Oral evidence: Reforming the water sector, HC 215

Oral evidence, 20 October 2026.

Witnesses

Dr David Lloyd Owen, Hugh Goldsmith and John Abraham.

Chair

Good morning and welcome to this meeting of the Environment, Food and Rural Affairs Committee. This morning, we return to our ongoing inquiry into the reform of the water sector, and we shall be dealing with questions around ownership of companies within the sector. We have three panels, so we are going to try to keep a good pace. For the benefit of those who are following our proceedings and for our own official record, I invite our witnesses to introduce themselves to the Committee.

Hugh Goldsmith

Good morning, everybody. I am Hugh Goldsmith. I am currently visiting professor at the College of Europe in Bruges, where I teach infrastructure, economics and finance. Before that, I was head of the water and waste management division at the European Investment Bank.

John Abraham

Good morning. My name is John Abraham. I am the chief operating officer for industrial water and energy at Veolia, covering the UK and Nordics. I am a civil engineer and a fellow of the Institute of Civil Engineers and the Chartered Institute of Environmental Managers. I have spent nearly 40 years in water, waste water and energy, across design and build operations and maintenance. My responsibilities include several major PFI contracts for Scottish Water, Northern Ireland Water and the Ministry of Defence. I will say more about Veolia later on.

Dr Lloyd Owen

My name is David Lloyd Owen. I have been following the water sector since the late 1980s, first as an equity analyst, and for the last three decades as an independent consultant.

Chair

Thank you all for your attendance. David, you said your experience goes back to the 1980s. That is a timely prompt because that is where—back in the mists of time—I want to start: believe it or not, I was still an undergraduate in 1989. I want to ask a question of David and Hugh; John, feel free to chip in if you feel moved. What were the problems with the logic of privatisation as it was carried out in 1989? What questions were being posed at that point, if privatisation was the answer?

Dr Lloyd Owen

When you look at privatisation per se, it was well expressed quite recently by Roch Cheroux, the new head of Dŵr Cymru, or Welsh Water: it is not necessarily the management model that matters, it is the regulatory model. There has definitely been a clear and present failure in regulation for the last 15 years, arguably for the last 20 years.

Hugh Goldsmith

Your question was about what problem privatisation was going to solve. The White Paper in the mid-’80s was clear that the objective was to provide benefits to the consumer. The benefits that were going to flow from privatisation included more efficiency, more innovation, and access to private finance. It was also couched in terms not only of customers becoming shareholders but of employees becoming shareholders and therefore interested in benefiting from the profitability of the company. That clearly took place in the context of the wider privatisation process.

Chair

Some of this would be driven by outcomes for customers—efficiency savings and the rest of it—and some was a political project around share ownership, which was part of the political zeitgeist at the time. Let us park the politics; we can do that. From the perspective of outcomes for customers, the drive for efficiency from the private sector suggests that there were inefficiencies. Were these problems somehow an inherent part of being in the public sector?

Hugh Goldsmith

I am not aware of what the specific inefficiencies were. I worked with the water authorities prior to privatisation; I worked with the water companies and the regulator after privatisation. The first thing that happened with the new water companies was that they started to look at ways of using all their assets more efficiently. For instance, they looked at voluntary redundancies to reduce staff numbers; they were clearly driven by an efficiency agenda in those early years. I was not aware of specific issues around efficiency. The other thing that is important to state is that they were borrowing from the Treasury or the Public Works Loans Board, and their finances counted on public sector borrowing. One of the big motivations was to take the investment off the public sector balance sheet.

Chair

John, you can bring in the private perspective.

John Abraham

In 1989 I started working in the UK water industry, and I remember fierce competition for funding at the time. Do we spend money on our railways, roads, public buildings, hospitals or water? Water got pushed to the end of the queue all the time and did not get funded. On the other hand, I remember going to what they used to call a treatment palace in the north-west. There was a lot of over-design, and no real focus on building efficient, fit-for-purpose solutions. So there was a big drive to get more efficiency in design and construction. The other element was that the whole of Europe was thinking about urban wastewater treatment Acts and trying to clean up. Primary treatment was the main source of treatment at the time; there was no secondary treatment—that came in in the ’90s, and the UK were the first adopters. We were far ahead of the game in terms of secondary treatment; we built the next generation of treatment plants very early in the process. Privatisation of the industry allowed funding to be focused on three drivers: quality, growth and performance.

Chair

This is a familiar tension: everything is important until there is a crisis in the NHS, and that is where the money goes. David, you spoke earlier about regulatory failure. How much of what has happened subsequently is a consequence of regulatory failure as opposed to ownership?

Dr Lloyd Owen

It is an essential factor. The regulatory history can be broken down to events in two crucial phases. Under Ian Byatt from 1989 to 2000, and during his final AMP3 period in 2005, there was an emphasis on increasing investment in infrastructure and its maintenance first. Post that, the regulator moved to what some would tritely call a cheap and nasty approach, whereby cost to customer overruled everything.

Chair

Just keep the bills low.

Dr Lloyd Owen

That is right. In terms of operating spending and maintenance, it remained static for 25 years, even though £200 billion of new assets were brought in. Ultimately that meant a lot of new assets were simply not managed or operated: they were allowed to stagnate.

Chair

Some studies show that the growth in value among water companies has been mainly funded by debt, not equity. With the benefit of 40-year hindsight, to what extent does that tell us something about the logic behind the initial decision in the 1980s? This is an easy question for the academics.

Hugh Goldsmith

It is clear that all the investment in the water industry was being funded by debt because when they were privatised they were debt-free. All the debt was paid off.

Chair

The debt was taken on to the public books; in fact, they were given a bit of a sweetener, of £1.5 billion, were they not?

Hugh Goldsmith

They were given a £1.5 billion green dowry. The companies started life with working capital from the Government, and they were debt-free. No equity was paid into the companies; the purchase price from the people who bought shares went to the Government. It was a transaction about the future value of shares, not an investment in assets. The companies started life with a clean balance sheet; therefore it was always going to be more attractive to fund all their investment through debt. Debt funding is the standard way that infrastructure assets are funded all over Europe: you borrow to invest. When the first regulatory review came out, it gave a regulated capital value that showed significant regulatory equity in the system; but that was created by the particular regulatory model—the indexed RCV—that was being used. There appeared to be equity in the companies even though equity had not been paid in for investment. Debt funding was always going to be the main game for financing actual physical investments.

Chair

This sounds like an accounting trick just to magic capital out of nowhere, or is that a misunderstanding?

Hugh Goldsmith

The RCV—regulatory capital value—model was developed in the Treasury by Ian Byatt; when he was working in the Treasury there was something called the Byatt report, which presented a way of making infrastructure assets attractive to private capital. One of the things it does is to take inflation risk away from investors—in effect, passing it on to consumers—because consumer bills go up by RPI every year, less any efficiency gains, and the assets inflate by RPI. If that is all debt funded, your equity value goes up over time, but cash is not being paid in to build real assets. If you were dealing with a greenfield project, you would do it on project finance: debt comes in, there is a slice of equity that comes in from the investors, and that is all capital that goes into building the project, taking on risk in delivering it, and the operations. In this case, that was not how the model worked.

Dr Lloyd Owen

At privatisation the credit rating agencies gave the sector two As, the second highest possible sovereign debt rating. Ofwat made clear in its next two periodic reviews that it was perfectly happy to have a triple B rating. One of the consequences was that the cost of capital—the coupon—rose, as did the debt; the more debt the water companies have taken on, the more expensive servicing that debt has been. There is an interesting contrast between this and Scottish Water. Scottish Water has as much debt in terms of its regulated capital value as the sector in England and Wales: however, the interest it pays is materially lower and that has an impact on its costs.

Chair

It has an impact on its stability. Keeping the focus firmly on customer outcomes, how would you characterise the broad trends in England since 1989 in 30 seconds or less? I am thinking about pollution, leakages, consumption, investment and customer service in the round.

Hugh Goldsmith

I have been drinking water from Thames Water for around eight decades; the quality of drinking water has not changed dramatically. There has been an improvement from 99% to 99.3%. The big improvement has been in in waste water treatment, as John mentioned. The introduction of European environmental regulations has driven much of the investment in the sector: the long-term objective of the water framework directive is to improve the ecological quality of water bodies. The drivers are towards environmental quality. There are people who are suffering from sewer flooding in their basements, but those numbers have gone down. Ofwat keeps various performance measures, and there have been improvements. The big impact has been around the environmental improvement of waste water treatment, and that is where the big investment has gone.

Chair

You are saying that that was driven by the water framework directive.

Hugh Goldsmith

First, there was the urban waste water treatment directive, then the nitrates directive and others—there is a whole web of directives governing environmental activities. Since 2000—in Europe anyway—there is the water framework directive, and that got translated into the UK. The aim is to achieve the long-term benefit of making all rivers of good ecological quality for fish and for our grandchildren to swim in without the risk of something nasty happening to them.

Chair

We touched earlier on the grand vision of a share-owning democracy in the 1980s: there would be employee share owners and a wider public share ownership. Yet in 2026, very few water companies are even publicly listed. My final question on this for the moment is, what impact has that had, and is it where we should be looking for change?

Hugh Goldsmith

I would say that the water industry has evolved in many ways. There was the multi-utility phase, where United Utilities was created as a combined water and energy utility in the north-east. Welsh Water tried to do the same thing in its link with SWALEC; that got turned into Hyder, which got into financial difficulties. There were strategic investors such as Veolia, Suez, and FCC; RWE—the German multi-utility—was an owner for a while. The 1999 price review—where the share price dropped below the capital value—was a critical moment for the industry. Since then it has been financialised: in the latter period, the major investors have been financial investors seeking to extract cash from the business and increase leverage.

Chair

It was a watershed moment for the industry, in terms of the way that the focus shifted from customer service to financial management.

John Abraham

Ownership is only part of the story. During the first third of the privatisation story, a huge amount of capital was put in to build secondary treatment—real, fundamental, basic treatment—to clean up our rivers and improve our drinking water. We build things in the water industry really well; the CapEx delivery is very good value for money. The problem now is how we are operating in maintaining the assets that we have spent the last 38 years building. The same people are operating the same assets the same way because there is an operational monopoly within a monopoly organisation. My company, Veolia, is the biggest water company in the world: it looks after water for 110 million people. If you get on the Eurostar and go to Paris, we are producing water for 4 million people there. Yet there is no market in the UK: I cannot deliver my world-class operational and maintenance services across England and Wales. I have some market in Scotland and Northern Ireland and the Ministry of Defence, but I have no market in England and Wales because it is operated and maintained by the same people the same way. That is where the problem is; not the ownership, which can be detached as a PFI is run.

Chair

We will call that a good-quality elevator pitch. We are going to move on to look at the experience elsewhere in the UK. Henry, you are going to lead the questioning.

Henry Tufnell

To crack on about Welsh Water, is it attractive to bondholders and can it attract debt at a competitive level?

Dr Lloyd Owen

It is a mixed story. Originally, we called it Gwaith Cymru, the Welsh way. The key element to Welsh Water—the Glas Cymru model—was that it was not for profit, therefore any surplus was either put into customer rebates or discretionary spending. Unfortunately, the actual performance of Welsh Water—on all the publicly available metrics—has not been a great success. I would classify the 10 water PLCs as follows. Wessex and Northumbria are owned by international utilities; they generally outperform the rest of the sector. The following three—Severn Trent, United Utilities and Pennon—are still market listed and perform on average. Welsh Water is below average. Finally there are the four private equity companies; they are dramatically below average, especially in the case of Thames. That is key. One has to have no sentimentality about ownership models: private equity has no other purpose than asset stripping. In the case of Welsh Water, there is no doubt that the finances have dramatically improved. When it was brought out of SWALEC, its debt was 93% of equity: it was a highly leveraged company. These days the debt is 53%, and it is the least leveraged of all the water companies, so that side has undoubtedly been a success. We had an honest moment last week when the new chief executive of Welsh Water spoke to the Financial Times. He previously ran Sydney Water, so he has a lot of experience in a state-owned company run on private sector lines. He said that, unfortunately, he believes that the Glas Cymru model is not delivering any specific advantage and is entirely dependent on the regulatory environment.

Henry Tufnell

The gearing is below average, at 62.8%; the credit rating is going down, so it has gone from A minus to triple B, with debt servicing costs equating to 25% of bills. With that financial situation, how will it get the money to pay for infrastructure?

Dr Lloyd Owen

It is the best rated company in the sector. One of the things you need to bear in mind is that the headline figures for debt are the lowest ratings; its overall debt is A minus to A. Anglian is the only other company that has an A rating on its senior debt, but debt rating is clearly one of the biggest challenges for the sector overall. There is a regulatory issue here: in the early 2000s, there was no ceiling on debt, which allowed Macquarie to gear Thames Water for up to 95% of its equity through various investment vehicles. That was a real issue for the private equity-owned companies. Now Ofwat says 65% should be the ceiling, and 55% gearing is desirable, so it is being brought down; but it is also evident that a lot of the gearing shot up after the 2008 financial crisis, when the cost of capital was historically low. We have now returned to normal levels, and the water sector is not equipped to finance those things without a profound impact on its profitability.

Hugh Goldsmith

Before the creation of Glas Cymru and the not-for-profit model, EIB was the biggest lender to Welsh Water, and subsequently it has been a major lender up until the UK left the EU and EIB lending became difficult to access. I checked online last night for information about the EIB’s lending—I want to make it clear that I retired from the EIB in 2021, so I am speaking on a personal basis. The figure I found online was £780 million; it has been lending amortising loans. The difference in many countries is that people borrow and pay it back like a mortgage. They do not take on long-term bonds that rely on their ability to refinance. That is what has caused the big problem for Thames right now: it cannot pay its maturing loans. Welsh Water took on a significant debt from the EIB, and I noticed that Tideway tunnel also took on long-term amortising loans. Once you have lost access to that source of finance—it is still the biggest source of water sector finance in Europe and possibly the world—then your national infrastructure bank should potentially be stepping in. In the Scandinavian countries, municipally owned companies largely run all the water services. They could not separately access the levels of finance they need, so they have set up a communal credit bank. Austria also has a credit bank. Public sector banks can channel the necessary funding for that investment. Welsh Water was doing that before and after it went into a not-for-profit model, but I do not know what the attitude of the National Wealth Fund is now towards financing the water sector.

