakeholders should be able to expect and that water companies should deliver.

This amendment will ensure that never again can regulators be unaware until it is too late for them to act of what financial strategies water companies are pursuing. If only they had intervened earlier, water companies could have been prevented from siphoning off huge funds to parent companies and being loaded with debt. I will listen very carefully to what the Minister has to say, but we need to help the water industry to help itself, and for that reason I may need to test the opinion of the House.

I turn now to Amendment 8 in my name, which is in the same group but on a rather different subject. Along with failing to notice the financial jiggery-pokery, the other major failing in the arrangements was the extent to which—so long as water was plentiful, clean and cheap—environmental issues and pollution took a distant back seat in the regulation of the water industry. The lesson here is that civil society, not the regulator, repeatedly raised—sometimes in co-operation with the media—the issue of river and beach pollution. I noticed on Monday’s news that local campaigners—again, not the regulator—have now brought to public attention that developers have apparently been discharging sewage from construction projects directly into the Thames. The regulator’s response? That it is not a matter for them.

A proper mechanism is needed for civil society to engage with the authority, and water companies, in order to raise issues of concern and have them noted and addressed—not via some occasional talking shop that can be ignored but by a regular pattern of meetings that the authority commits to that are minuted, with the minutes made public.