Water industry bosses questioned by MPs over Thames Water finances – watch live

our money at the prevailing rate when we borrow new money and that will reflect the bank of England's interest rates at the time okay thanks Alan Brown yeah thanks here um which teams were debt and how much has been paid in dividends since privatization so um current level of net debt is 14 billion pounds that compares to a regulator Capital value the value of the business of 19 billion pounds which gives you the 77 gearing rate in total um dividends that left the company since privatization is about three billion pounds if you compare that to how much Equity investment that's been that has been already put into the business and or will be put into business as part of the secretary support package that's about four billion pounds so in essence the current set of shareholders have who haven't taken any dividend at all will be committing best part of 14 4 billion pounds of equity to this business much higher faculty and robust but even then that's four billion that's paid the shareholders that could have invested elsewhere indeed but we're investing almost a record 1.8 billion this last year we will maintain those record levels of investment going forward and in fact we fully expect investment levels to have to increase because the next price control as we uh as we seek to improve asset resilience but also is that dividends to external shareholders or to actual um the sort of core investors in the company can we talk about that was total dividends to to um so last year for example we paid 45 million pounds to to service debt um at the at the the ultimate holding company to be absolutely clear our shareholders our current shareholders have taken no dividends since 2017. by the renewed figures roughly 33 there it creates the dividends sorry roughly 33 of your debt is equivalent to dividends it's been paid out in in in that simple Mass absolutely that's great can I ask about 10 sideway who's helped funded that's funded by an entirely different Regulatory and price control um it's not funded by Thames it's it's the different company as independent of Thames and there's there's Thames investors get in returns from Thames Hardware not directly um it's also underpined by regulator asset base model how much cheaper is out made that because that's obviously underpinned with the UK wide X checker is your question oh Tim stayed with the infrastructure is funded under our regulated RCA base model which is risk sharing with the UK taxpayer how much of our benefit does that run as I understand it um helped reduce the cost of funding of that project pretty much I I don't know you'd have to ask tideway what was the original estimate for attend Steve win what was the current construction estimate as I say I'm not the best person to ask is is an entirely independent company I definitely getting any more alerts here thank you very much if we could just move on to Philip Dunn who chairs the environmental audit select committee you've been very involved in water quality particularly in our Rivers thank you chair I'd like to touch a bit on some of the regulatory challenges that the company faces I think Mr Cochran you became Finance director after the record fine of 20 million pounds in 2017 for sewage leakage and then the repayment to customers 120 million pounds for water supply leakage problems but you were in post last week when the company was again fined over three million pounds by off-woped for deliberately misleading of what uh according to the the citation is there a culture of ignoring regulatory requirements in the company so I pick that up would you mind um yes so yes there is a culture at all yes you want to answer the question yes I'm going to pick that pick up your question and answer it so you're right so last week we had the decision from the judge in the Crawley prosecution case um that case dates back to 2017 uh so it is rather rather historical in in nature um there is no doubt that we caused a serious pollution incident in the Crawley stream we've apologized unreservedly uh for that um the judge in that case did find that we had deliberately misled the environment agency um I have been through the case style I've read everything I I don't see that but obviously we completely respect the judge's decision in terms of your point on culture I think one of the things that we've done over the past couple of years particularly on the Sarah's leadership has been to really change the values and behaviors and the culture across the company I think historically we were a company in which bad news traveled upwards too slowly I think people were afraid actually to say how things really were on the ground and I think that's one of the things that we've achieved actually over the past couple of years has really been to turn that around that it's really helping us to be honest actually within the company about the challenges that we face so that we can really address them and make improvements are you included within the companies being investigated by off water Environment Agency for breaches of Licensing for sewage discharges yeah and how many cases are being investigated at the moment at the moment we've got two large investigations so we've got one being conducted by the environment agency in relation to compliance with political treatment and then we've got another one being conducted by offwat on the same issue and I believe offward is also contemplating whether we're in breach of section 94 of the water industry act which is obviously the Parisian of effectual drainage they are considering multiple instances under that broad heading but there are just those two investigations the off sort of indicated with environmental agency they're looking at over 2 000 breaches across the industry new indicates the community What proportion of that if you haven't got a specific number yeah I don't have a specific number with me I mean I certainly think that Thames would represent a large proportion of that we have been very open and transparent about the extent to which we are discharging untreated sewage into rivers we've also said that that is unacceptable and we've been fully Cooperative with the investigations that are being run both by our Fort and the environment agency a final question for me Chad the government have announced today that they're removing cap on fines for breaches of license permits what have you made any assessment yet what you think that might mean for Thames water in the event that these investigations lead to fines we haven't assessed the the impact of that particular change no I mean the one thing that I would say though is that although I can understand why the government is doing what it's doing we are committed to becoming more compliant with this legislation we're committed to delivering better against the expectations of the public in respect of River Health and almost regardless of the level of financial penalties we would stay committed to those goals because it's simply the right thing to do and that's what the public expect this is a culture change that we can look to for the future which is Alice I assume you've endorse absolutely I mean I think that in respecting our environmental obligations and respecting our obligations regarding drinking water these are the fundamental bedrocks on which a successful company culture is based and actually I think one of the one of the important sort of contributory factors is the culture of the people at the coalface it's probably mixing my metaphors and I think when you talk to I started to talk to people on the ground they are very committed to customer service and they are the best advocates for the business we must Empower them and let them do their business going forward that's the witnesses to speak architecture quickly which to speak up a little please um okay thank you just I think going back to what you said about it was it was a leak at near Gatwick wasn't it where lots of fish were killed and I've read some of it and it was it was a genuine had a mistake or a technical thought that caused the problem that the problem was the the cover-up afterwards and I think um the the judge Christine Lang Casey said she believed and I quote there would have been a deliberate attempt to mislead the environment agency by emitting water readings and submitting a report to the regulator design denying responsibility are you saying you you don't agree with that you said it was it was an accidental it wasn't delivered it was accidental that the the misleading readings were given and and the responsibility was denied let me let me recap and first let me say I absolutely accept the judge's decision there's no equivocation with with the judge's findings but what happened in that case was that we had two pumps working to pump surge in in the city of treatment works and one of them started to work constantly to pump sewage directly from uh where the sewage came into stormwater tank we're not denying that that there was a technical thought it was the the cover-up which I think the judge was drawing attention to and then the attempt to mislead off what about what actually had happened I mean to clarify it was the environment agency rather than awful but it still stands so what happened was we actually conducted two separate investigations into what happened following this malfunction of a pump um one of those investigations concluded that there were multiple factors that could have contributed to the pollution incident and it wasn't clear that it was our error and a different investigation conducted by a different team concluded that it was in fact to do with an error that was made by Thames water not to sort out the malfunctioning pump those two investigations happened in parallel they were conducted by separate teams those teams did not talk to each other when we were asked to submit our investigation to the environment agency the investigation that got submitted was in fact the one that had said that it wasn't our fault um in fact what should have happened is that we should have sent both of those investigations and all the underlying data to the environment agency which in due course we then did right um but of course it transpired that what appeared if you were looking at this from the environment agency's point of view is that Thames of water had said that it wasn't its fault when it knew