Henry Tufnell

What about accountability within the governance structure? Glas Cymru as the holding company could have up to 200 unpaid members to hold the Welsh Water board to account; it has 47. Who are these people? It is not representative; there is no one from the Welsh Government, no elected individuals from consumer bodies, and no local authority involvement. We are owned by bondholders in Luxembourg and then run by these 47 people who answer to no one.

Dr Lloyd Owen

I was a member of Glas Cymru for 11 years. The selection is somewhat arbitrary: members are invited to apply, but as you say there is no actual representative mandate. The idea is to act as a proxy, a quasi-shareholder. They turn up twice a year to meetings and ask interesting questions, and that is as far as it goes. There is no other form of representation.

Henry Tufnell

In terms of interesting questions, leakage increased by 15% from 2019-20. The company has not met its target to reduce per capita consumption, and for three consecutive years it has been one of the worst performers in the sector for supply interruptions. Major missed targets remain. Presumably the interesting questions that are being asked do not pertain to performance because performance has been going south. Do you think that is a problem?

Dr Lloyd Owen

When I was first involved with Glas Cymru, I was an idealist: I thought it would be an exemplar for the rest of the sector. I am afraid that the reality has been a disappointment. There is a crucial issue here that does not apply to England: the 1999 devolution settlement meant that under Ofwat’s blessing, it reports directly to the Senedd, the Welsh Government. You cannot apply that model in England, because there is no regional devolution. For example, Kelda—Yorkshire Water in those days—also wished to become a mutual; Ofwat overruled that because it did not have the devolutionary element. It eventually got swallowed up by private equity, which was not in anybody’s interest.

Hugh Goldsmith

After the 1999 price review, the regulator effectively cut bills, and that was what pushed the share value below the regulatory asset or capital value. Several companies went to Ofwat to effectively de-privatise themselves. There was the Kelda proposal; Anglian and Southern Water had proposals. Some wanted to become friendly societies. The idea was to move to a model where the assets were owned by the public sector; the water companies would then take on the staff and operate the assets, moving much closer to the French model. That was being proposed by the industry itself. Ofwat opposed that until the proposal from Welsh Water; the reason, of course, was that it was perceived as being part of the devolutionary settlement. That was what the Welsh people wanted, therefore there was a way that they could create a not-for-profit model in Wales. Regarding the actual governance structure, I agree with you. I have worked for a company limited by guarantee: it is a strange governance structure. You wonder who it is accountable to.

Henry Tufnell

How do you think the Scottish model compares in terms of that accountability?

Hugh Goldsmith

I am not familiar with the exact governance model in Scotland. My understanding is that it is publicly owned—therefore there is public accountability—but I am not sure whether local as well as national Government are involved on the board. Historically, the previous stage was in 1904, when the water sector was being taken out of private ownership and the Metropolitan Water Board was formed. There you had representatives from local government plus the Thames Conservators, people who were democratically accountable for the area where the services were provided. In terms of that governance element, Scotland also has a different regulatory system, where the price settlement seems to be negotiated, rather than the confrontational version, where companies want this and Ofwat says that and ultimately the Competition and Markets Authority makes a judgment. The big difference in Scotland is that it counts as public sector borrowing. If you are trying to ensure that, as the French say, l’eau doit payer l’eau—water should pay for itself—there is this principle of full cost recovery. If people are generally willing to pay for it, then you want a structure that it is not on the public sector balance sheet but can none the less be publicly owned. There are many examples of that.

Dr Lloyd Owen

Scottish Water started off as 11 entities in the 1990s, which merged into four. They became Scottish Water in 2002, whereas England and Wales were merged into their current state in 1974. So there has been quite a bit of catching up on the rationalisation of Scottish Water. It has adopted the Ofwat model, in that it has an external regulator, but with a different relationship: it is indeed state owned and state funded for debt, but the company is run as a quasi public-private entity—in other words, it is supposed to generate a profit and so on. When you look at the actual performance metrics, by its own admission it outperforms the English and Welsh companies on certain metrics but underperforms on others. You have to bear in mind that Scotland has a completely different relationship with its water resources. It is a mixed picture: western Scotland has an embarrassment of riches, but eastern Scotland is as vulnerable as southern England when it comes to reservoirs and droughts. Scotland is not necessarily a paragon: it exhibits both the joys and the miseries of being in the public sector as compared with the private sector.

Henry Tufnell

Veolia deal with Welsh Water and Scottish Water. Our colleagues in the Scottish Liberal Democrats found overflow data for 12 sewer assets managed by PFI, nine of which are run by Veolia. There were 513 spills in 2023 across these assets. In terms of the workings of the public-private partnership model, how can that be? In Wales, Veolia has a contract with Welsh Water for the Five Fords waste water treatment works, and in Herefordshire—

John Abraham

I do not think we have any operations in Wales. We have Seafield, which is the catchment in the Almond Valley in Edinburgh, where there is a rigorous compliance regime. We face severe fines every time we breach our licence, but that has not happened because our standards are higher than those required by the regulators. There are various spills arising from storms, which are fully licensed. Three or four weeks ago in Seafield, we had a once in 300 years storm: we dealt with it very well. We work well with Scottish Water all the time. We have a lot of data that proves that where you almost ringfence a catchment and you have a PFI like we have with Almond Valley, Seafield and Esk, AVSE, which I think you want me to talk about later on, the performance is strong, efficiency is high and there is value for money. We have invested a lot of money into that plant: it is the biggest waste water treatment plant in Scotland. We produce 108% of the energy that the plant requires, and it is the only one in the whole of the UK that is a net exporter of energy. We will hand it back to Scottish Water in less than three years’ time, so the concession is coming to an end. We are proud of the performance of Seafield, but I can take that data away and look at it.

Henry Tufnell

Our friends at the Liberal Democrats identified 165 spillage events in Seafield in 2023, and long-standing complaints from local residents about smells from the plant. Is that a success?

John Abraham

If you are familiar with the plant, it is near Portobello Beach, in a very built-up area; it is the largest treatment plant in Scotland, so there is not zero smell coming from the plant. At certain times when the wind is blowing in a certain direction, there can be a very mild odour, and there are local residents who are unhappy with that. It is a well-documented and understood issue around the Portobello and Leith area. But if you compare the performance of our PFIs to other major plants in England and Wales, such as Beckton and Crossness, there is a positive difference.

Henry Tufnell

Is this a blueprint that other parts of the UK should be looking at?

John Abraham

England and Wales are already working with Ofwat on what it calls direct procurement for customers, or DPC. They are looking at major investments similar to the Thames Tideway tunnel. For example, Anglian Water is looking at a PPP model for desalination plants to ringfence the supply of drinking water from the sea. It is looking for separate finances, and Ofwat is pushing forward the direct procurement model.

Chair

David, picking up on your point about the relationship between the company and the regulator in Scotland, you contrasted Scottish Water—which is regulated by the Government body SEPA—with more adversarial relationships in the rest of the country. That might be a way of saying that it is a bit cosy in Scotland. Relationships south of the border have produced a remarkable range of metrics against which performance is assessed. How does that compare to the situation in Scotland? Is it the same or is it different?

Dr Lloyd Owen

One of the things you need to appreciate about Scottish Water is that it has faced a catching-up exercise since 2002: you could argue that England and Wales had a 10 to 13-year headstart. In practical terms, the key element to date is that the regulator has been much more amenable to increased costs and spending than in the case of England and Wales. With the current price review period up to 2030, that has now levelled out. The cheap and nasty model in England and Wales has been superseded. I would argue that the relationship between the regulator and the company in Scotland has been an exemplar for England and Wales, in that it has been more consistent and less confrontational about spending; there has been an acknowledgment about the challenges it faced and the fact that it had to deal with them.

Hugh Goldsmith

The debate about regulation and the conclusions from the IWC review have raised an issue about what happened, and what went on, with regulation. One of the most interesting interventions was from Professor Stephen Littlechild—the author of the English model—who went on to be the electricity regulator. He made a submission to one of the regulatory hearings—I cannot remember exactly which one—where he said that the model had failed. I think he described it as purgatory, with the regulator trying to outguess the companies in a five-year cycle that then just starts again. Ultimately, when people do not agree, they go to the Competition and Markets Authority for a decision. He argued in favour of the Scottish model because it is closer to the negotiated outcome that you get in some American regulatory systems.

Chair

The third section of this tutorial will look at the ownership and management of water outside the UK. Terry, you are going to lead the questioning on that.

Terry Jermy

We have already touched on some examples of ownership models around the world, and the Committee has received a significant amount of evidence and examples of direct public ownership, delegated private management and something in between. What approaches do you feel might work best for England, and what are their advantages or disadvantages?

Dr Lloyd Owen

The Glas Cymru model can be used as a template. While acknowledging its shortcomings, there is a lot to be said in favour of bringing in a sense of stakeholder participation.

Terry Jermy

That is the governance point you were making with Henry.

Dr Lloyd Owen

That is right. The Prime Minister’s allusion the other day to increased state investment in the sector is a way forward. Looking at this retrospectively, things such as private equity simply should not be allowed. Companies should either be owned by a sympathetic utility, as is the case in Northumbria and in Wessex: their parent companies operate other utility companies and understand them. Welsh Water is flawed, but it is a way forward. And the listed model is still appropriate. The crucial thing is to eliminate private equity from the sector, alongside reinstating a sense of public participation. I forget the exact year, but until the mid-1980s you had local council representatives on each of the water authorities. There used to be about 50 members on the board, and that was then cut down to 11; I think they were removed in 1984. That element of accountability is important: apart from anything else, it relates to the process of rebuilding trust in the companies. We have to appreciate that we have lost that trust. My greatest analogy here is the drought of 1976 versus ’95. In the 1976 drought, people stoically accepted standpipes. In ’95, a friend of mine was working for Yorkshire Water when it mentioned that it might have to use standpipes. He went to a garage, took out his Yorkshire Water company credit card, and the person next to him spat in his face. I do not think people realise just how fundamental, how crucial, that element of public understanding—stoicism, fortitude, whatever you prefer to call it—is for a utility. When it was lost, it was damning.

Hugh Goldsmith

I absolutely second what David has said. What are the objectives of this change? Rebuilding public trust has to be a fundamental part. There are many ownership models out there. You still get listed companies that are publicly owned; Acea—the utility that supplies energy and water to Rome—is listed on the stock exchange, but it is 51% owned by the municipality of Rome. Having been through this learning experience in the UK, the challenge now is what we should do next. Public ownership, or something like it, is probably what the public is expecting. That seems to be the zeitgeist. The question is, how do we get there? An example that no one has mentioned is Northern Ireland. I went there when it was looking for a large EIB loan to fund two projects, including Alpha, a project to build new drinking water plants to supply about half of the drinking water in the region. At the time, they were called PFI-type projects; they were both DBFOs. The company that delivered on Alpha—I think it was Kelda—did an amazing job. It found a way to redesign and rethink the way the project was going to be delivered, which cut the cost down from £156 million to £110 million. It was done as private finance: the EIB lent about 40% of the money, a Dutch bank lent another proportion and then there was some equity. The project was built, it worked, and the performance was outsourced to the private sector; at a certain point Kelda decided it wanted to withdraw from operating its non-core business, and it sold the equity to Northern Ireland Water. So it remains a private company—a project finance special purpose vehicle—but it is now owned by Northern Ireland Water, which has been able to achieve synergies through integrating it with other parts of its operations. So that is another way in which you can make that transition: the public sector can purchase equity. We have to get away from the idea that there is a perfect model, or that, “This is what they do there, so it’s what we have to do here.” These things evolve over time. You can try to learn lessons and see what could be done better, but I absolutely mirror what both John and David have said: you cannot look at ownership in isolation. You have to look at ownership, governance, finance and affordability as a package; these things have outcomes, ultimately, in terms of consumer tariffs and consumer perception that their opinions have an influence on the performance of the companies.

Terry Jermy

As a Committee, our task is to tease out those different ownership models and their advantages or disadvantages; fortunately we do not have to make a decision. Within the models we have looked at, there are clear trends about how different models serve different purposes, whether that is being better for the environment or better for customers. Are there any particular trends that the Committee should be particularly aware of? For instance, which model is better if we wanted to get strong environmental improvements, or is it not as clear as that?

Hugh Goldsmith

There is no particular model that gives you particular outcomes. A lot of academic research has looked at public ownership versus private ownership; there are certainly cases where you have a badly performing public sector and you can get big improvements. To go back to what John said, I have dealt with private water companies around the world, especially the French ones, and they are good at their business. If you package it as, “Will you operate these sewage plants for us, and will you design, build, finance and operate, or will you just design, build, and operate,” and you transfer risk through good contracts, the responsibility is then on a company that is good at doing that. That is separate from the ownership of the company. Globally, the dominant model is publicly owned, and then financing tools that give you what you need: long-term, low-cost finance that can feed into lower tariffs for consumers.

