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The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Dr Thérèse Coffey)
It is a pleasure to serve under your chairmanship, Mr Gray. I congratulate the hon. Member for Harrow West (Gareth Thomas) on securing this debate through the Backbench Business Committee, and I thank Mr Deputy Speaker for selecting it.
The hon. Gentleman and many others raised a huge number of points, which I intend to address. However, I think I will have to edit my reply to add a few facts about dividend payments, leakage and other matters, because there seems to be a complete lack of understanding and an attempt to use averages everywhere. I appreciate that that may be beneficial at times, but we need to get into the granularity of these points as well.
Water is key to life, which is why it features so prominently in our 25-year environment plan. The long-term view for the industry is clear, including on matters of supply, leakage, demand, consumption, environment and the necessary investment in infrastructure. Those matters are well set out, and companies have to consider the 25-year environment plan when producing their own future plans.
The Government support a private water sector model, underpinned by strong, independent economic regulation. It has been 30 years since the privatisation of the water industry in England and Wales, but the industry has continued to evolve and has always been underpinned by regulation through Ofwat—particularly as the provision of water, unlike that of other utilities, was not opened up to the market for consumers. We have introduced competition for business customers, but all the evidence that I have seen as water Minister predicts that opening up the market causes bills to go up rather than down, at least initially. One of the reasons we support the model as it is—which is not to say that policy may not change in future—is to ensure that Ofwat continues to effectively challenge water companies. Back in 2009, Welsh Water was challenged by the regulator to reduce its bills, and indeed it did—it reduced its operating costs by 20% to make that happen.
Since privatisation, approximately £140 billion has been invested in infrastructure. That is equivalent to £5 billion per year—almost double the level prior to privatisation. Customer satisfaction levels have risen to about 90% and customers are now five times less likely to suffer interruptions to their supply, eight times less likely to suffer from sewer flooding, and 100 times less likely to experience low flow pressure than in the days when water was a nationalised industry. As my right hon. Friend the Member for Newbury (Richard Benyon) points out, they pay just over £1 a day on average for water to be delivered, treated and returned to the environment in a good state.
I recognise that bills increased significantly, especially in the first 10 years after privatisation. A lot of that was to gather the necessary investment. Average bills have remained flat over the past two decades, however, and are planned to fall by 4% in England by 2025. Some companies, such as Yorkshire Water, are keen to increase prices because they want to invest considerably more from an environmental angle, but that is a decision for Ofwat to agree or disagree to.
We are not complacent. I am very conscious that too much water still leaks out from our system. Significant investment is needed to improve the resilience of our water supply, and corporate and financial behaviours need reform. We have therefore challenged and will keep challenging the industry to continue to improve for customers and for the environment, as well as for shareholder returns.
People talk about dividends, but I am very conscious that the average dividend paid out has fallen: in 2008-09, under a Labour Government, I think it was £2.5 billion, whereas in the past year it was less than £1 billion. We are often accused of being ideological, but—dare I say it—when Labour was in charge, returns to shareholders were a lot more. We have taken action against that.
The hon. Member for Harrow West focused in particular on changing the ownership model of water companies. Although he did not seek to suggest that we nationalise the water industry, he is clearly a supporter of social enterprise and mutual organisations. I am very conscious of the experience he has had with Thames Water, particularly on dividends paid out and with the former owners. The owners have changed and I believe there has been a significant step change in approach, which is most welcome.
A lot has been said about what is happening in Wales. Following the original privatisation, the company covering Wales, which was called Hyder, had expanded into other sectors. After the new Labour Government’s windfall tax in the late 1990s—and other economic challenges—the company effectively collapsed and was acquired by Western Power Distribution. That focused the business and it sold the water division to the two founders of Glas Cymru for £1, with £1.85 billion of debt, and that resulted in Welsh Water.
As has been pointed out, the key difference for that company was that it was created by a small number of people. It does not have shareholders but is limited by guarantee and funded by the bond market, so it still has external financing. One of the ways in which it has adjusted its gearing is to hold very high cash reserves, which helps reduce borrowing. However, I do not think that we necessarily get better value for customers just through every provider having a not-for-profit system. I think it was the hon. Member for Islwyn (Chris Evans) who complained to Ofwat a few years ago that customers across the border in Herefordshire, who were supplied by Severn Trent, were paying a lot less for their water bills than people in Wales. While I am conscious that there is not the same pressure on water supply, I am aware that there are particular challenges in the network when it comes to sewerage. It is important to recognise the different catchments, river basins and sources of water on which different water companies rely. Some rely more on water that is gifted from the clouds; others, such as those in the east of England, extract more water. Getting that balance on what is needed right will vary around the country.
