A failing water sector in which “water companies increasingly look like financial institutions rather than businesses servicing monopolised critical infrastructure” is in need of “root and branch reform”, according to a new report by Parliament’s Environment, Food and Rural Affairs Committee.
The report says there is a cultural problem in the sector and call for “a major refresh of the incentives and drivers” and “much more regulated management of financial incentives for senior executives”.
MP’s are urging the Water Commission to consider a variety of models of corporate ownership, which they say “could offer a better culture of responsible leadership.” and want the Commission to “determine how regulators can better vet or veto potential owners of water companies to prevent bad actors from running critical national infrastructure”.
The report notes that bonuses totalling millions of pounds have been repeatedly paid to senior executives over many years, despite poor performance, which they say “seriously diminish trust” and may fail to incentivise improvement.
MPs want the Commission to consider reforms to “ensure that the right people are put into senior positions” as they call for greater oversight from Ofwat before appointments are made and bonuses are paid, as well as “clearer statutory expectations on the criteria for bonuses”.
The report states that “privatisation has almost certainly weakened the accountability of the water industry to the public”, noting that water data is often not public in practice. MPs want water companies to be legally obliged to publish performance, environmental and financial data on a regular basis.
There has been “serious economic mismanagement of companies” says the report which calls for greater regulation of debt accumulation and debt management, saying that “a culture of relying on debt must never be allowed to arise again”.
On the issue of dividends, MPs call for safeguards “to prevent egregious dividend payments” and say that examples of excessive dividends contrasted with poor performance, are “symptomatic of a culture of profiteering over duties to regulators and customers”.
Stating that “investors need to see stable but modest long-term returns”, the report stresses that the regulatory system should “ensure that services for customers and the environment take priority”. MPs say that dividends should correlate to a company’s performance.
On the question of special administration, MPs believe it should be a last resort given the high initial cost to government but say “it is unclear whether allowing a failing company to struggle on and accumulate progressively more debt is a better outcome than assuming temporary national control more quickly, with the associated costs that it could incur”.
During its inquiry, the Committee heard of instances of inadequate communication from some water companies during events such as water outages or raw sewage entering homes and was particularly concerned to hear of vulnerable customers not receiving the support they needed. MPs also say that “it is generally thought that levels of compensation after these events are too low and easy to avoid paying.”
Said the Committee
“The water sector has a serious culture problem. Water companies are the keepers of a vital national infrastructure. They exist to provide an essential service to the public and to protect the environment. But these primary functions seem to have been forgotten. Amidst growing public outrage at the poor performance of water companies, some companies have been paying out high dividends to shareholders and excessive bonuses to their senior executives.
“Water companies’ complex and sometimes impenetrable financial structures, with their myriad subsidiaries, holding companies and parent organisations, seem to suggest that their purpose is less to provide a good service to their customers and more to allow them to juggle their finances and their increasingly unsustainable levels of debt.
“Meanwhile, an ineffective regulatory system has failed to protect customers, the environment and the financial stability of the sector. It has failed to ensure that companies invest in essential infrastructure and it has not encouraged long-term thinking.
“This has got to stop now. Trust and accountability in the water sector are very low. It is not acceptable that it has fallen to commendable citizen scientists to expose issues with local water resources. Environmental protection and the delivery of a reliable and safe water must be the first priorities of water companies and regulators.
“We want the country’s water sector to be fit for purpose. Now and in the long-term. The Water Commission has got the opportunity to draw up the root and branch reforms necessary to ensure that the issues plaguing the sector are resolved. It must not shy away from bold proposals.”