John Abraham

We are neutral as to whether it is nationalised or privatised. We do not bring capital, we save it. We are focused on operational and maintenance efficiencies at scale, and that is the opportunity we get in places such as France and around the world. There is nothing to stop the English and Welsh WASCs from taking a catchment and putting out an international tender to get the world’s finest operators and maintainers to come and tender over a 10 or 15-year concession period. They can do that, but they just don’t—nobody does. The only concessions we have are where the companies are nationalised. We have three PFIs in Scotland and one of the other PFIs that Hugh referred to. There was Project Alpha and Project Omega—Alpha was water, Omega was waste water, and we run Omega now. We look after all the sludges and bioresources in Northern Ireland and five major waste water treatment plants, and have done for the last 20-odd years. This is within English and Welsh capabilities; they would have to get Ofwat and regulator approval, but we do not understand why we do not have comparative models and we do not just operate and maintain everything the same way. The conversation needs to turn to the Cunliffe review recommendations, and the comments we made on alternative operation and maintenance models, where people have clear black-and-white specifications of what the expectations are in particular catchments. If you breach those expectations, you are instantly fined, as you are in a PFI; there is not some big, three-year court case, where the Environment Agency brings a CEO to court; there are instant penalties for failure, which drives regulatory compliance. It is more about the next tier of how you deliver the services, and the customer services, for the people of England and Wales.

Terry Jermy

Consistency is key.

John Abraham

It is about having alternative models; it is not one size fits all. In England and Wales, everything is delivered the same way; as Albert Einstein said, “Insanity is doing the same thing over and over again and expecting different results.” We are doing things the same way we always have; the model needs to evolve, and we need to bring private experts into the operation and maintenance arena, as we have with the CapEx arena. Look at how the CapEx industry has evolved throughout privatisation; you will remember the big process contracts in the ’90s, design and build, and the disputes. The water industry has developed some world-leading alliances. I am a founder member of the @one Alliance in Anglia Water; it is held up by the Treasury as one of the best major capital framework delivery references. We work well in creating the assets; why can we not turn to all the international and global experts to operate and maintain those assets for efficiency and for performance?

Terry Jermy

I am conscious of time; I will ask one more quick question. David, you spoke powerfully about regulatory failure. It is fair to say that few countries have privatised the sector to the same extent as England. One of the countries the Committee looked at was Chile, which is obviously a different context entirely. Can any lessons be learned from elsewhere in the world around how a fully privatised system could be better regulated?

Dr Lloyd Owen

We have to restrict ourselves to OECD countries because they are comparable. One of the most useful comparators is Singapore; water is state owned, and it has a problem: people use bottled water because they do not trust such excellent water to be so cheap. Their model has been that, although things are state owned, if the private sector can come in with something more efficient, then they are open to that. A lot of major projects such as desalination, water reuse and so on are operated by private sector companies, and the overall result has been a remarkably high quality of service. Then there is the Scandinavian model—in Denmark, for example. Danish water costs a great deal more than British, but that means, first, that the water and waste water industry is entirely self-financing: there is no debt. Secondly, the cost of the service has forced demand management into the public imagination. The average water consumption in Denmark is roughly 100 litres per capita per day, against 142 in England and Wales. It has created something thoroughly beneficial. Then you have hybrid models such as in Germany: roughly 25% to 35% of the population is managed by the private sector, but the assets are held by the state. Again, there are very high expectations of efficiency, service, delivery and cost. That is certainly worth looking at. The tricky thing about Germany is that—if memory serves me right—it has around 6,500 utilities. As someone pointed out when I was at the IWA conference in Glasgow last week, the smaller the utility, the more it becomes a princeling; transparency and data sharing are poor, but delivery tends to be excellent.

Chair

The outcome for the consumer at the end of the day is an important point on which to end. Gentlemen, those are all the questions we have for you at the moment. Thank you for your attendance. We will move on without any pause. Our next witnesses will join us online—technology permitting—and we will have a further panel afterwards, back at the table. Thank you for your attendance. You are welcome to remain or to leave, as you choose. Examination of witnesses

Witnesses

Dr Marine Colon and Professor Klaas Schwartz.

Chair

Good morning. Welcome to the Committee. Thank you very much indeed for joining us. For the benefit of those who are following our proceedings and for our own records, can I invite you to introduce yourselves to the Committee? Marine, we will start with you.

Dr Colon

Thank you and good morning, ladies and gentlemen. First, I would like to thank you for giving me the opportunity to contribute to your Committee’s work. I am currently a lecturer at AgroParisTech, which is a higher education institution that trains engineers in the fields of life sciences and the environment. I am also a researcher in public management and deputy head of the joint research unit called G-EAU, which gathers 100 researchers on different water matters. I am in charge of the annual survey on concession contracts in the water sector in France for the French Biodiversity Agency. Before being an academic for the last 10 years, I was and still am a state water engineer, but I used to work for the Ministry of Agriculture as a consultant to support local governments in the management of their water and sewage utilities in rural areas.

Professor Schwartz

Good morning, everyone. My name is Klaas Schwartz. I am a professor of water services governance at the IHE Delft Institute for Water Education in Delft in the Netherlands. I am also a professor of water services governance at the University of Amsterdam, focusing mainly on governance and management issues in relation to water services provision.

Chair

Marine, we will start with you for a few questions, if we may.

Sarah Bool

Welcome, Marine. It is lovely to have you with us online. We want to look particularly at the French model. We know that France uses a leasing or concessionary model for many of its water resources. Can you explain how that works and set out some of the advantages and disadvantages of this approach?

Dr Colon

I will start by explaining the broad picture so that you can understand where the lease contracts fit in. First, the main difference and characterisation of the French model is that local governments are responsible for delivering the water and sewage services. They own the water systems and take all decisions regarding investment. They have to look for funds to invest according to their long-term planning, and they organise operation and maintenance, which means they decide whether to create their own public water operator or go for a lease contract. We call them concession contracts nowadays, according to the EU directive. That contract is signed between the local government and a private operator. They agree on the duration of the contract and they agree on commitments that should be met to deal with the core issues and challenges that characterise this territory. This allows the private company to bill directly to the water users. With this money, it pays for its operation and maintenance costs. If there is a little investment that is included in the contract, it also uses this money to fund these investments. Most investments that are included in these contracts today are replacements of worn-out pumps, for instance—everything that is turning engines in treatment plants. There could also be bigger investments, which are less used today, but it is still a possibility; for instance, in Nîmes, close to Montpellier where we are, the city contracted with Veolia to add biogas to the generator in the waste water treatment plant. This is the kind of element that can be agreed on. The French model has around 22,000 water and sewage utilities; it is a lot. More than half are operated by public authorities, and they deliver water to half the population. This means that, compared with English and Welsh standards, our utilities are very small. We have only a few utilities that look like a standard English utility, around Paris, obviously. I am talking about Eau de Paris, SEDIF, and SIAAP. The situation may look like the situation in England before the Water Act in 1973. In France, 31% of water services are operated by private operators, but the regulation is very different from the one that you have talked about so far. We do not have a central regulator like Ofwat. The regulation is made when there is a private operator through the contracts. As mentioned earlier, if performance is not met, operators are fined. There are penalties included in the contract. There are some incentive mechanisms to make sure that the operators deliver what is expected during the duration of the contract. The state still has a role: to check that the drinking water quality and the effluents released in the environment meet the standards set by the state. An important thing to think about regarding the French system is the huge responsibility of the local governments.

Sarah Bool

In terms of advantages, there are so many smaller utilities, which means it is individualised and very personalised for the area. Do you see that as a benefit to the system, or do you think there should be more central regulation and larger organisations involved?

Dr Colon

There was an attempt at the end of the ’90s to bring in a central, big regulator. The project has now been abandoned. At that time, there was a crisis of mistrust due to a lack of transparency about the management of water utilities. This has been overcome by setting up a platform where water utilities have to share data about their systems and performance: main performance indicators. The main drawback of our system is that, as you pointed out, all these small water systems lack capacity in terms of expertise and in terms of financial capacity to face the current challenges that we face with climate change. The state has been trying to merge these small services. There has been a drive and we have dramatically reduced the number of water and sewage utilities over the past 10 years. There is still a long way to go to reach a size where it becomes more comfortable to tackle the current issue we are facing.

Sarah Bool

Looking back at the contracts, you said that if you need to maintain a performance level, there will be fines. Do you think private sector involvement has generally improved service levels, efficiency and investment?

Dr Colon

Are you talking only about the private operators or the public operators as well?

Sarah Bool

I do not mind. You can address both if you want.

Dr Colon

In terms of performance, we are doing quite well. Among the thousands of water and sewage utilities, I am not saying we are meeting targets perfectly everywhere. There are some issues in some places. We have very good public operators and less good public operators. There is a great diversity of situations. The main lessons that we can get from the French experience is, first, that we have to have a strong public sector where local authorities are able to really understand the main challenges that need to be addressed by the operators, set the right targets and so on. It is important to build this capacity within our local governments and authorities to improve and make sure that you can take advantage of a very good firm that is very experienced and can deliver. If you do not understand its work, or draft proper terms of reference, you will not get the best it can offer. The capacity of our local governments is key. Local authorities must be able to drive their operations. In terms of investment, we have an issue of under-investment. We are quite worried at the moment in the sector because the pace of replacing old pipes is not good enough. We know we are going to have to handle a lot of investments to adapt to climate change. The way we fund investments only through water tariffs is seen today as leading to a situation where water tariffs are going to increase dramatically. The model really depends on the volume of water that is sold because, as was said earlier, only water can fund water in France, which means only water bills can fund investments in the water sector. Since we know that we are going to have to reduce the amount of water sold, we are in a tricky situation and we are looking for a new model to fund our water systems.

Sarah Bool

Excellent, that was about to be my next question, so you have already answered that. We are having a big debate and asking questions here in the UK about how to fund things, with that under-investment. It has been mentioned that there are many cases where private contracts have been ended in France and the local authority has taken over control of the operations, such as Paris and Montpellier. What was the driver behind the taking back of those contracts?

Dr Colon

The root cause comes from the ’90s, when there was a big crisis of mistrust towards the model of concession contracts. Prices were going up very rapidly because there was a lot of investment to be made, as was said earlier, regarding sanitation to meet the standards set by the European Union; that was a great driver, and we could clean our rivers, but it is very costly. At the same time, utilities and local government relied on the private sector to bring money and expertise in the treatment and so on. At the same time, there has been a lack of transparency in the management and some cases of political corruption that you might have heard of. All this has created a lot of resentment regarding this model of involving the private operator. There has been a growing idea that we should move away from this model and trust more in the ability of the public sector to manage itself. This is one of the roots of many decisions to go towards building a public ownership of the operator, but it is not the only reason. It is not only the moral idea that it is not right to make money from the water business; there is also something else. At a time when water issues are so sensitive, there is a will by many big cities to keep control of the whole water cycle and to not think about water services as a separate topic from urban planning and other local public services or issues, so that they could also use water and sewage services as a way to develop sound local development policy for water-resilient territories. That is also a very strong driver.

Sarah Bool

Just very practically, in terms of if a local authority such as Montpellier is taking back control, what steps need to be taken in reality? What has to be done?

Dr Colon

In France, the first step is a political decision. Often it is during local election campaigns that a mayor is elected. The Montpellier mayor won on a programme that included the remunicipalisations. That was the first step. Then it was about creating a small enterprise in Montpellier at that time. In Montpellier, a 25-year contract with Veolia was ending. The issue was to find the right people—the head of the Régie—to recruit the employees, build an organogram, fund offices, equipment and so on. As I am sure you are aware, the issue of human resource management is key. In the case of France, it is interesting that we have a law that protects all employees of local public services. If there is a change, if a new operator takes over, whether public or private, the new operator must offer positions to the employees working in the utility so they can keep their jobs. This not only protects workers but also helps guarantee the continuity of service. For instance, in the case of Montpellier, the head of the water production plant chose to follow the Régie and not work for Veolia any more. It was very nice for the Régie to rely on this high-level expertise to guarantee that once it takes over, it will have the expert from the water treatment production plant with it. That is something that is tricky. Then at the end of the day, you get a Régie that looks like a small enterprise, with people coming from the ex-private operator and employees coming from other types of organisations. The challenge is to make all these people work together with common values. In Montpellier and in other cases, it is a great opportunity to involve citizens. In Montpellier, citizens have been involved throughout the process leading to the decision to create a Régie and to choose the type of Régie that should be created. On the governance board of the Régie now, there are seats for the citizens. Lastly, if the Régie is not ready to handle all the activities on the first day of operations, there is also the opportunity to outsource some activities to the previous operators. This is what happened in Paris and Montpellier. In Montpellier, the billing system and the call centre were managed by Veolia for the first years of operations until the Régie felt confident enough and developed its own system.

Sarah Bool

I have a quick final question because I am conscious we need to move on to the Netherlands next. Does the evidence suggest that this public control has led to better outcomes? Or is it too soon to tell?

Dr Colon

It is a tricky question because, to my knowledge, there is not yet really a study, and we should do it in France. It will be interesting. What I can tell you is that, in the case of Montpellier, for instance, the regime has been in place for more than 10 years, and is performing almost at the same level as before, under Veolia. It is able to invest a lot; a new water production plant has been delivered recently to secure the supply in Montpellier. Often, the worry with public operators is whether they can innovate and keep a high level of expertise. In Montpellier, it won an EU-funded research and development project to develop a mobile unit to develop waste water reuse to flush out the networks, and for diverse uses in the city. It is evidence that the public sector can also go towards innovation.

Chair

We are going to move on to some questions regarding the Netherlands experience.

Josh Newbury

Morning, Professor Schwartz and Hartelijk dank for taking time to be with us this morning. We are really interested as a Committee to look at the example from the Netherlands, because you have relatively large regional water companies, which is similar to the system we have in the UK, but different. In the Netherlands they are owned by local authorities, and in the UK we do not have any involvement with councils in water. To begin with, could you give us an overview of how the Dutch model works, and what you see as the benefits and drawbacks of that system?