As the hon. Member for Plymouth, Sutton and Devonport (Luke Pollard) was correct to point out, traditionally South West Water has had the largest bills, which is a reflection of the amount of ongoing investment that that area still needs.
Richard Benyon
The Minister is making an extremely good point. People in the south-west had been pleading for years about the cost of cleaning up beaches and other infrastructure problems, but of course the Labour Government ignored those pleas. It was the coalition Government who got a £50 reduction for every single bill in the west country, which was extremely valued by water customers in the south-west.
Dr Coffey
My right hon. Friend is correct, and that has been considered. The balance is very important. However, we need to continue to challenge South West Water to make sure its investment is effective. The hon. Member for Keighley (John Grogan) talked about the challenges on sewage, and there are particular challenges in the south-west on aspects of combined overflows. We continue to press the company to make sure that it is maximising the investment on improvements.
Gareth Thomas
Will the Minister comment on two points? I mentioned in an earlier intervention that, since Scottish Water was set up in its current form, the price of water is 2% lower in real terms, while water bills in England have gone up by an average of 13% in real terms. Secondly, in the current price review, does the Minister intend to require Ofwat to significantly lower the cost of capital, which is included in the amount that Ofwat allows water companies to charge?
Dr Coffey
I am not aware that I have the power to direct Ofwat on exactly how it comes up with its cost of capital. My understanding is that it has reduced what it assumes to be appropriate for the weighted average cost of capital, but I expect the price review to be published shortly. I am due a briefing from Ofwat within the next week on that particular issue.
On prices, Severn Trent’s average bill is still lower than that of Scottish Water. I want to bring some facts into the debate. The need for ongoing investment in the water industry will vary around the country, as will what water companies put forward as necessary for the changes we require.
Ofwat has highlighted the benefit of modernising licence modification powers, after the Secretary of State asked it to look into what further powers it felt it needed. We are currently consulting publicly on that proposal and will make a final decision after the consultation. If we decide to proceed, we hope to bring that forward in a legislative vehicle in the next Session.
The Government’s strategic policy statement in 2017 set out the need to improve protections for vulnerable customers. To help water companies achieve that, the Government introduced data-sharing provisions in the Digital Economy Act 2017 to better identify those who may need help with their bills. Companies have responded positively to that challenge in their draft business plans. Between 2020 and 2025, they have pledged to reduce dividends and bills, increase investment to £50 billion, improve transparency on executive pay and increase the uptake of social tariffs by nearly 90%. Welsh Water’s level of investment is nowhere near as high as that of the average water company in England.
I am pleased that many water companies have set out how they will share profits with customers either directly or through community benefit schemes. They have set challenging targets to extend their support to vulnerable customers, including a commitment from Northumbrian Water and South West Water to eradicate water poverty in their regions.
The industry plans to reduce leakage by 16% by 2025 and has set the ambitious target of a 50% reduction by 2050. Companies also plan to reduce individual water use by 2045, targeting 83% metering penetration and a per capita consumption of 123 litres, which would be a significant improvement on today’s average of 141 litres in England. We will hold them to account on those plans and we will take action ourselves. In our water conservation report, which was published just before Christmas, I said that we would carry out a call for evidence and a consultation on the measures we can take to reduce demand.
Even though we expect that leakage will fall and demand will drop, water supply still needs to be increased. To ensure key infrastructure can be delivered on time, we are consulting on a draft national policy statement for water resources infrastructure, which will streamline the planning process for new large water infrastructure projects, such as reservoirs, desalination plants and water transfers. We expect companies to collaborate with one another on regional water resource plans that transcend company boundaries, to identify the most cost-effective solutions for each region and for the nation. That includes water companies considering other water users in their plans and working together where appropriate. The Environment Agency’s national framework for water resources will support that work.
It is important to recognise the regulators of the water industry, namely the Drinking Water Inspectorate, the Environment Agency and DEFRA, which itself continues to regulate on a small number of matters. They all have good powers to protect consumers and the environment.
The work of the Consumer Council for Water has been referred to. As the consumer body, its role is to hold the water companies to account on behalf of customers. It acts for both residential and business customers. We want to see a water industry that puts customers at the heart of the business, contributes to society and protects our precious natural environment. We will continue to push the sector and to hold it to account, to ensure that it achieves those objectives.