that it was its fault and I can see how that how that comes across I can absolutely see that how that comes across I I think it was um I think it was an error on our part rather than a deliberate intention to mislead but I completely respect the findings of the judge it's very early days for me I've been in the chair for two days but I got a lot of experience of dealing with other utilities and I think the change could you speak up please I'm sorry the change that needs to occur within Thames is to treat all our Regulators as partners we must have an open book basis for The Regulators women's treat them as people who have the interests of the industry and actually of terms of customers at heart and just help them by being very transparent in what we do that is the tone I think that we need to set from the top okay thank you Barry Garner yes um Mr Cochran you've painted her to my colleagues a very uh good picture of the the state of the company at the moment but in May of this year JP Morgan's report said it took poor financial performance you've been the finance director finance officer for uh since 2021 weak operational performance a stretched balance sheet uh it talked about the Enforcement cases coming from our Fort and uh pretended stricter off what dividend policy coming in the future um 151 of your staff you've now chosen to make redundant that was on the 20th of June just a month after that report are they paying the price for your failure I think we have been very clear uh indeed on on Monday when we released our results that are operational financial performance wasn't where I needed to be um we've been very transparent about that we know we need to improve performance for our customers we haven't been transparent about that for the past two years have you since you've been Financial director let's look at the the figure that you discussed with my colleague Gary you know 14 billion pounds of debt um I think actually note 18 of your account shows that your borrowings are 15.7 billion how does that reconcile with the 14 billion that you were talking about earlier 14 billion just to be absolutely clear is our statutory measure of net debt net debt um it for Covenant calculation purposes which is what we report in terms of gearing it's 14.7 billion and that takes account of um what is called debt accretion the additional costs for hedging inflation and other risks that was 14.5 isn't it 14.7 and I thought 14.5 takes the form of your whole business securitization a structure that you've used to borrow against your highly regulated assets into a net there on a covenant basis is 14.7 um that as I say Compares so to get to the 77 of gearing which is the lowest level of gearing in the in the last decade that we announced this week sorry the lowest level gearing in the last decade that you've announced but the second highest in the sector indeed but yeah indeed and the of what when you were regulating or fought controlling off what was um I thought you said that the the uh ratio should be 60 percent not 77 not 80. is that not the case you said it should be sixty percent well this assuring that we were using when I was at off water in fact off what's been using right up until the last price review is the notional level of gearing that of what uses to input into the formula that users determine the weighted average cost of capital Did you recommend 60 yes you did didn't you no we were using a 60 assumption for the purposes of calculating the wasted average cost of capital in a price control so you weren't concerned at all that at that period the company had over 80 percent for all of you at the time and I I will fully acknowledge that views have moved on but our view at the time was that a company's choice of capital structure was a matter for the company itself and that the shareholders bore the risk of that now obviously views have moved on since then was the view at the time right so now that the views have moved on what discussions have you had with the government on the potential nationalization of your company no no why do you think it's being talked about in the Press so freely well I can say that over the last couple of weeks I've read a lot in the Press some of that was rather more outlandish than perhaps we would have liked I think one of the things that may be outlandish major Mr Cochrane can come to this is the way in which you structured what was it 560 million pounds of debt just in the case that the government should have to take over the company do you want to comment on that Mr which debt are you referring to this is that the amount of money that would be payable from your debt uh should the government the government would have to pay 560 million pounds off to your your share in your debtors um I I I don't recognize that figure but um yeah I think what Barry's referring to is when um Mr Corbin is leader of the labor party and there were Manifesto commitments to I think I'll say it in my own words chair thank you very much okay um there was uh talk about the nationalization of the water company at that time um but actually since then public opinions moved on public opinion has actually gone from 79 of people opposed to the nationalization now to 83 because of the way in which your companies have been failing and to to meet the Public's expectations um so nationalization seems to be a pretty popular thing amongst the public and maybe that's been referenced in the Press um but my question is about the way in which you included a clause in a previous debt issue that would require the government to immediately pay off around half billion pounds of debt in the case of nationalization you don't recognize that Clause don't recognize that course name okay in that case perhaps you could sorry sir Adrian you you seem to want to come in there I was going to address the question of nationalization okay if we can just finish finish off with Mr Cochran first um if you could write to us tell us in fact was such a clause included in a previous debt issue if it was why was it and what would the implications of that have been for the uh for the government thank you I'll do that yes sir agent I was going to address your question on nationalization if you go back the very dawn of the private ownership of these utilities the rationale was to empower the utilities to borrow privately to use private sector capabilities performance through the operational utilities we say that we have much more to do in that area but I think the key thing is remove from the treasury the burden of funding the improvements of the orders sector that we're now managing privately and that was the driver of privacy but the problem sir Adrian has been that actually the although there has been substantial investment in the infrastructure since privatization are absolutely with you on that it hasn't been enough has it and that's exactly the point of my colleague Mr Dunn's questions to to your colleague earlier and indeed we've got to increase the flow of that investment that's what our refinancing package is aiming to do what your structure the structure of the company not when you were necessarily but what the structure of the company allowed was for an Australian Bank to actually leverage the fact that your regulated asset to extract money because you did not yes I think that there was a flow of dividends from the company under previous ownership it it's for us quite a long time ago Mr Gardner I think it reflected slightly it reflects the state of the company now or doesn't its rate it reflects I think the state of what the markets were and the practices at that time um I can't I can't those practices are still going on aren't they I can't Corey's doing the same in other regulated Industries and actually you yourself I believe are on one of macquarie's companies Cadence and and actually Catherine Ross um is on British grass transmission aren't you National Gas transmission not national grass transition which are both Macquarie companies there's a very cozy Arrangement here I have to correct you Mr Gardner they are not Macquarie companies they have a range of international investors in them including in my case Chinese and Qatari investors um they're all very responsible investors they're all seeking to perform and improve the performance of the companies that is the case here it was probably the case with Macquarie owned a major stake in the company I can't answer that myself but this was ancient history relatively speaking ancient history for us because Macquarie exited in 2017. well you and I have a different definition of ancient serrated thank you very much reflection thank you uh Rosie I think you wanted to come with a supplementary on that question thank you very much to just following on from Barry Gardner's question 278 418 people have now signed the petition to bring water companies back into National ownership and I helped some of my constituents deliver that to Downing Street around Christmas last year because it was started by a group in my constituency just leaving aside you know the idea that you don't think that that would work because obviously you don't um do you understand why the public would like to see our government or whoever being responsible for the water company so that everything's transparent it's not as though we can shop around as customers it's a vital utility we don't know who all these investors are from foreign companies that own our utilities can you understand any of you or all of you why the public want transparency so we don't have to do inquiries like this I think that um public ownership seems to be the answer to many questions I think when you conduct a real evaluation I think private ownership is still the way forward I mean that's a personal belief by being associated with private sector operations all my life I can understand the frustration of customers we want to see improvements we would love to be able to deliver all those improvements overnight but it will take time we will try very hard to bring the customers with us our Frontline employees serve customers every day they're very much in touch with everything that happens on the ground we also need to be in touch with things that happen on the ground and we've got to improve our standing with customers we're absolutely agreed on that but I think the way is continuing the private sector model not reverting to the public sector that will be my