Professor Schwartz

The Dutch model is currently more or less enshrined in the Dutch Water Supply Act, which dictates that water utilities are essentially organised as private companies, but the shares have to be owned by public entities. Historically, because we came from a situation of having municipal water utilities, it means that for these private companies that provide water services, the shares are owned by either municipalities or provinces. The Water Supply Act also dictates that these companies have a security of supply that they must guarantee and have a duty of care for the infrastructure they own and use to provide services. They are private companies but owned by local government shareholders, so the idea is that they combine a degree of autonomy for the water utility to make decisions that are in the best interest of securing supply and maintaining the infrastructure, while having the shareholders be local government means that they are going to particularly focus on the level of services that are being provided to the consumers and on the tariffs not being too high.

Josh Newbury

That Act of Parliament sets the rules for the whole system; everybody knows what they are working to. Is there a feeling that that is a bit restrictive? Does that restrict innovation, or do people feel that it is a safety net that they want to keep in place?

Professor Schwartz

Until recently, it is a model that has worked very nicely in the Netherlands. We of course also went through the 1990s with questions about efficiency. That is still a question that remains. On the one hand, the advantage of the model is that it creates a distance between the public shareholders and a water utility, which basically operates relatively autonomously. On the other hand, the disadvantage is that you have a model in which you have shareholders that are at arm’s length, and a utility that operates relatively autonomously. A lot depends on how the utility fills that role. The challenges for the Netherlands will especially come in the near future. The challenges facing the sector with droughts, such as we had last year and for the previous four or five years, are highly problematic. Newly emerging contaminants are problematic. We are also at a stage where a lot of the infrastructure and investment from 50 years ago needs to be replaced. This is something that is just developing. The big question is how the model will fare under these pressures, because one of the things that is going to happen is that the tariffs are going to increase. In 2022, we paid €1.90 per cubic metre. This year it is up to €2.70 and it is likely to increase further in the future given the challenges we are facing.

Josh Newbury

That was going to be my next question: what is the public perception of the cost and levels of bills? Is that a big part of political debate in the Netherlands at the moment? Are people very dissatisfied with those charges? Do they feel that it is an important, necessary investment?

Professor Schwartz

Consumer trust was also referred to earlier. Dutch consumers of water supply services have a great deal of trust in water utilities. If you go out on the street and ask people, “How much do you pay for water?” I do not think anyone could actually tell you what tariff they pay. I work in a water institute. If I ask my colleagues, it is unlikely that they will actually know how much they pay. The tariff is also relatively low because other services are much more expensive: electricity and gas. In comparison, water is not something that consumers think about, other than that they want to be able to open their tap at any given moment of the day and the water that comes out needs to be good quality and potable. The water utilities understand that the trust of the consumer is extremely important, so they are also investing in maintaining that trust.

Josh Newbury

Public trust in the UK is in a very different place with most of our water companies. We are very keen to get your insights on that. I want to ask you about the fact that local authorities play such a big role in the water system. I know from being a member of a local council previously that anything that the council touches can potentially become a point of political debate. Is there any politicisation of that system in the Netherlands? Is it a feature of local election campaigns, as Dr Colon was referring to in France? Or is this something that, as you said, everyone trusts is being dealt with well and they just leave it alone and focus on other issues?

Professor Schwartz

One major difference is that in the Netherlands we have regional water utilities. Marine was talking about situations where one municipality decides. If you have one Government shareholder, it is easier to politicise decisions about water utilities. In our case, for example, if I look at a utility such as Vitens, it has five provinces and 92 municipalities as its shareholders. None of these shareholders has a majority. First, there would always need to be a coalition of municipalities that argues for a certain position. Second, the question is: what would you gain? What would you win? The level of service being provided at the moment is quite good. The tariffs are considered acceptable by the consumers. They rate water services at 7.9, which is relatively high for public services. If you were to politicise it, there is not that much to gain by doing that. It is also perhaps important that our mayors are not elected; they are selected and recruited by the municipal councils.

Josh Newbury

That is interesting. One thing we are looking at quite intently at the moment in the UK is public involvement. A recent bit of legislation passed by our Government mandated customer panels to empower customers and give them more of a direct say, or at least be able to lift the lid on what is going on in their water company. How much direct public involvement is there in the Dutch water system? Again, is that something people are just not clamouring for?

Professor Schwartz

No, it is very little. In some cases, utilities have tried, following customer service councils in England and Wales, to establish a customer council, but they could not find people who were interested in dedicating their time to be part of such a council. The utilities would be open to it, but there are not a lot of citizens or consumers who consider it to be a relevant enough question at this time, at least, to really engage themselves with. Again, in my view, we in the Netherlands are at a turning point where we are facing a lot of challenges that are quite severe.

Josh Newbury

One of the things I was struck by when I was looking at the map of the areas that the water companies cover was that some seem considerably larger than others. You mentioned Vitens. It seems to cover a huge chunk of the country, whereas others are relatively small. Do you see any kind of advantage or disadvantage in the size of those companies within the Netherlands? Does that have a bearing on their performance, or are they different factors altogether?

Professor Schwartz

No, other factors are much more relevant, such as water sources; whether they are surface water or groundwater companies really impacts tariffs. Some areas have easier access to water than others. These factors are much more determinant in the performance of the utilities. In the case of Vitens, a managing board and a board of directors became big in the 1990s. There was the threat of privatisation, and the idea was that if it grew, it would be more difficult to take over. That is one of the reasons why Vitens is relatively big. It is also quite problematic for Vitens because although it is a large company, its service provision system consists of hundreds of smaller systems that are not very well connected. That leads to a lot of difficulties because it is not able to actually ensure that the water is going to the systems where it is most needed. You need to distinguish the size of the company from, in the end, the provision of water services, water supplies, and infrastructure. The infrastructural system is crucial, perhaps more than the size of the company.

Josh Newbury

I wanted to come on to the infrastructure because you mentioned that, similar to the UK, the Netherlands has a lot of ageing infrastructure. A lot of investment will be needed in the coming decade or two. Obviously, the difference with your system is that you do not have private shareholders who can put in equity; it has to come from the local authorities. How effectively have those companies been able to invest, and what is the forward view?

Professor Schwartz

Like in France, the companies do not receive any funding from the local authorities. The companies are completely self-financing. They fund their investments through loans, which they then have to pay off through the revenue generated from the tariffs. Apart from the tariffs, they have no other source of income. The Dutch water utilities are able to source relatively favourable loans because they are a monopoly for water supply, for which there is always going to be demand. They are semi-public, which means that the odds that a water utility is going to go bankrupt or default on a loan are very small. That means that banks are quite happy to provide the loans for investment. Again, it means the tariff is going to increase. It has increased substantially over the past four years. I assume it will continue to increase in the coming years. That is the way it is.

Josh Newbury

We are interested in the role of the Dutch water bank, which was obviously set up in the wake of devastating flooding in the Netherlands. It seems to have played a crucial role in providing stable, low-interest finance. We have also heard that the bank has expanded its operations massively, and there is some concern that it is not providing enough finance now for its original objective of securing the country’s water supplies. Is its role diminishing? What will its role be in this future investment?

Professor Schwartz

The Netherlands Water Bank was initially established by the water boards, not by the water supply companies, for water security and water safety issues. In principle, it has a mandate to lend to entities which have a public purpose. Water supply companies have access to the Netherlands Water Bank, and some utilities also have loans with it. However at the moment, the Netherlands Water Bank’s main source of loans is in social housing. It has moved beyond the water sector. For the water utilities, it is not such a problem because the private banks are also quite interested in lending money to the water utilities. Most water utilities will have loans with multiple banks because they want to spread their loans over multiple providers and keep contacts in case they need to have quick access to loans, and so on. I personally do not think that the Netherlands Water Bank’s development is damaging for the water utilities. The water utilities in the Netherlands are still able to access the funding that they need quite easily.

Josh Newbury

Do those private banks demand a higher return on their investment? Is there a concern about water companies perhaps taking on too much debt, which is very much the case with many of ours in the UK?

Professor Schwartz

If I am not mistaken, there are limits to the loans that they are able to take. I do not think there is a concern at the moment of utilities taking on too much debt.

Josh Newbury

Is there a concern that if there are limits on the amount of debt they can take on—as you mentioned, local authorities do not put money in—there are potentially some big investment requirements coming up? Is there then a concern that that will fall on tariffs because that is the only other option you have?

Professor Schwartz

It is going to fall on tariffs. The question is how to deal with keeping the tariffs more affordable. In the Netherlands, we have never subsidised tariffs; it is not something that we have ever done. Instead, the social security system provides benefits or allowances that can support low-income families in covering higher costs for certain basic services. The support for low-income households to deal with higher tariffs would come from a different source than from the water utilities. The tariffs, by law, need to reflect the cost of production; they need to reflect the cost of provision. They are allowed to make a small profit, which sometimes goes to the shareholders, and sometimes is reinvested in the system. They need to reflect the real costs of providing services.

Josh Newbury

Lastly, I want to ask you about the research you have done on public ownership more broadly: the studies you have looked into outside the Netherlands. What kind of lessons do you think we can draw from the work you have done looking overseas? Nobody has a perfect system, but it seems that there are very good features of lots of different systems that we need to bring into ours.

Professor Schwartz

If it is a public utility, it is important to look at it in the broader governance structure. The Netherlands has the Water Supply Act, which is crucial. The fact that there are multiple shareholders is crucial. There is a lot of shared collaboration between the water utilities. Although we have 10 water utilities, we only have four water quality laboratories because most of these laboratories are co-owned by different utilities. In my view, it is that broader structure that makes a water utility provide an enabling environment and a situation in which it can perform well. If I look at the cases that I have studied abroad, they often try to reform the utility, perhaps change its ownership, or make it into a private company owned by a public shareholder rather than a direct public utility. I am not so convinced that that is enough. You need to think more about the broader governance structure and the enabling environment in which that operates. If you do not address that, then changing the ownership has little impact.

Josh Newbury

Marine, you wanted to come back in.

Dr Colon

Yes, thank you. If time allows, I just wanted to add something regarding funding of our water sector. A fourth of our water bills funds water agencies and all the money that is collected within a river basin can be used and then redistributed to local government to help them fund investments. Local governments can use revenues from water bills, subsidies, concessional loans from water agencies, and funding from the European Union and other local governments to help them fund their investments. This was a quick add-on that I find useful: having an agency at the scale of a river basin that can give priority in terms of investment and orientate the action of local governments by bringing additional funds to issues that are seen as most urgent and relevant within a river basin.

Josh Newbury

That is interesting, but I will hand back to the Chair in the interests of time.

Chair

Marine and Klaas, thank you so much for joining us in our little Committee Eurovision homage. We appreciate your attendance. There is a lot more that we could discuss, but unfortunately time is against us today. Thank you for your attendance and co-operation. Examination of witnesses

Witnesses

David Henderson, Professor David Hall, Professor Ewan McGaughey and Professor David Saal.

Chair

Good morning, everyone. Thank you again for your attendance. We are up against it a bit for time, but I am sure we will manage to ventilate all the issues. Can I just invite you all to say a few words of introduction?

David Henderson

My name is David Henderson. I am the chief executive officer of Water UK, which represents all the water companies in the United Kingdom.

Chair

Welcome back.

Professor Saal

I am David Saal. I am a professor of economics at Loughborough University. I fell into water and sewage in 1999 when I started working with David Parker on privatisation of various industries. I have been working on it since, doing cost assessment modelling, regulatory work and so on.

Chair

There are so many ways we could take that introduction, but we are going to be disciplined.

Professor McGaughey

My name is Ewan McGaughey. I am a professor of law at King’s College London and a research associate at the Centre for Business Research at the University of Cambridge.

Chair

And the third of our triumvirate of Davids.

Professor Hall

Yes, another David, I am afraid. I am a visiting professor at the Public Services International Research Unit at the University of Greenwich. I have been researching this stuff for some decades now.

Chair

We are going to be looking now at some issues with privatisation and the potential for a reformed water sector. Sarah, you are going to lead our questioning on this.

Sarah Dyke

The IWC report published in July 2025 sets out a comprehensive vision of the water industry and what it could look like. It is proposing reforms to tackle the issues of the water sector. What problems will the commission’s proposals solve? What issues do you think are going to remain unaddressed? I will start with the first of Davids.

David Henderson

It is a very good report. I should say that, in representing all the water companies across the United Kingdom, I represent the state-owned Scottish Water and Northern Ireland Water, the not-for-profit in Wales, as well as the private companies in England. It is very clear that the challenges are the same. Climate change does not discriminate against ownership model. The changing needs of businesses—especially data centres, some of which can use a hell of a lot of water when it comes to high temperatures—do not discriminate against ownership model; nor does population growth. We are seeing that in all four nations of the United Kingdom. Sir Jon Cunliffe has identified that there is no correlation between ownership and performance. It is a view backed up by the OECD in Paris, when it looks across Europe as well as the rest of the western world. Cunliffe has identified that, regardless of ownership model, there are three crucial ingredients. First, there must be clear strategies set by the Government of the day; the Government need to be clear about the trade-offs—what they want, broadly understanding the cost impact. Secondly, you need strong regulation, so you are able to implement that strategy, enforce it and make sure that the water companies are delivering. Thirdly, in order for the water companies to deliver, they need the money. It does not matter whether that money comes from water bill payers or from taxpayers, but it has to come. We see challenges in the financing, whether it be privately or publicly owned. I thought it was very interesting hearing some of the financing challenges in France and the Netherlands that you heard earlier, where we have state-owned companies insufficiently invested in their infrastructure. That is what Cunliffe has set out to reform. There are 88 recommendations in total. It is an excellent report; it has now been with the Government for 15 months—15 months tomorrow, to be exact. It is very necessary for them to get on and deliver that report. If they do, it is going to deliver the transformation to the sector that the whole country wants to see and rightly deserves.

