Britain’s privatised water companies are escaping scrutiny by the regulator because there are “limited mechanisms” for checking whether the utilities are delivering on promised investment, according to an official government report.
Water companies are planning to spend £104bn to maintain and upgrade the system over the next five years, including £44bn of investment in new infrastructure.
But although regulator Ofwat scrutinises water company business plans, “there appear to be limited mechanisms for directly checking what has actually been delivered”, the 293-page report published by the Department for Environment, Food and Rural Affairs said.
“This has raised questions over whether money from customer bills has been used to deliver what was set out in the business plans agreed by Ofwat,” the report added.
The findings come ahead of a call for evidence and is part of an inquiry into the water sector led by Sir Jon Cunliffe, former Bank of England deputy governor. Billed as the biggest review into the industry since privatisation, the inquiry has ruled out nationalisation and is likely to focus on a regulatory overhaul, with the findings delivered in the summer.
Cunliffe, chair of the Independent Water Commission, said he did not believe the problems were “the inevitable consequence of a privatised regulated company model”.
Instead they were “due to factors including poor decisions and poor performance by companies, regulatory gaps, policy instability and a history of ad hoc changes that have left an increasingly complex system that is no longer working well for anyone”.
Environment secretary Steve Reed said: “Our waterways are polluted and our water system urgently needs fixing. I urge people to respond to this Call for Evidence on what needs to change to clean up our waterways and rebuild our broken water infrastructure.”
The review comes as water companies are under fire for failing to invest adequately in infrastructure while also paying out £83bn in dividends and taking on £74bn in debt, putting pressure on their finances.
Thames Water, which services about a quarter of the UK population, is fighting a temporary renationalisation under the government’s special administration regime.
To shore up the sector’s finances and deliver infrastructure improvements Ofwat has approved a record 26 per cent rise in average household bills to £603 this year, marking the biggest annual increase since privatisation.
But the report said there was no way of checking whether this would be used to improve infrastructure.
Although Ofwat requires companies to self-report annually on metrics including mains repairs, sewer collapses and unplanned water outages, these only track failures, rather than measuring the condition of assets, it said. In addition companies “do not appear to have comprehensive asset maps or asset health information”.
The replacement rate for infrastructure is also low, the report found. The majority of mains pipes were built prior to privatisation and their replacement rate has decreased significantly since 2008.
The replacement rate for water mains is 0.1 per cent annually, 10 times lower than the European average, while the replacement rate for wastewater assets is 0.2 per cent, three times lower than the European average of 0.6 per cent, according to the report.
If companies underspent the money allocated by Ofwat from customer bills, this was considered “an efficiency” by the regulator and the company got to keep some of the savings, the report added.
Companies “may have historically been incentivised to pursue a short-term cost efficiency approach where assets were only fixed when they failed rather than proactively maintained (‘fix on fail’)”, the report said.
In some cases the regulators lacked the capability and resources to do their jobs. For example, the Environment Agency was still using legacy IT systems for some functions, the report added.
David Black, chief executive at Ofwat, said it was “clear that the water sector needs to change”. “The Cunliffe review is a once-in-a-generation opportunity to help rebuild public trust,” he added.