instinct it came in on the ground in whitstable in my constituencies lots of poo and sewage so it'd be nice to improve that anyone else want to come in I mean the only thing I would add is there is a obviously a perfectly reasonable National policy debate about ownership models I think that's perfectly legitimate that's absolutely normal in a democracy um our job at Thames and this is what Adrian was talking about is is to keep the Taps flowing and the lose flushing into improve our performance under whatever model the government of the day decides and that's what we'll keep focusing on Catherine we've just heard your chairman talk about wanting a closer relationship or partnership with Road used between terms of water and awful you're a previous chief executive so does the relationship that is aspired to this partnership and does a trend of off what staff seeking high paid positions in Industry affect the ability to regulate water companies yeah so the first thing just to be really clear on which I I'm sure you you know is I left off what in January 2018 I went to work for BT for three and a half years before I then applied for the role at Thames water so there was quite a gap between me leaving off what and joining Thames which is quite important um I mean personally I think that there is an important role for better understanding between companies and the regulator about what each is trying to achieve and about how the how the regime works I mean I I'm immensely proud of my time at off what I think off what people do an incredibly difficult job every day they're very passionate about the water actually wanting to deliver for customers and I think for me to come into a water company and a water company which is facing very considerable challenges and a massive turnaround but bringing that understanding of what the regulator is trying to achieve which is actually you know very much in common with what we're trying to do at Thames uh is is helpful and I think that Mutual understanding is is beneficial thank you but um so while you were too big chief exec you delivered a strategy on building trust and confidence in water services has that been delivered it's a work in progress um and so I'm a West commonwe so you might understand why ask that question what was your view on um macquarie's approach to Thames water why are you as CEO of off between 2013 we've covered it briefly but in terms of their relationship and their the way they built up debt was that a concern when you're a tubing yeah so let me let me just sort of go back time which I said before does feel like quite a different world actually I think things have moved on a lot so when I when I joined off what um as I said before it the the the Zeitgeist at the time was very much that decisions around capital structure were a matter for companies and their investors and their investors were on risk for that and that as a regulator we would keep a weather eye on things and we would be ready to act but only when acting was really necessary so things like the requirement in licenses to maintain an investment grade credit rating was was really important but beyond that if a company chose to Gear Up essentially its Equity was bearing more risk and that was a choice for its Equity now I think you know even as I was sort of leaving offwards of 2017-ish and then after I left in 2018. I think views moved on quite considerably and as you've seen in more recent years off what's taken a Keener interest in what it calls Financial resilience which is a broader concept and then as part of that in capital structures that then culminated in more recent license modifications so given that Financial resistance and then extraordinary pressure on Thames water today do you expect or intend to increase customer bills in the near future well in the near future not so we're currently in in the current price control uh settlement that was established by our fort in 2019 so the offwork can't reopen that and so those price limits will hold until 2024 so we remain restricted by the pr 19. yeah exactly now Beyond them and I think we've already talked about this there is no doubt and tens is not alone here there is no doubt that there is a substantial need for more investment in the sector as a whole including intense and we've said repeatedly we have an aging asset base we have assets that aren't as resilient as our customers and the environment would expect them to be we also have a lot of new infrastructure that we need to invest in to meet the challenges of climate change adaptation and population change and so that that will need to be funded and it is an unfortunate truth that the only source of ultimate funding for that the current model is the customer now the really important thing is that we as a water company are as efficient as we possibly can be so that a customer does not pay a pound more than they need to but it's also important our previous conversation that we can access Capital markets so that we can finance that investment and smooth the cost over decades rather than basically having to recover all of that cost in let's say a five-year period in which case the bills will be substantially higher surgeon and hearing all that and understanding the at the moment if you have to put prices up the customers would feel they're just paying for the failure of terms of water potentially the work you need to do between now and next year are you you how are you going to approach that to restore trust so that when people's bills increase potentially it actually recognizes to pay for the service they've received not the way the companies run I think there are two elements in this we must deliver on our promises we've been much better at communicating with customers it's a long hard road but that's what we will have to do thank you thank you chairman thank you very much indeed um can we ask Darren to come in let's check his chair of the business and energy committee so we're pleased to have you as our guest thank you sir Robert good morning everybody um Catherine Ross in 2014 as the chief executive of the water regulator you signed off the business plans for the water companies didn't you I did and you just said that at that time you thought it was okay for those companies to increase their debts because it was their risk is that right what would have happened at that time if any of the water companies went bankrupt oh gosh right so just let's just take a step back um and if you could ask my question if a company during the time when you were CEO went bust what would have happened yeah so what would have happened in the event of a bankruptcy or insolvency is that the special Administration regime that set out in the legislative framework would would kick in that is a decision for the Secretary of State I mean when I was at off what our expectation would have been that we would advise on that but it would have been a decision as I think it still is for the Secretary of State in plain English that means that it would have to be nationalized and taxpayers would have had to pick up the bill that's right isn't it not necessarily well especially special special administrative regime either you sell the business to someone else as a going concern as we've seen in the failure of the energy Market all the government has to pick up the bill as it had to do with bulb energy so ultimately the taxpayer would have been on the hook wouldn't they well in the event that the company couldn't be sold as a going concern uh yes there will be some liabilities that would have to be met and they could be met by the taxpayer or they could be passed on to Futures depending on the regulatory regime at the time right we're here today because Thames water which you now run is in a position where the government is having to plan to re-nationalize you because of a failure of your finances but you signed off as the chief executive of the regulator in 2014 for Macquarie to ramp up the debt from 3 billion to 10 billion pounds while taking out nearly 3 billion pounds in dividends often paying dividends higher than the profits the company made in particular years the reason we're in this position and the reason that taxpayers are now potentially on the hook for billions of billions of pounds of national borrowing is because you as the chief executive of the regulator and the regulator failed in delivering your statutory duties do you want to apologize to the public Miss Ross I don't accept that characterization of off what's price control in in 2014 the other thing I would say as well is special Administration is obviously a matter for the government but special Administration is very much a nuclear option there is a very very high bar on the government deciding to put a company into special Administration and one of those triggers would be insolvency and the other one would be uh you know perhaps persistent and severe breach of our license uh now we are not close to either of those two triggers and you heard uh our CFO uh talking a little while ago the fact about the fact that we have 4.4 billion pounds of liquidity we are a long way off uh that insolvency trigger and I think a long way off the conditions for special Administration being that okay good ideas to add something when I'm ready surgeon so forgive me um so Miss Ross you just said in the 2014 price review you didn't accept that characterization but you've just admitted to the committee that you signed off the business plans that allowed Macquarie to increase the debt which has got Thames water into the position it's it's been in the regulator facilitated this problem didn't it let me let me clarify so in 2014 uh the off what board not just the opportunity executive uh issues issued a set of final determinations that that is correct what those final determinations actually did was set out what the company needed to deliver for its customers and the environment and also the amount of money that they could recover from their customers to do that that is all they did and then of course the incentive framework that off what puts around that determines the amount of money that the company actually makes now what policy at that time which has moved on but off what policy at that time was that if a company made a profit under that regular regulatory regime it was up to the company to decide what it did with that so if it chose to pay that profit out of the company in