Professor Saal

I will say what I agree with, and then the “but”. The regulatory model is not fit for purpose, particularly Ofwat’s modelling and approach to things. I agree with that. There is a great need for better public control and more local control. The idea of having more catchment management and some sort of public representatives is very good. Catchment areas are very good. Let me just go back a little in history because this will be relevant. There was a great report from the advisory board somewhere in the Aston library when I was there as a research fellow. When the RWAs were created in 1974, the engineers and experts were saying, “We need 10 to 15 entities for water basin management. We need 50 operating units. Economies of scale, how we run things and how we do things is so different if it is a city or a small place and so forth.” I do not know who did it—I never found it out—but, loosely, the politicians got hold of it and said, “Ten is a good number,” and they merged everything up to 10 units. That system was never economically rational. The WASCs were not based on any economic rationality. Most of the systems we have talked about today—I know about Japan, Germany and the Netherlands, and I have written on two of those countries—organically develop and merge. They are not forced together like that. When we come to Cunliffe, I absolutely agree that we should go to catchment management and think about it that way. However, that means that the way Ofwat has been assessing costs would need to fundamentally change. What drives and what will be needed will be different in different catchment areas: different ways to treat sludge, different ways to get the water. We heard about surface versus groundwater and so on before. The other issue, which I do not have enough time to go into this session, was a comment before about two periods post Ofwat. There was the first period up to 1995, when there was basically no incentive to do anything because the price caps were set by the Government to make sure privatisation was successful. Ian Byatt came in and tightened them, and then my own research shows that the RCV values were completely overvalued. If the prices of companies went below that, that was just reflecting the true value the investors had put into the companies. Skipping ahead to the most important thing from 2015 to 2025, TotEx is an expenditure that needs to be funded. It is not a cost. From conversations with Alan Sutherland at WICS a long time ago, the regulator is responsible for making sure there is enough money. That is not a cost. The whole idea is Cunliffe is saying we need to do more thinking about how capital is invested, breaking up OpEx a bit. I do not have what he said down exactly in my head. What is missing in Cunliffe is what structure that needs to be. It does not mean you have to break up the companies, but it is how you assess them. Secondly, it is the way that Ofwat assesses. Ofwat was not a bad regulator because it did too much econometrics—I would say that, I do econometrics—but because of the way it did it. The goal post 2015 was driving competition, which really has not happened. Sorry, that was a bit long.

Sarah Dyke

That was great. Thank you very much indeed.

Professor McGaughey

I agree with a lot of what Dave has just said. The essential question that Cunliffe could not answer—because he was not asked—was the ownership question. We are going to hear a lot today, and we have heard a lot from the water industry, about how what matters is good regulation and about how ownership does not really matter, if at all. There are at least four reasons why that is clearly mistaken. First, if you have private owners, then they are paying shareholders. If you do not have private ownership, you do not have to pay. About £85 billion—I think £85.2 billion last time Dave checked—since privatisation has gone to shareholders. That is money that could be reinvested in the system but is not. The second big disadvantage of having private ownership is a higher cost of borrowing. If you are publicly owned, you can access the lowest cost of borrowing, close to the Bank of England base rate, the Public Works Loan Board. If you are a private or mutual entity, because non-profits are still private, then you are going to have to access the private bond markets. The amount that has been returned to banks and other bondholders since privatisation is now in excess of the amount that has been returned to shareholders. I just did some figures myself in a short report last year, and on the figures that I came up with, Thames Water had returned over £13 billion since privatisation to bondholders, whereas to shareholders it is a little over £10 billion. The second point is higher borrowing costs. The third reason why ownership really matters and why it is not just about good regulation is that if you have public ownership, you can set public purposes in a statute, whereas the purposes of a privatised water company are going to be oriented towards returns to capital. Fourthly, and this is so vital, is that when you have a privatised water system, you have a permanent lobby group trying to game the regulatory structure, trying to make sure that the regulators are not doing the job of regulating—turning a blind eye to the pollution, the leaks, and the billions and billions that are shipped overseas. Those are the main things that obviously Cunliffe was not asked to deal with and that really matter. This is why this Committee is a great opportunity.

Professor Hall

To cut it short, agreeing with much of what Ewan said and one or two of the interesting points that David Saal made, the elimination of public ownership from his terms of reference was a really serious error. That is highlighted by Marine Colon’s initial statement about France, which is very simply, “Local authorities are responsible.” They are responsible for the service, setting out plans and making sure decisions are taken in accordance with those plans. They are also responsible for deciding how the system is operated, including the potential for concessions and otherwise. That cannot be said here. Even that first part cannot be said. Local authorities are responsible for nothing in the system at the moment. That is the result of a couple of major decisions made in previous decades. One was the decision that David Saal referred to, of the creation of the regional WASCs in 1974. Again, as he says, it was not done on the grounds of economic rationale but environmental rationale. That is a difference from the Dutch system, where the regional companies were developed on an ad hoc basis. That decision in 1974 effectively created multi-municipal entities that were still governed by the municipalities. The second decision, which was briefly referred to by David Owen earlier, is perhaps a more serious one, which was that in 1984, water responsibility in the UK was nationalised. People ask, “Should we nationalise the water system or not?” That was done in 1984. It was done by the Thatcher Government. That effectively took away the remaining responsibilities and powers of local authorities on the regional water authorities. Since then, that has been the crying gap in the entire system that is very noticeable at the local level. I notice it on occasions when I am asked to comment on radio programmes on local problems. There are local councillors articulating the concerns of local people, desperately frustrated that they have no power to do anything about them at all. That has to be the most fundamental thing that should be rectified in the system: public responsibility, which implies public ownership of the system, to take decisions.

Chair

Can I just put down a marker here before you carry on? Nationalisation did not happen in Scotland. Water remained under the control of the regional councils, which themselves were then reorganised in about 1996. It was only then, with the creation of Scottish Water in 2002, that you had that process of nationalisation. Are there lessons that we might draw from that? Bear in mind, I do not want to start a hare running here but just put down the marker.

Sarah Dyke

Just to your point and to David’s point there, in Somerset, we have quite a unique situation. We have the Somerset Rivers Authority, which was set up after the floods in 2013-14. It brings together water, flood and land management partners together at a catchment level. Do you think those existing partnerships, such as that particular model around the Somerset Rivers Authority, which I do not believe has ever done its job in becoming an authority, could be the start of a model for regional planning that perhaps the commission envisages, rather than setting up new organisations? That is to David and David, Saal and Hall—only because you mentioned that.

Professor Saal

The first thing I would say is that we should go back to lessons learned. It is like how, as a parent, you do not want to make the mistakes that your parents made; you want to fix them with your kids, right? There was a great paper when I first started doing privatisation work, by Hunt and Lynk, which basically said that there was a loss when, at privatisation, flood management and other activities—I forget exactly what they were—were hived off from the water authorities and put into what was the National Rivers Authority. What I want to get after is that one of the things that really matters here is that water is different and sewage is different because it has so much non-priced merit goods or whatever around it. People may or may not be willing to pay for the environment, and we have to make decisions around that. Yes, is the answer: the Somerset board could be a way forward. However, what I really picked up from Cunliffe, which I have been reading and thinking about more in the last couple of weeks—I wonder why—is how there is such a multiplicity of organisations responsible. You have to be careful because you need separate agents. One of the benefits of privatisation is you had a separate economic regulator. You had an entity other than the regional water authority that was responsible for drinking water quality and environmental management. On the other hand, you need advocates. There is some balance between bringing together and understanding and capacity, because you need capacity to know what is going on, to plan and to think, but there is also a need for agents. One thing I picked up in Cunliffe was a very contradictory statement in there about how the water regulator should be merged, meaning Ofwat, but it also should be independent. That will not happen if it is in the same entity. So yes, but the devil is in the details on how you do it.

Professor Hall

I go back to my previous statement and say, yes, that is indeed possible, but the key first step is to give local authorities responsibility for the system. You phrased it as an intensely local question. That seems to me to clarify an important reason why these responsibilities should be devolved back to the local level, which they are in virtually every other major country in Europe and North America. I would like to just carry on a bit on one or two points. One of the frustrations I came across over the lack of local authority responsibility was following a presentation by somebody of precisely a catchment area plan for the Eden Valley in Cumbria. It was a very eloquent presentation of a beautifully prepared plan, with discussion with landowners, farmers and so on. She said, “That was great, we were very happy with it, we press-released it and then we didn’t know who to show it to get it actioned.” That can be repeated here in many local conditions. Again, just to comment on multiple responsibilities, I am not sure if it is necessarily inefficient. France has an astonishing range of local bodies. The clean-up it did on the Seine involved I do not know how many local authorities, sewage authorities and water authorities but it was effective and it worked. It does that planning in managing its rivers as well. Maybe multiple authorities can work, but that issue of local responsibility is key.

Sarah Dyke

I will move on because I know we are pushed for time. The People’s Commission on the Water Sector stated that public ownership could save the public over £22 billion over five years because this is the return on capital allowed by Ofwat for private operators to distribute to shareholders, banks and other lenders. Supporters of the private sector often point to its role in innovation, finding efficiencies and growing productivity. To what extent have these aspects improved in the water sector since 1989? Could any gains be threatened by reforming the system?

David Henderson

I am very happy to describe the benefits that have come since 1989. I would argue, and some of your earlier witnesses agreed, that we have seen a transformation specifically in terms of waste water treatment. We used to have almost no treatment of sewage before 1989 in large parts of the country, now we have tertiary treatment in almost all the major urban areas. That has radically reduced the amount of ammonia and phosphates entering our rivers and streams: 80% or 70% reductions or so. We have also seen the quality of our bathing waters increase six or sevenfold in terms of those that are rated good or excellent. This was not the case back in 1989. Drinking water was always pretty good but is now around the world’s very best. That was not the case back in 1989. Unfortunately, we used to have cryptosporidium incidents, which can be very dangerous, happening almost every year. Now they are happening about every decade. There have been improvements. That is not to say there is not a lot more to do; there definitely is. We know that the people rightly need to have a far better performing sector, which is why Cunliffe’s report is so important. We are all in on the catchment-based area that has just been discussed. It is an excellent model for enabling people on the ground who understand their areas best to identify what needs to happen, work with farmers, house builders, the highways agency and local authorities, and then allocate the funds in the most efficient way. It would also be cheaper if you had nature-based solutions being used more often than the concrete and steel we are forced to build because of very prescriptive legislations, which actually is not a good use of funds. There can be a lot done there. There was a discussion earlier about dividends, and it is not true to say that the public sector does not extract dividends. In Northern Ireland, the water company is forced to pay dividends to its owner, the Northern Ireland Government. In my home state of Victoria, the state government own all the water companies and extract billions of dollars over time from their water companies, as the case in New South Wales. The returns on the investment, as it were, the return on equity measure, are far higher than the privately owned companies here in England and Wales. Dividends can be paid whether you are privately owned or publicly owned; it is a question of whether that is being used to finance the investment. That £22 billion you mentioned is the return being paid. If we had it separately paid by the taxpayer for example, we would be paying a return to the people who lent us the money, or taxes would need to rise, or we would need to inflict spending cuts elsewhere to fund it. The funds have to flow from somewhere. You see benefits and disbenefits from different models. It is important that you identify what is needed. That strategy is the first recommendation of his 88, and it is the most important. Government need to be clear about what they want, then the regulation can flow, then the funding needs to flow.

Sarah Dyke

Greenpeace has stated that, “England’s 35-year experiment with privatised water has failed,” and shareholder returns have been prioritised over public service. Surfers Against Sewage similarly argued that the review, “Utterly fails to prioritise public benefit over private profit.” What do you say to those?

David Henderson

As I say, I am not sure what Greenpeace thinks about leakage falling by about 43%, 80% reductions in ammonia, and very large reductions in phosphates in our rivers and seas. They are the consequence of very large investment. Those are facts independently verified. The state of our environment is better. It is not as good as it should be, that much is very clear; it needs much more investment. Climate change is putting huge pressure on our network. That is true across the whole of the United Kingdom. It is going to need very large investment. As we just heard, the same is true in the Netherlands and France. Climate change is putting huge pressure across the whole world. That is going to require a stronger and bigger system, more able to withstand those torrential downpours of rain, and then enable us to provide water when we have not had any rain. In some parts of the country, the most recent drought we are currently experiencing has lasted 60 or 70 days. We need very large investment. It can come from bill payers or taxpayers, but it needs to come.

Professor McGaughey

I agree with hardly any of that. First, there is the idea that we need tax rises or spending cuts to finance water improvement. No, if we had a public system, we would have about a third more of our bills going into infrastructure spending. It would not be going in the returns on capital that you mentioned. Ofwat sets in the price reviews a limit on returns on capital, which is £22.047 billion in the current price review period. By the way, in the last price review period it was about £11 billion. The amount that shareholders and banks can get out of our water system has almost doubled in the last five years. The other thing is this fantasy story that everything is hunky-dory and that our water system has improved. Just some quick statistics: we have the seventh worst surface water quality in Europe, we have the fifth worst bathing water quality in Europe—this is in England—and we have the sixth highest bills. You can find that in the EurEau report on drinking water in Europe statistics. It is untenable to suggest that things are getting better. I will just give you one more example. Ofwat also sets targets for pollution reduction and leak reduction. In PR19 it set a pollution reduction target of 30% for Thames Water. By the way, that means that 70% of the statutory duty to make sure that all sewage goes through secondary treatment is not being touched by Ofwat. It is just saying, “Do 30% of your statutory obligations.” Thames Water not only could not reduce the pollution by 30%, but pollution incidents went up by 53.6%. It had a leak reduction target of 20.4%, and it did not get anywhere close: it reduced leaks by 13.2%. A nice comparison with this is Cambodia. In 1993, the capital Phnom Penh had 72% of its water being leaked and it got that down to 8% in 12 years. If Cambodia can do it and Phnom Penh can do it, there is no reason why London could not do it if we did not have the disastrous system we have at the moment.

