Water Commission Call for Evidence suggests prospective reform hotspots

How water is planned, managed, regulated and funded have emerged as likely areas for the reform recommendations that will follow from the Independent Water Commission, chaired by Sir Jon Cunliffe.

As it launched its public Call for Evidence last week, the Commission highlighted the following consistently raised issues from its initial private engagement with around 90 sector stakeholders:

• The need for strategic coordination across sectors impacting or interacting with water, because planning, regulation and investment decisions are often kept in silos.  

• The need for clear long-term planning, because the sector lacks a cohesive long-term plan.

• The complexity and volume of water industry regulation.

• Concerns about regulatory oversight, including where regulators’ remits overlap, where there are gaps; and concerning mechanisms to secure environmental performance and accountability.

• The need for fair and stable returns to investors, to ensure the industry is investible (see below).

• The need for an improved infrastructure resilience framework – particularly regarding asset maintenance and in light of climate change.

The Call for Evidence sought further input on these popular topics. 

Some key questions arising include: 

• Could a long-term national strategy give clearer guidance on priorities?

• How could cross sector planning be improved, and siloed decision making be integrated?

• Do current water industry planning frameworks reflect the right outcomes and incentivise the right actions? Could they be simplified?

• Should regulators’ responsibilities and structures be clarified to resolve overlaps and gaps, and if so, how?

• Is the price review process still adequate and effective?

• Could there be a stronger role for Government in holding regulators to account for their performance?

• How should regulatory oversight of the environmental performance of companies be strengthened?

• How is Ofwat handling its role in setting investor returns? 

The Commission’s work and Call for Evidence have been widely welcomed, although supporters of nationalisation have challenged the scope of the review, which is limited to improving the existing water system rather than fundamentally reconsidering it.

The Sewage Campaign Network, a coalition of grassroots campaigners for change which includes Windrush Against Sewage Pollution, Save Windermere, and the Ilkley Clean River Group, has set up the People’s Commission on the Water Sector to run in parallel to the Cunliffe Review. It intends to hold public meetings in venues across England to elicit views from the public, as well as an online meeting on international water systems.

The idea is to broaden the Independent Water Commission’s work in terms of engagement and scope. “The People’s Commission will not be hampered by pre-determined solutions,” its website says (https://www.thepeoplescommissiononthewatersector.co.uk/).

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Cunliffe on finance, investment and growth – by Verity Mitchell 

One of the Cunliffe Commission’s objectives is to “ensure the water industry regulatory framework delivers long-term stability and enables the privatised water industry to attract investment, maintain resilient finances and contribute to economic growth.”

While Sir Jon Cunliffe stated that he comes to review the water sector with an open mind, he has already concluded that, compared with the past, "investors increasingly view the water sector as high risk”. There will need to be change, he observed, in order to restore stability.

His expertise in banking and financial services is revealed in his understanding of how infrastructure is financed: "There is a perception among some commentators that the increase in debt has been a bad outcome. However, debt has an important part to play in financing company investment.”

Given the quantum of new capital needed to deliver significant environmental improvements, the water sector needs to be investible. Sir Jon said: "We need to restore the water sector’s low risk status, increase the stability and predicability of investing in water and rebuild confidence in a fair return on investment... Investors and the public need to know that the financial problems we see today in some water companies will not be repeated.” He continued: “Companies should clearly be held accountable for financial mismanagement, but unpicking who is responsible today is challenging.”

The Commission will be looking at the relationship between ownership models and investor types, as well as between company performance and resilience. Sir Jon said in his speech launching the review: “While there can never be absolute certainty and standards and society’s expectations will change, investors, in water company equity and debt, need to be able to trust that the regulatory system through time will be generally stable and predictable.”

Ofwat is already under scrutiny for previous regulatory decisions. "Ofwat appear to have historically approved some company decisions which have led to financial resilience issues (but) It is important to note that the UK government also only granted Ofwat the power to introduce new licence conditions without the consent of water companies (including conditions which relate to financial resilience) in 2021 (and now) Ofwat has begun to set clearer expectations on gearing through the price review."

However, the Commission identified a problem with Ofwat’s early diagnosis of financial problems in the sector: "Ofwat’s reliance on credit ratings may limit its ability to identify internal weaknesses at companies early and do not account for their own influence on credit agency rating decisions.”

Even in the Call for Evidence document, Sir Jon has already proved that he understands clearly the risk reward balance needed to make the water sector attractive to the capital providers.