distributions it was free to do that um Miss Ross let me ask the question in a different way two of the statutory obligations of off what the regular water regulator when it was set up was one to protect the interests of customers and two to make sure the privatized water companies could Finance themselves on both of those measures Are you seriously telling the committee today that you as the chief executive the regulator at the time succeeded in delivering those statutory obligations in the context that you're before the committee today are you really saying that was a success I think at the time when I was at off ward and I believe it to be true today everybody at off what takes their statutory duties incredibly serious what did you perform them we were exercising our functions in pursuit of our statutory duties whether every decision we made was perfect with the benefit of hindsight possibly not but that's exactly what we were trying with the benefit of hindsight would you like to apologize to the tax preparer for being here and potentially putting them in this position where yet again another regulated market could potentially collapse and expose taxpayers to billions of pounds I think if you're asking for an apology from offworth I think you should asking for an apology from you Ms Ross no I I won't apologize for my role okay thank you thank you darling I think Barry wanted to come in with another quick point just on the the question that my colleagues just raised um if you go through special Administration then of course the shareholders take the hit if the company isn't financially viable and that's that's what shareholders are for and that of course relates to the 560 million question earlier um but the process need not be renationalization as such you could actually set up Regional local Authority bodies to take over and transfer the company as a growing concern to those Regional local authorities could you not I think that would be possible yes and and actually that is the way in which many countries in the rest of the world actually run their Water Industries and it I mean there is as I said before there is a perfectly reasonable debate to be had about the right out structure and partnership model the question was simple it was that is the way that many other countries in the world run their water industry is it yes there are a variety of models and that's one of them and and and they do it actually more successfully in many cases than we happen to have done don't they can't comment on that well in terms of the the questions that my colleague Philip Dunn put to you earlier um I haven't got the comparative information about the political performance of different regimes thank you chair thank you just a couple of final questions um obviously um you've got very high levels of gearing as we've already mentioned and but you've just talked about you know long-term investment and how you're looking at decades ahead so do you think it was a mistake by the company to have so much of it does if it starts about 50 actually linked to inflation rather than taking out more long-term deals giving it to such a long-term business and was that done maybe because um the people then knew the company were so closely connected to the company and I know you've sort of referred to that but you know is it the case that actually the shareholders cope without a dividend because they're getting these interest payments in many cases well we manage our balance sheet to to to reflect the period in which we're investing in so we have debt that's up to 40 years in tenor the average age is at 13. um critically um the shareholders have put in additional Equity to ensure we retain that strong balance sheet so that we continue to be able to borrow money at a efficient rate of interest and do so your credit ratings of bonds of late haven't they the how can we still retain an investment grade credit rating a triple B credit rating which is a strong investment grade rating that allows us to borrow money efficiently and therefore we can keep customer bills down thank you I think Alan Brown would come in with a quick question about our staff at lights here and asking about dividends and we've got a briefing and flicker Thames uh utilities terms work utilities um accounts it shows a cumulative dividends paid out 7.2 billion so why did you have a much lower figure let me provide you the analysis um after this committee yeah that'd be very good thank you finally I just ask yes please on that specific point it would be very helpful if you could in your reply on dividend payments separate those which are payments to equity shareholders and those which are characterized as dividends in the accounts but actually I'll rep are within the financing structure funding debt payments yes thinking that the statement about uh not our shareholders haven't taken a dividend it was only referring to the the normal shareholders not the debt finances yeah that's absolutely correct they haven't taken any income for their investment that's right and Mrs having been both involved with off water and obviously terms water do you think the remit evolved what could be extended to look maybe a little more deeply into the sort of the financing structures within water companies rather than just sort of the relationship between the the sort of provider and the and the customer too to get a bit better picture of just where that debt is and how exposed you might be because obviously I don't think um most people were aware that you were so exposed to high inflation in terms of your debt repayments in terms of upwards remit I mean I think that's exactly what off what's been doing in recent years I mean you can ask them more about it because that's carried on off after I left but but certainly from about 2017 if I'm recalling certainly through 2018 and more recently they have been paying a lot more attention to what what they refer to as Financial resilience and part of that is is about gearing and the appropriateness of the capital structure for the sort of investment programs that are needed and I think that's entirely appropriate okay thank you and just before we let you go um Mr Cochran you talked about 151 redundancies are those going to be voluntary redundancies could you give an assurance because obviously there'll be people working in the company who will be worried about their jobs and their future will they be compulsory evidences or do you are you confident you can fill those advances with other early retirement or voluntary redundancies to the best of my knowledge we haven't announced a redundancy program right I I think that the garage was 151 redundancies as a Satan to the best of my knowledge we have not announced a redundancy program in fact we have been hiring people consistently in fact we uh for example we onshored our client service our customer service facing team into the region as part of our turnaround plan and continue to insource activity so that we can get an operational grip on our business to help part of this tournament we see Barry's Champion why when I mentioned that earlier did you not immediately say that I'm I'm astonished if I may just just one further thing and that is given that um inflation is going to rise and your your uh interest on your debt is going to rise um is it the case that prices are going to go up for customers indeed under the regulatory model um prices are indexed to inflation so why is it that you and others uh indeed in offered have and the indeed in government have been saying that there is no possibility that bill payers will see their bills rise I think if anybody's said that um that is not government Minister actually I think as well I mean the the regulatory settlements are done on a cpih class well indeed yes we all know your interest payments are going to go up this is what's precipitated the problem so so the question is how much are they going to go up what do you actually foresee the rise that that your customers are going to have to pay as a result of your company's failure actually our customers are paying less than they otherwise would as a result of the poor operational performance of the business because we are in penalty territory in terms of what's incentive regime now that means that the penalties we pay actually translate into lower bills than would otherwise be the case for customers because we're not delivering the service so we want companies to fail in order that bill payers don't pay as much is that what you're saying no but the view is that customers should pay for the service that they receive we haven't been providing the level of service that customers expect and therefore we shouldn't charge them at the prices that we would otherwise have charged we're talking about the interest payments on your debt leading through to a rise in the bills that your customers will pay is that the case no no there is no mechanism within the current price control to enable us to put up bills to reflect higher interest payments and so your bill pairs can rest assured on the Assurance of the co-chief executive of the company that uh the financial difficulties that you've got yourselves into will not result in their bills Rising thank you very much good well thank you very much indeed for coming and giving us evidence we'll now move on to our second panel thank you very much indeed to our Witnesses Lee suspended the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently suspended Welcome to our second evidence panel from off wedge off what could I actually off wet as well probably but could I ask my the witnesses to introduce himself Ian I know for my time at the Department of Transport of course so welcome nice to see you again so just introduce yourselves briefly please um this time last year so 12 months David black chief executive at offer thank you very much indeed uh you can ask Robbie Moore to start the questioning please uh yeah thank you chair if I said that off what is the economic regulator of water and wastewater sectors in England and Wales would I be correct yes that's right so how can I or indeed any members of the committee sat around here or indeed my constituents have any confidence in off what when on the 29th of June you express confidence in Thames Waters financial situation yet Thames water's debt burden is 20 above your recommended level so yes so uh as as they can't regulate it we set a uh