Professor Saal

There is not a decision that says nationalisation or private is better. The experience for many consumers has not been perceived as good or has not been good in the UK, but some issues boil down to what David Hall said before about the current system: there is just not any local public voice. If you have a problem with a stream near you, how do you get that through? Even Cunliffe’s idea that the Birmingham mayor where I live in Solihull is going to be my representative or something is just not going to work. It is also about the incentives and what you value. I agree with David Henderson about the Government and/or the catchment authority. I emphasise again that you have to assess costs at catchment level, integrated, not at company level, if you are going to do that. You have to set priorities; you need to get local voice to that, and then you need to set the incentives right. I will give you two examples. Leakage came up. I cannot find them any more, but I remember years ago I did a paper on water leakage and incentives and efficiency, and we found a couple of quotes at the time that Ofwat was telling companies “No, no, no, do less. You’re doing too much on water leakage.” The second example is from when I was working with Anglian Water. I did its cost modelling for the 2019 price review. We developed some beautiful models that took into account that it was an absolute leader on per capita consumption and leakage. There was nothing in Ofwat’s modelling directly in the econometrics that took that into account. If the incentives are not being set properly—it could be that the statements say, “We want this,” but it’s not being followed through—there is a problem. With regard to the whole dividend debate and so forth, I had data that was consistent until 2015, and regulatory capital values definitely were higher than any investment that went in. They are not a true measure of value. There definitely were issues in the beginning with excess funding. Even if private companies are stewards, I will just say it, my perception from working with Anglian Water closely for about three or four years—I no longer do—was that the people there cared and wanted to do something about the environment. The ones I was interfacing with did, but if the incentives and the system are not supporting that, you are going to have a problem. It is all about getting that right.

Sarah Dyke

Clearly, we have some differing views around the table. However, the stark reality is that it is estimated that over £300 billion-worth of investment is needed over the next 25 years to reach the Government goals and improve future water security. On that basis, is it the private sector or the public sector? Which is better equipped to really raise that money at the scale that is required, invest over that timeframe and bring value to our customers?

David Henderson

If we agree that it is £300 billion, and that is the estimate of the National Audit Office, then that money would need to be found either by the taxpayer, if it were owned by the state, or by a bill payer. That would be slowly paid over time, just like a mortgage is, which is being first paid up front by the investors. If the state can be very clear—

Chair

We would still have bill payers in a nationalised system.

David Henderson

That is right. Just like a bank provides the funding for the house up front if you have a mortgage, and then the mortgage holder slowly repays the price of that acquisition of the house over time, here in England and Wales we have investors putting in the money up front and it is slowly recouped over time through the bill. Yes, the bill payers ultimately pay. As in Northern Ireland, you could have no bill payers and instead just have the taxpayer. If the taxpayer is prepared to find that £300 billion over 25 years and is very clear on how that is going to be funded, then of course that would be able to work. We have a lot of people standing in the queue for scarce resources: people who need money for defence, health or education. Across the world, we see Ministers generally prioritising expenditure from those quarters rather than water. Ministers frankly prefer to cut ribbons on submarines than sewers. That is true across the world, and I go to many international conferences. There are not that many votes in sparkling clean sewers, compared with sparkling clean schools and hospitals. However, if the Government can absolutely be certain they are going to find that £300 billion, then of course they would be able to do so and facilitate all that investment. It is just that experience suggests it is a difficult thing to do.

Sarah Dyke

Ewan, you might have a different point on that, and then I will come to David Hall.

Professor McGaughey

Just very briefly, because a lot of the work comes from David’s figures, there has been £85 billion since privatisation to shareholders and more than that to bondholders. If you add that together, that is £170 billion. If you want to finance £300 billion in spending, then it is probably going to be a lot easier to do that if you are not paying the people David Henderson represents.

Professor Hall

I have just a couple of points. First, another bit of research we did was to answer the question, how much equity have private shareholders actually invested in the system since privatisation? Equity is the additional thing, if you like, that private companies had. The answer, we found shocking, but in real terms it is minus £5 billion—minus £5 billion. The actual equity on the books at the moment is £5 billion less in current price terms than it was at the start.

Sarah Dyke

On that basis, does that fundamentally weaken the argument for the private ownership of assets?

Professor Hall

Yes, hugely, because the only additional thing that you are hoping to bring is that. For example, private equity funds, for sure, have billions or trillions of dollars available but that adds nothing unless they actually invest it in the systems. Simply buying the systems from the previous owner does not inject any money into the system. We must have equity investment, and we have had less than zero. That undermines any idea that the private sector is being innovative. I have a quick supplementary point. In David Henderson’s initial statement he referred to treatment, but typically the advances claimed by the private sector under privatisation are advances driven by EU regulations. They are actually achievements of public regulation and law rather than the particular operator that happens to have had to implement them.

Professor Saal

There is possibly a case with Scottish Water. Some PFI treatment plants were put in because Scotland was late, but my understanding—I am not sure if I am correct on this—is that Scotland is moving away from those PFIs because they are actually relatively expensive. It has been trying to do that. I wanted to change the debate. If we are talking about catchment, we want to talk about public interest and we need to do the right thing, like the point before. What really matters is we need a plan of where we are going and what environmental and drinking water issues we care about, which really satisfies people’s needs and the environment. Then we need to decide, what is the best outcome for consumers and the environment? That goes back to the public interest and how you get that in but also, what is the cost of capital? You often talk about a weighted average cost of capital, which is the various ways you can do it. I am aware that we have had examples. Companies such as Scottish Water, and apparently Welsh Water, used retained earnings. They make a profit and it goes back into investment. They also use debt. That debt could be private or public. Scotland borrows money from the Treasury, Anglian Water and Severn Trent borrow money privately. There is equity investment, and we can have injections into the model. Somebody’s comment earlier today that there was no equity actually ingested in privatisation, and they just bought the company, is true. However, you could get equity investment and of course you get public injection, which is very common in America and Japan. The national Government actually gives grants to build capital. I am not a financial economist, but the right way to do this is not what is the cheapest, but what is the best, lowest-risk way to do that? My pension fund is in trouble with Thames Water because it wants risk-free assets. USS owns a lot of Thames Water. We want to track those kinds of investors, and we need to think about that. We need to move forward and find the cheapest way. I am not sure if saying public or private is the best way of doing it.

Professor McGaughey

I would like to just add a footnote, which is actually really important not just for water but for energy and transport. If we want to get more investment into the water system, then potentially there needs to be borrowing, and water companies might go into debt for borrowing. If water companies are taken into public ownership, our current fiscal rules under the charter for budget responsibility say that a publicly owned water company’s debt counts as part of the national debt. We are the only country in Europe that does this. All other countries under the European system of accounts say that when you are adding up national debt, if you have publicly owned companies, including water, energy and transport, their borrowing does not add to the national debt. One of the big reasons why the former Chancellor, Rachel Reeves, did not want to look at public ownership of Thames Water and putting it into special administration was a concern that it would add to the national debt. Some £2 trillion-worth of assets under management wrote to the Treasury saying, “Please change the charter for budget responsibility accounting rules so that we take out public corporations that are market actors from the calculation of national debt,” but it was never replied to. It is so important to understand that we are unique in artificially inflating our national debt under our own accounting figures, unlike the European system of accounts and the United Nations system of accounts.

Sarah Dyke

I want to move on to dividends because, historically, excessive dividends have undermined the financial stability of the sector. Has this problem been resolved with Ofwat’s new powers?

Professor Hall

I did a quick calculation on that just yesterday because it looked like a question that was going to come up. The ones I looked at were Severn Trent and United Utilities, which have been mentioned as potentially okay companies because they are listed and so on. I just looked at what has happened over the last two years, in ’24-25 and ’25-26. Looking at the level of the group companies, which are the ones listed, which effectively comprise largely the water and sewage operations, each of them has paid out over £700 million in dividends in those two years. United Utilities paid out £712 million and Severn Trent paid out £727 million. That is just in the last two years. It is a matter of judgment whether you regard that as being a controlled level of dividend payments. There is another thing that is illuminating in the annual reports. They both say more or less the same thing, but I will give you United Utilities’ one: “Our dividend policy is to grow annually in line with CPIH inflation.” In other words, the shareholders of United Utilities have a single lock. United Utilities proudly says it is a commitment it has maintained since 2010. The idea that equity capital is somehow risk capital would seem to no longer apply if the companies are guaranteeing CPIH linking of dividend payments. We need to ask the simple economic question: how on earth can they do that economically? They can do that economically only if they have a regulatory system they can rely on to allow them to generate the revenue sufficient to cover all that.

David Henderson

There are six companies that have paid no dividend in the last year, and five the year before that. The shareholders of Thames Water have not received a dividend for quite some time. The shareholder in Northern Ireland, the Northern Ireland Government, received a dividend. The dividend there is running at about 2%. It is quite a bit higher than for the six companies not paying any dividend at all. Dividends are a function of return, and return is set by the regulator, be it the utility regulator of Northern Ireland or Ofwat in England and Wales. We can argue about whether the return is being set at the right level and whether the incentives are in the right place. We have been very open in saying that the system in England and Wales is broken and that the Government should get on and fix it. Cunliffe has set out a very clear set of recommendations for fixing it, starting with strategy, then strengthening regulation, and then enabling financing to flow. The question of dividends is actually immaterial to ownership. You can have a publicly owned system that is taking dividends or you can have a privately owned system. In the case of some privately owned operators, they are not taking any dividend at all and have not for some time. The dividends situation is a bit more complicated than it may appear on face value.

Sarah Dyke

Quite rightly, some water companies should not be taking dividends, particularly in the case of Thames Water. Do you think there should be some licence conditions attached to those dividends? Perhaps minimum and maximum dividends just to keep more money in the system for investment?

David Henderson

There are at the moment. Ofwat has introduced rules to cap dividends and block them if certain criteria are satisfied, such as gearing levels, and for some companies that has affected their ability to pay dividends. There are rules and it is up to Ofwat to set them wherever it wishes. If it wishes to set different rules, it is totally able to do so. This is a question for independent regulators looking at the factors before them.

Professor Saal

I am not going to try to comment on whether the current system is right to deal with this. There are people who are better qualified on that around the table. There is a second issue related to this: is the state of the finances of the companies currently worse because, in an earlier time, excess dividends were taken out? I will not work with the TotEx-based data after 2015, because it is inconsistent with the earlier data. In some analysis I have done from, I believe, 1991 to 2015, there were excess dividends. There was a combination of interest rates getting low, so of course you moved to debt financing, and there were high profits being made. There was a previous comment about the price caps being too high right after privatisation. Is it excess dividend that was taking those profits out? Should more have been retained? Almost certainly. You have a problem where maybe the finances were not as good as they should have been in the past, even if the companies are not doing it any more. Let us remember that, if you have equity investors, or Government bond investors or whoever, they do not just give you your money: you need to give them a return, right? Dividends are not inherently evil, and nor is it bad that they are being paid, but there is a correct amount. We have to think about what we do about the problem we cannot do anything about, which is perhaps the financial state of the companies because of the past. How do we make sure we do not get there again?

Sarah Dyke

This is my final question, Chair. This Committee proposed that a much clearer, more easily imposed regime for special administration could incentivise much better performance. Do you think that this could be enough to improve the outcomes in the water sector?

Professor McGaughey

The existing special administration regime works pretty well. There are other special administration regimes in lots of other sectors. Of course, Railtrack was put into special administration. It cost £70 million for about one year, and then it was passed on to Network Rail, which of course is now the publicly owned rail operator. Bulb Energy was put into special administration and transferred to the private sector. The system that we have at the moment has not been tested. That is the problem. It is not the existing system. Let us imagine that the Government bite the bullet, which they definitely should, and put Thames water into a special administration. We can do that for two reasons. First, it is effectively insolvent because Ofwat has not been enforcing the anti-pollution duties. Secondly, the licence could be withdrawn for poor performance. We could talk about at least four or five other water companies around England fulfilling the same criteria: too much pollution, too many leaks, or both. What would happen then is that the special administrator is appointed by the court, but ultimately the Government are selecting them. The special administrator would look around for a potential bidder. You might have private bidders but just as easily, for instance, the Mayor of London could set up a publicly owned company, perhaps organised with local councils, and it could also bid for Thames Water. The argument I have been making, which is increasingly widely shared, is that the shareholders have obviously done such a terrible job that they are entitled to zero compensation. The creditors should not be due anything at all because of the state of the infrastructure, the bill that has been run up for repairs, and the excessive returns of capital. David Henderson is not mentioning that although there are restrictions on dividends, there are massive returns of capital to bondholders. Basically Elliott, Apollo and Silver Point are the American funds that are in control of Thames Water. If a public body bid zero—the special administrator is entitled to choose—but said, “We’re going to fulfil the statutory duties better,” then the special administrator will be entitled to transfer the assets to a public body for zero compensation to the polluters that had done so much damage already.

Chair

We really need to get moving on, but I want to just tease out one point: let’s stop talking about this as an exercise in corporate finance and look at it from the customer perspective. As David Saal said, there is nothing inherently evil about dividends; we live in a capitalist economy. But the concern that a lot of customers have is that dividends represent money being taken out of the industry that should be there for service improvement. David Henderson, we have raised the example of no dividends being paid out of Thames Water, but Thames Water is a very particular structure now, where if anybody owns it—nobody seems to want to admit to being the ultimate controller—it is owned by its own creditors. Its own creditors now lend it more money, and we believe there to be fairly significant rates of return. There is not a great deal of transparency here. By that route, money comes out of the industry that should be put into service. That is the objection that most customers would see to the current set-up.

David Henderson

I understand that objection, but in the case of Thames Water, the company has been very clear that those interest rates are not being funded by bills. Ofwat sets the cost of debt, and that is the limit of interest that can be paid by a company through water bills to any financing it receives. Companies that borrow at higher rates need to fund that themselves, and that is the case for Thames.

Chair

It is not going to get cheap money because of its credit rating and balance sheet, is it?

David Henderson

That is right. There needs to be a resolution, and some time has now passed since the company got into the issues that it is now facing. It needs to be resolved, but it is ultimately a matter for Government to decide which way they wish to go.

Chair

We could debate Thames Water for the rest of the day, but Henry, you wanted to come in.

Henry Tufnell

I just have a question for David Henderson. We have seen the excellent report set out by Cunliffe. With the supervisory model of the regulation, there is an added cost to the companies in terms of the interference and, effectively, how to please the individual teams from Ofwat. With that model, when we talk about the sums involved in terms of the level of investment in the infrastructure, should a movement perhaps have happened towards a catchment model based on a planning investment and driving through a competitive procurement process, whereby you can have multiple different actors involved, be they private companies, state actors or local businesses?

David Henderson

You are right, and Cunliffe points to both. He says that we should have regional system planning, which is how you allocate resources at the local catchment level that are going to best effect change in the environment, bringing together all the actors in that catchment: farmers, house builders, highways agencies and water companies. That is about the local environment and how you want that best changed, considering all the costs that are associated. Cunliffe’s idea about supervision, if you read his report in the way that the industry and many campaigners would, is that we need to have more company-by-company assessments: teams of engineers going into companies, understanding the condition of their assets, looking at the area and its topography, geology, urban density and users of that water, understanding the assets and the condition they should be in, and then setting the allowances accordingly. If you did that, you could then strip away this extremely complicated series upon series of unbelievably difficult-to-understand, technically rich, jargon-filled, acronym-drenched econometric models that teams of economists in Canary Wharf, which is the head office of Ofwat, have dreamed up. They cause so much cost and expense for companies, analysts, investors and even Ofwat, which is why it continues to grow. It has more than 100 people working for it after the Government said they were going to abolish it. This is an animal that is feeding on itself. Cunliffe looked at that and said it has been tested to destruction and it should stop. In its place, instead of models that are a figment of imagination in Ofwat’s eyes, which is the notional company that bears no resemblance to the real world, we should have real assessments made by real engineers, not economists, of what each company needs. If we did that, we would have a much, much better system and the cost of enforcing and implementing and monitoring it would be far cheaper. In fact, it provides a model for many other sectors. Instead of having modelling being done where you try to pitch one company against this fantasy idea called the notional company, you instead look at each individual company on its own merits and independently assess what it needs.

Chair

David, in a minute or less.

Professor Saal

I would like to agree and completely disagree with what David said because, first, your question was about supervision. Ofwat’s modelling is not the problem. Read the SIPR report that I was involved in. I then parted company with SIPR and Ofwat because I said the modelling they were going to do—this is about 2013—was completely inappropriate and I did not understand what they were doing. When I worked with Anglian Water for the first time and got to know their engineers and had the kind of engagement that would happen with supervision, I understood what drove costs. You need to have some method to evaluate companies at catchment area, not company level, and econometric or DEA modelling, which all these countries use—the Netherlands and Denmark do that, for example. You need the modelling, but you also need a regulator that understands and is engaged with the company. Supervision is positive and worth the effort, because right now I do not know what they are modelling. As an academic expert in water modelling, I would not even use the data that they use—that is how bad the modelling is. I just want to emphasise that the issue is not about the modelling. Interaction with the companies through a supervisory process could really be positive because you get that understanding of what really drives costs, moving away from this battle all the time.

Chair

I am in charge of time control here as if I were a West Highlander. Terry, you are going to lead some questioning on public control and other approaches.

Terry Jermy

I just have a couple of quick questions, starting with public opinion, because it is fair to say that water management and ownership are very much a hot topic at the moment, and we feel that as MPs. The Westminster Hall debate on water recently was the most attended debate ever, which is quite telling. I wonder, given your experience and awareness of the industry, whether there is evidence or a view about what the public want to happen in terms of public ownership? I am really careful because we talk about public control and public ownership and they are very different things, but in terms of public ownership, what do the public want? David, dare we assume?

Professor Hall

The first part of the answer to the question has to be referenced to what the polls show, which has been consistent on a two-yearly basis now for some years. Up to 82% say they want public ownership, and only 9% say they want to keep private ownership. Not only have those figures been constant over about 10 years now, but they are also astonishingly cross-party. Whomever people voted for, the figures come out pretty much the same. In fact, there is a slightly higher percentage of Lib Dem voters who want public ownership than Labour voters, and so on. Also, going back to privatisation itself, it was never popular; the poll that was taken in July 1989 showed that 79% were opposed to privatisation. That does not answer the other implicit question behind what you are saying, which is, what does public ownership mean to the public? First, we should be quite confident that they understand what public ownership broadly means. It does not mean a regulator who is not even accountable to a Minister deciding what to do for them, who is a bit tougher with the companies that he or she meets on a regular basis. That barely counts as public control if the regulator itself is not under any kind of public accountability. Also, there is sufficient folk memory and awareness of what can happen elsewhere in distant countries such as Scotland, that actually local public ownership seems to be what would make sense. Going back to earlier questions about the boundary definitions, there are really quite interesting points being raised about using catchment areas rather than river basins, for example, or letting local authorities work it out ad hoc in the Netherlands way. There were strong environmental reasons for the original structure, so I suspect we should keep that original structure. It makes sense; it is one stable element. Then we can simply identify the groups of local councils and say, “Please work out how you would assemble yourselves to create a governing body for this region, with however many of you from which parties, bodies or whatever.” Clearly, the Dutch can manage to do it, so I suspect we can manage to do it.

Terry Jermy

Ewan, is it so bad we do not really mind what model we use?

Professor McGaughey

No, it really matters. Yes, as David said, the last two YouGov polls said that 82% of the British public support public ownership—by the way, that has been rising—and 8% support privatisation; there are a few people who do not know. But the rest of the world knows as well; that is the other thing. Some 80% to 90% of the OECD has water in public ownership, and you can see a more detailed analysis in the EurEau document. Sometimes it is national ownership; sometimes it is more local ownership. At the moment, the water industry just has scare tactics. There is this narrative that started with the Social Market Foundation report in 2018 that it would cost £90 billion to take water into public ownership. Then it was £144 billion in a recent paper by Frontier Economics reported in The Telegraph a few weeks ago. Just in the last week or two, the water industry has commissioned another think-tank, called Public First, to say it is £105 billion. However, the reality is—this is also what people know—that those figures are insanely and dishonestly inflated, using what we call regulatory capital value, which is far beyond even market value of companies. Just to give you an idea of how wrong this £105 billion figure is, at privatisation in 1989, there was £5.24 billion raised when the water companies were sold—that comes from a Bank of England paper called “Operation of monetary policy.” If you plug those figures in, what does £5.24 billion in 1989 translate into in today’s money? It is £14.42 billion under the Bank of England inflation calculator. Moody’s calculated that it would cost £14.5 billion in 2019 to take water into public ownership. The report I have done suggests that if you take the worst companies into special administration and do not bail out the banks in America that have been running the water companies into the ground, you get a few water companies into public ownership for zero. If you take the whole sector into public ownership, it will probably cost in the region of £12 billion. These are very, very rough estimates because we do not have the actual true cost of repairs for the water companies to make sure that all sewage goes through secondary treatment and to repair the leaks sufficiently. One of the things that this Committee could really do, and that I really urge, is you could tell Ofwat or put pressure on it to make sure that it finds out what is required to make sure that all sewage is subject to secondary treatment. I did an FOI with Ofwat and it did not get back to me, but it will probably get back to you, if you give it a go.

Chair

You are taking us into territory that we are about to come to in a later section, so maybe just keep that for the moment.

Professor Saal

You asked whether public or private is better. I will answer that, but I just wanted to say two things. The answer to what Ewan has said is that it is very important that the Committee takes on board that the RCVs are not representative of value. That goes beyond what we can discuss here, and I could provide some papers from my perspective. The other thing is I want to correct how David interpreted my comments about the RWAs, and this goes to accountability. The RWAs were created at 10, and the logic of that was for river basin management and transferring water between rivers and managing. Operation unit wise, there is no justification for that because there is no interconnection in many systems. A sewage system, by definition, has only one plant. If we had done 50 operating systems, there would be much better local accountability because they would be closer to that. I do not know if that is efficient or not, but there would be better accountability and possibly more efficiency. As far as what the public really want, I am going to answer that honestly and a little for myself. I want the water to come in, I want it to be clean, I want it to have proper pressure. That has definitely gotten better; when I moved here, I would not have drunk the water if I had known what it was like, which I found out later when I started doing water. The public want the sewage to go away, but after it is gone they then want vaguely a better environment. There is a tension there, because if that means that £100 billion is going to go here and it is going to come out of the NHS, that opinion will change pretty quickly. The public want better trust in the system, which Cunliffe talks about a lot. They want more public accountability. That means more local public control, which is down to catchment area. They want to be paying a fair price for that. What it boils down to is they want more public control, but if they are told that tuition fees are going to go up to £11,000 as a result, and they are balancing all those public interest things, they would go for what is the best and cheapest way to do this. That is a financing question, not a public or private question.

David Henderson

I agree. When confronted with the price of what people want, sometimes their decision about how much they really want it tends to change. You will be familiar with all the constituents you meet having competing and sometimes contradictory expectations of parliamentarians to do a lot with not very much. There has been some discussion about the £105 billion. That was an estimate put out by Paul Johnson. He is a highly respected economist who used to run the Institute for Fiscal Studies. He has looked at two components, really: how much would you have to compensate the shareholders, and how much would you have to compensate the debt holders? They are legally enforceable contracts. A lot of estimates can fly around, but none of us ultimately knows. It would be for court to determine. I would suggest that if the Government were to try to unilaterally break a binding legal contract between a lender of money and the recipient of that money, there would be some potential risk to the creditworthiness of the country as a whole. Other countries have tried this, and they have received pretty swift reactions from the agencies, and they have been negative. It has made the cost of their ability to borrow much, much higher. This is all obviously a matter of opinion. It would finally be for the court to determine, but the risk is not zero. There would be a dispute. In fact, Professor McGaughey has talked about the fact that this would result in some litigation. Anyone who can guarantee how litigation is going to end is being rather foolish. These are serious investors with serious money at stake and they have choices; they do not have to put their money here. That is just as true for the investors in the water industry as it is those for who invest in the country by lending to our Exchequer.

Professor Saal

We are really confusing cost and cost of ownership, and I am not even sure of what. Who owns a company? Equity owns the company. You could, in principle, change ownership—again, I am not a financial economist; this is just common sense here—by buying the equity and giving a fair return to that. The debt does not necessarily have to be paid off. You could just take it on board. You have to pay it initially, but you could restructure it gradually over time because the Government have debt of 100% of GDP roughly. The issue of ownership is distinct. That debt is not really a cost of ownership because that could be taken and gradually adjusted over time. I do not get that argument.

Chair

If you are going to readjust it, then you have taken ownership of it.

Professor Saal

No, but you have taken ownership, you pay off the old debt holders and then you can restructure with cheaper debt.

Chair

It is a matter of simple contract.

Professor McGaughey

Could I just correct what David Henderson has said? That is a misunderstanding of how the law works in two respects. First, the process of special administration does not leave the court to decide what the figure is for compensation, if any, to creditors or shareholders. The special administration procedure sets up a process. If there is going to be any challenge to the special administrator’s discretion—let us say, for instance, as I said, that we have a private bidder that is offering a few billion and a public bidder that says, “We’re going to fulfil statutory duties”—as long as the special administrator acts within the law and follows the rules, then there is not going to be a court deciding what the compensation, if any, would be. Then you have a second situation if you bring water companies into public ownership through an Act of Parliament. That is not ultimately going to be decided by a court, it is going to be decided by Parliament. It is true that Parliament would not want to deprive people of their property in a way that violated the European Convention—

Chair

That would scare the markets.

Professor McGaughey

No, that is a really important myth to dispel. As I mentioned, markets at the moment want to have borrowing by independent market actor, publicly owned corporations, including water companies. Obviously, if you nationalise for no compensation, Venezuelan style, that is going to scare people, but nobody is really talking about that, are they? We are talking about fair compensation, taking into account the repair costs that are needed and the amount that has already been returned in capital to the polluters in charge of water companies.

Terry Jermy

I am just going to move on to my next question if I may, as I am conscious of time. David Hall, I was struck by the contribution from the chap from the Netherlands earlier, when he was talking about how, essentially, in mayoral elections there, water is so good, or perhaps so boring, that it is not an election issue; it does not even register. Then we have suggestions in this country about mayors having more say in water. Are we risking politicising water if we have more control and oversight?

Professor Hall

No, water could not become a more political issue here than it is today without any form of public ownership. The reason for simply adding mayors to the list of district councils, county councils and unitary authorities is that some parts of the countries are governed under a mayoral system at local level. Basically, you throw into the pot all the public authorities in a given region and that will include one or two mayors; it is that simple. There is not any particular magic about a mayor as opposed to a county council, in that sense.

Terry Jermy

Is there a deficit for those areas that do not have a mayor?

Professor Hall

That depends on your view of the mayoral system compared with the other systems. There is a long-standing debate on that. It does not matter in terms of the principle of developing a structure of public authorities taking responsibility and forming the entities.

Terry Jermy

The last point I wanted to make was around different models. We have not spoken too much about mutuals and community interest companies today, which are somewhere in between private and public, with not-for-profits. To what extent do you think these approaches could deliver more public control and better outcomes? Is it worth looking at as part of it?