an amount of debt uh level in terms of when we set price controls as what a reasonable prudent company should have however companies have discretion uh to to manage their own financial affairs and so companies make decisions about the choices they make in terms of debt levels what we do as a regulator is to protect customers interests by ensuring that they do not bear the consequences of companies decision making and what we've done in the last two years is to is to very much strengthen the provisions around companies having adequate Financial resilience and so our concern is making sure companies have sufficient buffer to deal with uncertainty to deal with events that may materialize and that's exactly what we have done and so we have protected customers interests customers protected in terms of the bills they pay and the services they receive and they will remain too and so do you think that you've acted reasonably and responsibly and quickly enough within the situation they're seeing with Thames water at the moment so Thames water are responsible and the shareholders are responsible for for their level of debt uh and we are holding them to account on behalf of customers how are you holding them to account if we're in this situation that we are at the moment what action have you taken so far can I just say a few words um so the situation in which tennis finds itself is a consequence of its underperformance um so it's got high levels of gearing we would like to see the gearing levels down because it does provide as as David says a greater buffer when things go wrong so Thames is problems the moment being crystallized because they've got underperformance so they are not getting the revenue they expect because they're delivering poor service to the customers so the revenues are down and their costs are higher so the shareholders are now bearing the extra cost which means because the lack of resilience in the company which we are concerned about it now needs injection of shareholder funds so so our concern is performance they are in the situation because performance is not where it needs to be and we've got similar issues in other companies but at Thames their performance pad so we have been all over them in addressing their issues about turnaround Improvement customer services and costs so when you say you've been all over them why did you on the 29th of June Express confidence in their financial position we're only in July now that was only last month but we're confident that in the conversations we've had they have got sufficient Equity commitment coming from the shareholders to address their shortfalls so we we in the short term believe that the right course of action at this point in time because they haven't got Financial resilience is the shareholders to inject Equity to support the the business as it started they off what Express confidence in terms of water's financial position on the 29th of June we're now in July you are here recognizing that they have got challenges now with their financial position um Thames water has raised 750 million of that one billion it requires you've mentioned short term there what is the impact going to be on customers on my constituents and indeed constituents of those sat around the table here welcome it's before we respond to that I think we should make very clear that in December last year we published a report saying we were unhappy with teams as Financial resilience and that action was required at that time the company had committed to one and a half billion pounds of equity injections and on that basis uh we so that was the basis uh that that was our view at that time it's not that on 29th of June we've suddenly changed our position we were very clear and have been clear for some time that Thames has inadequate Financial resilience and that they need to address that so just to be clear on that okay so over that time frame Thames hasn't raised that level of funding is that is that correct so they've injected the 500 million pounds as they committed to uh as recently and it was the remaining billion pounds which they have now uh reached uh agreement with the shoulders to support a 750 million pound Addiction in the company so that's the change and that was our concern and why we were engaging with the company ahead of their financial about the shareholders commitments uh and those the discussions that we've been having with do you feel as a regulator that you've taken sufficient infection despite having first raised it in December and not giving as as a Starker warning as I would like to see from a regulator on the 29th of June I think our our warning in December last year was unambiguous and clear that they had insufficiency was a regulator that you've taken sufficient in their faction since the warning that was put out in December last year yes uh but we're also engaged before that we were having discussions I just shortly after I was appointed as acting chief executive I was discussing with the chief executive then chief executive Thames water about the about our concerns about their financial resilience and it was those con and and in terms of we have an annual process where we look at the company's Assurance around their adequacy of financial resources about how the company was going straight that and that was the outcome of those conversations with the company's commitment to inject the 1.5 billion pounds into the business so we've been engaged with teams on their financial resilience for some time they cut shoulders are responding but we are remain concerned that there are significant issues to address and as Ian said significant performance issues in terms of the turnaround of the company the how are you as a regulator going to ensure that that chat that challenge is addressed and their debt burden is going to be brought down so in terms of the first thing is for the company is to get a plan that will secure their their turn around so they've obviously made a number of tips to turn around their business uh those haven't succeeded at this point uh and we continue to hold the company to account on their performance to date and so imposing Financial penalties on on the company for their failures to deliver for customers we have so we have a number of licensed Powers but we have powers uh for example in terms of the payment of dividends which we've just uh brought into into place but we also will examine their assurances around their financial resilience which they have provided to us on this past Monday and we'll work through that and engage with the company we will remain in discussion with company with the company about their ability to secure financing from shelves so I mean my one of my concerns is that ultimately as a result of Thames is poor management this is likely to result in customer Bills going up no it can be unequivocal on that so we set companies allowed cost Capital Returns on the basis of an efficient well-functioning company so tham shareholders are up for the additional costs associated with airport performance and that is evidenced by the fact that I've had to inject additional funding into the company and they've had very little the web dividend payments over the last seven years so you were very quick to come up with a no there but over what time period does that relate to uh so in terms of we reset price reviews every five years but the key point is we're saying that we will allow Thames the efficient costs of running the business now that may vary and we will set that again as part of the 2024 price you can only confidently say no up until 2024 is that correct or beyond that not at all because we have a policy position so whether bills are going up or bills are going down that will be determined by the needs from a customer and environmental perspective and we'll set bills on the basis of teams as efficient costs and an efficient cost of financing that and so that will be the basis for setting bills and it won't be about teams as actual debt burden or actual costs Tim's customers do not pay a penny more for terms as 80 gearing versus other companies 60 gears thank you chair thank you John Jones um thank you last year my committee did a major inquiry into the collapse of the energy markets and highlighted a number of failings that the energy regulator off gem which they're now dealing with have you been working with off gem to learn the lessons from the energy Market as it relates to the water Market uh yes uh we we welcome your report and we have uh considered it we've also engaged with off Gem and the advisors they're engaged with during that process so for example we had the the consultancy they commissioned to do the independent review come in and speak to us in your leadership team and talk through their view about the Lessons Learned for officer okay so having considered my committee's report what do you think the main takeaway is that you need to now change it off what to secure the future of the water industry so we think the key changes we have made are the are they bringing into being of new conditions and Company licenses around payment of dividends and financial resilience so under the environment act 2021 we receive new powers to Min company licenses up until that point we didn't in our view of sufficient power to change company licenses we have now used those Powers the first Target to release those Powers was around strengthening provisions on financial resilience the second change we're making is about improving customer protection and customer service in 2022 off what started Financial monitoring of water companies according to the review of your 2014 price review that was published on your website were you not doing this before so we've published a financial monitoring report since 2016 uh so we've published a series of reports every year uh they come out we look at companies financial statements they provide us we do our analysis on a range of uh of financing issues around companies including their their debt structures their dividend payments uh and their plans with pumpkin so we've been doing that since 2016. did you raise issues about Thames water in 2016 so we identified that they had high levels of gearing that they had financial ratios that that did raise considered why has nothing happened about that uh so Thames have been able to to finance their activities and so there hasn't been it so that so we have been engaging