Professor Hall

Sorry, can I say something on that because I feel quite strongly about what has been said about mutuals in this current context, which is based on a lot of errors. That includes the simple and all too common error of treating Welsh Water as though it was a mutual, which it is not. It is just a not-for-profit company accountable to no one, as people have already said. It also treats John Lewis as a mutual, which it is, but it is a workers’ co-op, not a customer co-op. That does not give any confidence for the rest of the conclusions. Thirdly, there is really very little evidence for mutuals having a very strong public accountability system. If you look at Nationwide bank, for example, about 520 people turn up at the annual meeting. It is not a very powerful force. Mutuals are not used very much at all around the world. The biggest water mutual in the world, by common consent, is in the city of Santa Cruz in Bolivia, which covers 900,000 households—or at least 50% of them, because the poorest ones are not covered by the mutual. So there is not any international evidence to support that. We know what is likely to happen, because that was what was done with Network Rail originally. Originally, it was set up as a not-for-profit entity, to be precise. It always relied on a 100% Government guarantee to be able to borrow any money at all. Select Committees consistently criticised the mutual because its management processes were incredibly obscure and subject to cronyism. In the end, it was taken into full public ownership, including the debt being taken on to the public books. I just want to add one thing about that as well, because that happened in 2014. I am sure the Treasury was very up front to avoid any accusations of a cover-up as to how much debt was involved. In real terms of money today, it was £72 billion. I had not realised how high it was, but that is pretty close to the total debt of all the water companies now. That was taken on to the public books. During 2014, the yield on 10-year gilts fell from 3% to 2.2%. In other words, it did not go up; it actually came down. Reviews of the year said, “It’s been another great year for gilts,” and so on. That potential thing is another scaremongering issue. I am sorry, but I just thought I would add that to the mutuals question.

Terry Jermy

That is really useful; I appreciate that. Professor McGaughey, do you have any views on mutuals?

Professor McGaughey

Just that there is a higher cost of capital because they are not public. They cannot borrow from the Public Works Loan Board. I would just like to touch on governance because this has come up. If you look at Berlin, it was privatised and then taken back into public ownership in 2013. The way it is run is that half the board is chosen or elected by the workforce, who of course know most about how the water industry works; they are the experts. The other half is chosen by the city council. Paris was taken back into public ownership in 2009. There is representation mostly from Paris city council representatives, and then some workers and people who are chosen in consultation with consumer and environmental groups. That is the sort of stakeholder model that we could have. Actually, the existing law that we have now because of the Water (Special Measures) Act 2025 says that Ofwat has the power to change governance. We could already have worker representation and local authority or mayoral representation. I agree that until you complete the map of mayors around England you probably want local representation, but it is going to be easier if mayors are doing it eventually.

Terry Jermy

Those of us without a mayor feel a bit left out.

Professor Saal

In the first part of your question, you said something about politicising. I just wanted to respond to that first. We need to realise that we are the exception. If we take all those big Netherlands companies, I doubt they add up to Severn Trent. I do not know if that is right. They may have regional authorities, but they are small. Most municipalities in most countries have some kind of local control, which in a way makes it political, but it also leads to what I mentioned before about organic solutions. I know Pamplona very well. There are 15 municipalities around it. They decided to form a quango that does waste, water and sewage. That was their solution. I know some Japanese utilities that have completely outsourced their municipal control. In the French model, we said that there is a choice going on, but there is public control. It is political because they can change their mind if it is not working. You also get these other perverse incentives. The entire debate here is that the rivers are not safe. I am seriously working on a project right now about measuring the cost of improving sewage quality in Japan. One of the research questions is, why do the companies go beyond their requirements? It is a little different from what we talk about. We are hypothesising that it might be because the mayors are competing with each other for votes. I am not saying that is what they are doing, but it is about accountability. It can still be run by the private sector if it is contracted out because all through Japan it is contracted out in many ways.

David Henderson

Any model can be made to work. This is Cunliffe’s conclusion and it is the conclusion of the OECD. As he set out, what is critical for any model to work is having a clear strategy, strong regulation and then the money. It is true that Berlin moved to a municipal model, and it cost the city there over a €1 billion. In France, in the example in Paris, a licence expired, so there was no cost. If we are to move any company into a mutual, then you need to consider what the cost would be for the acquisition, and then of course the financing cost for the ongoing operations and the capital programme after that. Of course, as I said, any model can be made to work if you have those three ingredients that Cunliffe identified in the right place.

Professor McGaughey

In Berlin, they were better off in a few years, even after having compensated the shareholders.

Chair

We are going to move on now to some questions about opportunities, costs and risks of public ownership.

Sarah Bool

It has been very clear today that there is no perfect model we can adopt. Just looking at this purely pragmatically, because you always have to end up following the money, if you are trying to set out a case for public ownership, what evidence do you have that it is actually better in terms of better outcomes? Ewan, you mentioned at one point that, on one metric, we are the seventh worst comparatively, but I assume the other six above us also had a more public form of ownership. What quantified evidence can you give us?

David Henderson

There are those beneath as well.

Professor Hall

Yes, I have done various things on this. Let us take it point by point on the economics. First, on price, there have been two big comparative studies of private and public provision of water within the same country. One was in France about 15 years ago, which was a 100% sample. It covered everything. It concluded that, ceteris paribus, private water ended up being charged 16% more than public. A more recent one was done by Cornell in the USA on, effectively, the 50% of the population covered by the largest water authorities, which is pretty good as a sample. It actually found figures so embarrassing that it quotes only the numbers rather than the percentage, but it found that private water, other things being equal, is 59% more expensive than public water. It also tried to look at, does tough regulation make a difference? It found that in relation to private concessions, no. In relation to public concessions, it found it was a non-question because the view in the USA, which is also broadly the view in practice in Europe, is that if you have public ownership, you do not need a regulator. The public authority is the regulator on behalf of the public, with the accountable mechanism and the ownership relationship giving them the power. That is one interesting dimension. In terms of efficiency, there are a number of comparative studies being done around the world, not only in the water sector but in others; I am sure David Saal knows many of these as well. It is fair to say that the broad conclusion of most of them is that there is no significant difference. There was one very detailed econometric study by Bel and Warner about 10 years ago that claimed that conclusion very firmly. It is really quite firmly established. They are equally efficient. In terms of investment and price, Scotland is a shining example. If you take the total financial costs of water in England and Wales, it works out—these figures were a couple of years ago—at about 35% of all revenue: over a third of all revenue was going straight out in dividends and interest payments in England and Wales. In Scotland, it was just 8%. There is an obvious huge saving there in the Scottish system. The other thing about Scotland was that prices were, and still are, about 20% lower than in England and Wales. Capital investment has been 50% higher per household over a 20-year period, quite consistently. That is strongly indicative. This is not definitive statistical proof, but I would offer all those as examples. What also keeps being touched on, very interestingly by everybody, is what I call democratic efficiency. If you have a public system, you can mobilise people to work out solutions. I am a big fan of South Bend, Indiana, because it had a terrible “sewage in the rivers” problem, and the consultant shook their head and said, “You’re going to have to spend $950 million and you’re going to have to destroy two of your parks.” Then they just had a big public debate, which involved the computer geeks, the Greens and everybody else in town. After a couple of years of that, batting it backwards and forwards, they worked out a solution that cost only $400-something million and kept all the existing parks, and in fact created three new ones. There are other examples of those things happening around the world.

Sarah Bool

It is an interesting one though. Those are good examples, but we need to be able to compare like with like. Our starting position will be different from where it was for Scotland or for France in terms of when they took it on. There is a bigger question to be had in that.

Professor Saal

First, somebody mentioned opportunity cost, which has to be thought about here. It is also very difficult to know what the real answer is to that question. I know you do not want an academic to say that, but it is true. I will give just a couple of examples. I do not know if it is a study, but I remember talking to someone who was doing a study on French systems. He was finding that privates were more costly, but it turned out that when you looked at the contracts, they were doing a lot more investment than the ones that were not. I do not know if that is right or wrong. There are also issues about the opportunity cost, which is a key issue, and we have talked about that. You mentioned that in Scotland only 8% goes to financing, but Scotland relies on Government debt. I know that that was an issue when I tried to model in Japan. It has to be cost-reflective in its prices, but its political decision is that it gets a lot of grants and loans from central Government. If it is not paying anything on that, there is still an opportunity cost of that. I am not saying David’s answers are wrong, because I do not know what studies he has looked at, but there are important issues. The most important thing is that it is very difficult to compare across countries or even within a country. This is why I said I would not use Ofwat’s modelling, because it does not properly control for operating characteristics. I will end on this point. A very long time ago, IPART, which I did some consulting work for a long time ago, wanted to use Ofwat’s models to assess Sydney Water. It put the data into that structure for its company, and it abandoned it after three years because it was so different. Unless you have controlled for all those differences and problems, the question is pretty hard to answer. But I am going to go with what really matters is governance, public voice, more local accountability and a good institutional regulatory structure. Sorry, and there’s one more: Scotland and Australia both have regulators under public ownership. That is a big part of the system. Scotland works because of WICS.

Professor McGaughey

The empirical evidence is, as David Hall, has suggested. Let us also just take a step back and think about the economic logic. Water is a natural monopoly. It does not make sense to have competing pipes and sewers. It does not make sense to build two Victoria embankments, because it is going to cost too much. It is cheaper for one firm to provide everything. If something is a monopoly, then that means there cannot be competition to bring down prices and increase quality for the benefit of consumers. At privatisation, an economist called Stephen Littlechild said that what you could have is competition in the takeover market for water companies. Somehow, magically—he did not quite explain how—these benefits would be passed on to consumers. Of course, that just has not happened at all. The numbers I quoted to you before were that we are the seventh worst in surface water quality—rivers and so on—fifth worst in bathing water quality, and we have the six highest bills. If you wanted to ignore the logic and just look at empirical stuff, we would have to look at lots and lots of countries, see how the law has changed over a significant amount of time, and then match that together with data or regression analysis. The answer is that you would probably find just what 90% of countries around the world have already found, which is that it is probably going to work better in public ownership because water is a natural monopoly.

David Henderson

It is interesting that we just heard the word, “probably.” Of course, it is impossible to prove a counterfactual given that we are talking about what might happen in the future. Surface water quality is not just affected by water companies. Unfortunately, we have a lot of contributors: farming, house building and run-off from highways actually—a lot of chemicals can come off tyres for example, which can cause a lot of pollution. It is not quite as easy to compare surface body water quality in one country with another. The population density matters hugely. As I am sure this Committee knows all too well, the other thing about cost is that it sadly costs a lot more to build the equivalent piece of infrastructure in this country than in just about any other country in the world. We see that in aviation, transport, housing and energy, and the same is sadly true in water. With the cost of materials and the planning process, it takes years and years and years to build reservoirs. It is shameful that we have not built a single reservoir in more than 35 years. That is not for want of trying. We have sought again and again to build reservoirs that have been rejected by the last Government and by regulators. Finally, once we get the approval to build these reservoirs so that we can cope with the pressures of climate change, then the games begin with the planning authorities or the environmental impact assessments. It takes so much longer and ends up costing a fortune more than it should. There are complicated reasons why the average bill in England might be more than the average bill in France or Germany. It is interesting that, despite all those planning obstacles I just mentioned, we do not have the very highest bills actually. It is despite that actually. The companies are bending over backwards to try to be as efficient as possible. Why? Because it is in their owners’ interests. They have no interest in running inefficient operations. If anything, Ofwat has squeezed down the allowances provided to companies too much, which is why bills fell since 2010 for the following 14 years, down by a fifth according to real terms, which is why the maintenance of our assets is not anywhere near where it should be. We are right to look at Scotland. Scotland’s regulator took a very different approach. It consistently enabled just-above inflation investments to maintain the quality of the assets. It actually looked at the assets and established what was needed, as opposed to Ofwat, which looked at these backward-looking models. That is not specific to having a privately or publicly owned company; that is about the quality of the regulation. Sir Jon Cunliffe’s report spends a lot of time looking at what good-quality regulation is. That is a crucial ingredient. As he found, it is true no matter what ownership model you have.

Professor Saal

Can I just do a hopefully quick follow-up on a related point? I agree on natural monopoly. These are natural monopolies. I really want to make the point that what went wrong after 2015 and with the cost modelling is that Ofwat was pushing for competition. I have heard senior people in the industry, in company, say to me, “They should stop messing around with competition and just focus on the job of doing the natural monopoly.” The missing part of that is it also has externalities, public goods, merit goods, and all these types of things. That makes it much more difficult to bring the competition in. I agree with the comments on Scotland, but that also brings out what has been wrong here. I have had conversations with Alan Sutherland at WICS about what it did. He said, “We want TotEx because that’s what I have to fund.” He then thought through what the company needed. There was a more supervisory process with Government and the company, in effect, because it is such a small, flat regulatory system. They came to an agreement and funded it. Down here, we just started regulating TotEx, which does not make economic sense because it is CapEx plus OpEx. One builds capital stock; one is gone. Secondly, we build cost models to do that and we try to drive competition. When you put that all together, the natural monopoly arguments push you towards more public control, and then implementation of the competition regime has created big problems basically, because I do not know what the incentives are.

Sarah Bool

I could ask you a million questions more, but unfortunately time will not allow.

Chair

I have been reviewing the areas we had hoped to cover and actually, gentlemen, you have basically covered it all quite organically without us having to be too prescriptive in our approach. Can I thank you for your attendance? Can I thank you, in particular, for the way in which you have handled your differences? None of this is easy, none of it is straightforward. If there was a simple solution, we would have found it by now, but being able to take something of public significance and concern and manage differences well is worth doing. Thank you for your attendance and indeed the way in which you have presented your evidence. For today, almost half an hour later than I should have done, I am going to conclude proceedings.