with the company and we have raised concerns about it uh but frankly our concerns at the time are more focused on Southern water where we have secured injections of equity into that company and Yorkshire water we have also secured it with decisions in that company uh we have now uh more focused on Thames uh recognizing the issues that they're facing but at the time those issues were less severe uh than faced by other companies I've just named shouldn't you be focusing on all of the companies you regulate not just one at any given time uh we we do but the point I was making is that we're engaged with the shareholders of Southern at that time to uh in terms of securing their exit from the business and they enter into that business of new shareholders who are able to inject a billion pounds into Southern water in the previous panel the new chairman of Thames water said that we need to enter a period of transparency where the water companies are transparent with the regulator the implication of that is that they haven't been in the past is that right and they have provided information to us on their financing I think what I would say is they won't sufficiently transparent with the public uh obviously company financing issues are complex we've criticized them for being opaque we have introduced licensed conditions to require companies to provide more adequate financial information but I think there's a huge challenge for companies in like explaining and plain English what's going on with the financing structures where the money is coming from and where it's going to I think you said that from 2025 you're going to reduce the debt Target from 60 to 55 is that right it's part of the price of U.S we use a notional uh gearing Target and that is the signal that we think there should be prudent Headroom in financing structures uh so we would so we're using that to signal to investors and companies that we think their Equity buffer needs to increase as they face the challenges of the future they're going to be making large investment programs they're facing the challenges of climate change and we're also increasing the level of financial penalties on companies uh so we want them to have adequate Financial structures to bear that only three of them 11 water companies that you regulate have debt below 60 today what is the consequence if they don't hit your debt Target from 2025. and so what we're concerned about is adequacy of financial resilience and so that doesn't rest on gearing alone so I think we need to be quite clear that the gearing number is useful it's so could you try that in just plain English for me forgive me so what happens if they don't hit your debt Target what's the consequence for the company so the the we're not setting the Target in terms of companies why do you call it a debt Target if it's not a Target because that's the basis for setting the price review which is about making sure we're protecting customers interest so customers are paying a bill based on a 55 gearing Target rather than the actual dick gearing the company has which relates to the question earlier about how we protect customers interests so we're saying that we're going to set customer bills on the spaces if companies have different financing structures they bear those consequences so this is it's really important that shareholders and companies are responsible for their financial structures we are here to predict customers interests and that's what we're doing my last question is on consequences you've made made the point repeatedly that you protect customers and you've talked about customer builds you recognize though do you that there is a scenario in which the taxpayer would have to pick up the cost of a failed water company because they are too important to fail do you ever think about their risk to taxpayers of bankrupt water companies when you're looking at protecting consumer interests I think you're referring to the special Administration regime so the situation in wars with other regulated Industries is that a special administrator will be appointed if a company is in danger of insolvency it is their job uh then to deliver services to customers to protect customers interests but also to secure new owners for the companies and in contrasts perhaps to the energy companies you looked at water companies have very large asset bases and so in the first instance we think costs around special Administration we're born by investors we do accept that there is a risk for taxpayers and so that is one of the reasons why we've been working to drive increased Financial resilience into companies while we've used our new powers we've received under the environment Act change license conditions to tighten up on financial resilience the public will look at what's being reported as happening in the water industry having just gone through what happened in the energy industry last year and the risk here is that the government taxpayers have to borrow enormous amounts of money to underwrite the risks that companies have been allowed to take and the public will see once again companies like Macquarie cashing out walking away with their money the previous CEO of the regulator refusing to apologize for the fact that we're in this position in the first place and the public will say what are the consequences who is responsible for exposing taxpayers in this way do you albeit as the newer chief executive of the water regulator want to apologize on behalf of your predecessors for ending up in this position in the first place so just in terms of I think it's very uh we're beginning to be careful about the parallel with energy sector and so as I've explained energy companies which failed have very little in the way of assets we're talking about a in the terms case a 19 billion pound company and so the question is can the equity holders of needs must death holders bear the consequences of Mr Black a taxpayer and a customer is the same person it's still a person paying out money either to the government or to a company my question was whether you recognize the failure of the water regulator over these many years that's got us into this position in the first place and whether now as the chief executive of the water regulator much like the chief executive of the energy regulator did last year you want to apologize for the public for the position we're in today so we continue to predict customers interests customers that we are not in a position of either teams being in special Administration uh you think everything's okay right now is that what you don't I think there's some very serious issues that Thames water need to address but my point is that customers interests remain main protected by the regime we're not at the point uh where it has been very clear that customers are having to pay any more for terms as Financial issues or for their poor performance and that remains so and as explain the situation energy is different from water as in water companies have much greater capacity to absorb the consequences or should I say their shareholders I understand you've made the problem just very last year because I'm going to be testing the patients of the chair I'm very patient person well thank you well I'll keep going in that case um do you therefore not have a request of the government to enhance or extend your powers because it seems to me that both you Mr Black and your predecessor Mr Ross in the previous panel have said to us is up to the companies how they run their businesses and don't worry because if it goes wrong the government's probably not going to have to nationalize it anyway that's not what it looks like from from where I'm sitting so I would want you and the other Regulators to be in a position where when you're regulating a company that is too important to fail you actually know what's going on in that business and you have the power to make sure they don't end up in a position like they're in now so do you need additional powers from the government to do that job properly so I agree that this is your race in a very serious and I agree that up until 2021 we didn't feel weird social powers to address those issues so the crucial change for us in 2021 was our ability to amend company licenses and so the licenses instrument that we use to regulate companies we now think we have sufficient flexibility in terms of amending licenses both in terms of the changes we have already made but if we think further changes are required to go ahead and make those changes so we think the government has now given us the additional pounds and we've also received additional funding or the ability to raise additional funding so we can resource up to to exercise those those new powers thank you thank you Darren cat Smith thank you chair Mr Black earlier in response to a question from my colleague Mr Jones there you did say that the auto companies were in uh transparent with yourselves as the regulator but not necessarily with their customers I'm just wondering I'm left wondering what on Earth is the point of a regulator if then you're not communicating that with the public so we think companies have a responsibility to communicate clearly with their customers and so that was the question I was I was responding to we are able to get information from companies we require them to provide annual annual information address of considerable detail we also have a five yearly business plan where they set out their five yearly projects I'm sorry but if you know that companies are not being transparent with their customers and you know what's going on why why is off what not communicating that with them we would we want companies to take responsibility for communicating the customers we've changed company licenses to require them to to do that so we think that they are now uh taking steps to to do that but the point I would make is that it is challenging to explain these issues to customers and I think quite clearly customers do not feel that there's information and what is taking the situation so in terms of we can set guidelines in terms of what companies ought to be doing in terms of what they publish lines are obviously optional then yes we also have requirements of what companies publish what are the requirements so the companies do publish annual financial statements they do set out so the question is not so much they set out the information it is about communicating that in an understandable form to their customers so we think why the public are kind of questioning what is the point of your organization when it does appear that you have done absolutely nothing to inform them about some of the risks that these companies are taking and I I am left wondering whether or not this model that we have of water ownership in this country which is completely out of step with what is probably the international Norm here is is working because it strikes me that in 2017 the Ft reported in a 10-year review of Company accounts that on profits of 20.7 billion pounds water companies paid an average tax rate of eight percent who benefits from water privatization uh so in terms of since privatization 190 billion pounds have been invested uh uh so that and that has driven significant improvements in service so improvements in water quality uh improvements reductions in in the levels of pollution uh and improvements in uh customer service reductions and water supply interruptions so there's water investment uh capital investment in the sector was about double at the rate pre-privatization so clearly the question about the ownership of companies as a matter of government not for off watch uh but we you can point to tangible Investments under the regulated model of law investment and better service that said we're under no Illusions there are real problems for the sector to address uh the situation on sewage spills and storm overflows is unacceptable uh now that we have the information about those uh this charges action has been taken but I should point out that these are issues that exist in other jurisdictions as well there are a problem in Scotland they're a problem in other countries as well it does require a concerted effort to address it will require more Investments and we're we're part of that process we've had 34 years of water privatization and why is it that we're still talking about this desperate need for investment if privatization was meant to be the answer to this investment question 34 years ago why why are we still in this situation today because the water companies uh so I so in terms of areas of where companies have fallen short of performance so we've been very clear with the committee that we think the performance of Thames water is poor it needs to improve there are other companies where we have concerns about as well uh we think there are sector-wide issues to address uh but again as I point out if you look at other countries other jurisdictions they are facing the same challenges issues of climate change high density urban areas addressing uh uh particularly with older infrastructure issues about making the in terms of getting better performance that in line with what the public would expect and so that we can point to significant investment since privatization we can point to significant improvements is so unpopular whenever we see public polling on the idea of renationalization of water companies it's incredibly popular with the public why do you think that is I don't think that's a question for me to answer I think you as a NP will be much better place than me to address English it is because of the absolute utter failure of the water companies in England right now uh so to say we can point to huge improvements and service huge levels of Investments but clearly we accept the public is dissatisfied with companies we've done some research which suggest that trust and companies have fallen over the last three years uh we think it's really important the sector addresses issues Ian and I called our company's chairs and chief Executives in to to really make the point that they need to improve performance we are seeing signs of change in the water sector but much more change is needed and this is not about who owns the companies this is about companies uh really adopting much more forward-looking management practices so investing in smart grid smart Network should I say smart metering uh using nature-based the solutions at scale and really modernizing the way companies work and we will continue to push the sector to do just that can I just say a couple of words um it's a really good question about the prioritized water model so it has been privatized for 30 odd years 190 billion pounds has gone into investment in the sector that's four or five six billion pounds a year I I would worry that in a nationalized situation that the call on that kind of investment wouldn't be there so the money wouldn't be available so it is going in why are we facing such an investment crisis now it's because the nature of investment is changing so we've got to address things like water resilience we now need more water to cope with population growth urbanization um climate change there's changing standards on levels of water abstraction that the rotations are pushing through the drive towards net zero and the need to address of stormwater overflow so that is a very very significant step of investment that we've not seen in the past and that is causing some concerns about the future and my final question if I if I major is just about particularly like Thames water and can I ask what plans have been put in place uh to prepare Thames water for potential failure and what that might look like uh so um what we call contingency planning for the failure of a water company something we keep under review uh and in terms of our concerns about Thames water we have been looking very closely at the arrangements that need to be taken and we are confident that we can rise to the contingencies uh uh that that may occur but we think it's prudent planning to be ready for special Administration uh but uh as the company this morning they have sufficient liquidity to meet the challenges of the immediate future and shareholder commitment for additional funding should those materialize then obviously this planning work we needed but we think it's prudent as a regulator that we prepare for these outcomes and we've been working on that would you say you're confident that the special Administration regime will not be needed in the case of Thames water uh I think uh we we need some rain ready to employ that uh do you think you'll be deploying it uh I think at this point in time the company is saying that they have secured commitments from their shareholders and so believe them so it won't be needed uh um obviously so so in term terms of I think it's great that the company have Spirit they come from the shareholders but clearly there is uh you know the money has not yet arrived with the company and so that at that point uh we will feel uh more confident can I just just add a little tiny bit one of the reasons we're doing a lot of contingency planning now is to learn the lessons of bulb um you know what that would mean it's the most recent example of administration so we're working with our colleaguesity across government to say in the unlikely circumstances it happens are we already have we got everything in place so we don't think it's like at the moment the reasons David said but it will be sensible for everybody just to think about the possible implications you do not think it's likely at this point in time we're confident the shelves will inject some cash but the problems at Thames are deep rooted and I'll start I'll repeat what I said before the problems that Thames are a function of cost overruns and poor performance and they need to fix that as quickly as possible otherwise they will have the same problems in the future have you been asleep at the wheel as a regulator no okay sure thank you I think Darren's coming very quickly very quick follow-up but it's great to hear that you're trying to learn the lessons from the bulb um failure one of the issues with the energy companies that collapsed last year was the capital that the treasury had to provide to keep the running as going concerns bulb is was huge for the energy Market but it's actually quite small compared to Thames water what's the assessment been for the treasury in terms of the amount of capital it needs to put aside should Thames water fail uh so we've been working on those issues I'm not going to name a number in terms of in terms of where we're at in the process but as I've noted there's quite big differences between bulb which is a relatively asset light company exposed to energy Market fluctuations and Thames which is a large Capital Texas business uh with larger asset base and ability to raise funding when the energy market failure was happening both the regulator and the government wrote to my committee confidentially to tell us those numbers will you commit to do that to this committee uh I think we probably refer that to treasury these are questions for them really okay thank you I think could you sort of give taxpayers an assurance that if there were to be a special Administration this wouldn't be the taxpayer bailing out the shareholders they would have already lost their shirts and it would be a case of picking up the pieces more like the banks I suspect than the the the energy companies and that um who knows what you know if the company performed well they could well be sold back into the private sector as we've seen with some of the bank shares yeah so the company would remain an attractive interest for other potential investors and so as I say they've got a 19 billion pound asset base they have a secure Revenue stream uh so the question will be in terms of the interest of existing shareholders uh so they're the first in terms of their equities at risk they're well aware of that uh then there's a question about the debt holders in the company might be the same people we heard in the first session uh I don't think in the main that that is the case okay thank you sorry yes thank you chair um first of all let me make it absolutely clear I understand Ian you came into the business only in July last year and and Mr Black you came in I think in April just before that so um you you are left responding for things that happen broadly before your UH your tenure and and I just want to say we we appreciate that um if we go back let's go back to um 2003 South East water and you'll remember that Macquarie purchased Southeast water there um they sold it three years later for almost double what they purchased it for and they had by that time increased the debt more than four-fold um in effect they repeated that with Thames water it was a much bigger Prospect Thames water and they increased the debt threefold there um and instead of it being the case that companies raising debt in this way would would use it to increase the infrastructure for the benefit of the public the public good they actually took 2.7 billion out of it and 2.2 billion of that within loans so you've rightly and that you've reiterated it to this committee you you've rightly said that you are were very concerned about the gearing not only of of this company but but of others in the sector and the higher debt that gearing gives a notional lower cost of capital of financing doesn't it um so lower charges then result in the short term um my accusation against offward would be that you've basically over you've encouraged over leveraging and I have to say the two of you are not entirely innocent of this because of course in August of last year after both of you came into post and you encouraged uh the purchase by Macquarie um of Southern water now you knew its track record you know what this you know it over leverages you know that in the short term that can can can get charges down but when it goes wrong and financing costs increase we see the debacle that we've had with Thames water so it seems to me that off what over a long period of time has been guilty of encouraging over leveraging and the immediate charge that I would lay at your two doors is that you did exactly the same thing just after you came into post with Southern water so just in terms of to contextualize so going back to around early 2000s so the sector assets I forget about actually go right back to Startup privatization the sector asset base was nine billion pounds it was fully financed by Equity at that point today the sector asset base is around 85 billion pounds and debt levels around 57 billion pounds so that growth of an asset base of uh 78 77 billion pounds since privatization 57 billion pounds has been financed by debt and about 20 billion from Equity so when we look at the picture across the sector debt has been a key source of Finance not the only source of finance and that was intended a privatization so that debt levels would increase overground where we agree yes yeah so now can I move on over ground where we just disagree so yes so now moving on to the the cases that you've talked through in terms of and it's a very uh knowledgeable question in terms of Southeast water and the macquarius ownership of Thames uh I would agree that macquarie's ownership of terms that they uh you know they did gear up the company's very high levels they extracted that in form of dividends and that's the reasons why we have changed the licenses want to further the power to to do so however ever we've been very clear that about the new basis and our new expectations of investors so and just coming to the specifics of Southern water my quarries injected a billion pounds into the southern water group and now standing by to get to further 500 million pounds they have had very little on the way of dividends out of that company so I take something I take some satisfaction and we've got new controls on dividends now so they cannot get the money out of the business uh if so we have the ability to intervene so I take some satisfaction actually that macquarie's as an investor are injecting money into the sector rather than taking it out of it and we have the arrangements in place to protect customers interests well it goes back to um your response to to my colleague Darren Jones doesn't it that actually what is this target about you know the the gearing that you want um if you can't enforce it um what what gives you the assurance that that quarry are not going to do with Southern water in exactly what they did with Thames and exactly what they did with Southeast let me just say the difference is the new Financial resilience measures we put in place which prevent companies taking us um taking dividends out of the company when they're poorly performing or when they're not justified we didn't have that power before sorry and I I don't know the answer to this question that's rare when I asked the questions Barry no no it's not I assure you it's not chair usually I know the answer to the question that I'm asking uh so let me ask you Mr culture um are you saying that in a highly complicated debt structure like uh WBS in in Thames water uh that you have the power to stop dividends going to each of those debt Pairs and not only to what everybody would normally understand as being the shareholders the equity shareholders we have the powers to stop dividends being released from the operation company so where they go beyond that is a matter of the company but but we would the financial powers that we have got retain the dividends what would have been paid inside the company if we're not satisfied that they are performing and they've not satisfied they have sufficient Financial resilience we didn't have that power before were you now and the southern one is a good case in point working so certain um Macquarie have gone in there with a group of investors they've looked at the business they now realize and I need to inject further Equity because of the base and that is what they're doing precisely now and we are confident that the the situation that happened at uh a decade or so ago is is now protected thank you so what you're saying is had had these new Arrangements been in place when our previous witness was the CEO of of the organization and subsequently what happened with off what what happened with tennis water it could not have happened we would have had the ability to block the dividends going out of the company yes so I think again it was a question from my colleague Darren Jones um to her um when she denied that they had failed in any way or lacked any powers to do so that is one way in which the debacle could have been presented prevented yeah thank you um so are you confident that going forward um no company no uh part of the ownership of the company would be able to receive the level of returns that Macquarie was extracting from Thames water between 15.9 and 19 that's over double the normal uh return that uh yeah so we've changed the license to to make those um sorry to give us the power to do that but furthermore we've now got more flexibility with the license if we think further changes are required we will introduce them right um thank you very much thank you I think Rosie wanted to come over the supplementary on that yeah I mean I'm going over some ground covered by Darren Jones and Captain Smith I'm afraid but my constituents would really like to know I mean do you understand why in the coastal town of whitstable for example they don't have a lot of faith enough for all the environment agency or anyone else that is supposed to be imposing fines and stopping you know we know that you impose these record fines against Southern water for example but nothing is actually practically and physically changed every time we get a thimble full of rain there's sewage released into the sea which affects every aspect of daily life in a town like whitstable um can you just maybe you know can I just give you the chance to kind of briefly explain to them why they should have faith in you what you can do I mean you've talked about improving customer service revoking licenses stopping shareholders getting dividends um and that customers interests remain protected can you convince my constituents that you're doing your job there he goes um so that the issue of stormwater overflows um is appalling you know we have said this and I have said this committee before the Reliance over-reliance and use of stormwater overflows to deal with rainfall as you suggest is is unacceptable so what we have we've been very clear to everybody that if a company and this is the same for the environment agency if a company is in breach of its legal or regular obligations they will take action and they will force compliance and the companies will be responsible for rectifying the problems we have got ourselves in a situation where some of these stormwater overflows have do allow under perfect to release surge into the underwater systems so we need to tighten up all of those permits to say to people that is no longer acceptable so you might have a permit today but we need to see that tightened over the course of time but you know we will enforce and ensure companies comply with the law comply with their environmental obligations and their permitting requirements and the cost of doing so is for the companies themselves we have got six concurrent large-scale investigations into the companies that have been doing this to satisfy ourselves but they are complying with illegal obligations and complyment environmental permits they are complicated I don't wish to trivialize it but we are working through that and we know our colleagues at the EA are doing exactly the same Frankie if they're still within those legal limits though and sewage is still spinning out every time it rains who is then responsible for changing that or imposing different legal limits or I mean is that us so you're saying we need to come back and change that or definitely to that's a different environment agency so it's the environment agency that permits each and every storm discharge and so that's the that's the arrangement we just refer to the um defer's water plan for water which does set much lower targets the use of these storm water flows it's going to take time but it's uh the government has set out a 56 billion pound plan to address this issue I've been on site at whitstable so there is scope to make quick improvements which the companies in the process are making but then there are some quite significant issues which will require investment to address thank you very much okay I think Philip there is coming after Neil knudson's question okay thank you chair I just wanted to follow up and quickly before I get on to my so the main question about Mr couch you've been before us before and I've asked you about the the teeth that you have in terms of putting pressure on the water companies and we've talked about fines and then allowing dividends to go out um in terms we've talked about financial performance today and and we and and Rosie's been touching on the sort of sewage overflows as well do you feel that the teeth you have um if water companies are having these unacceptable and immoral sewage discharges into our watercourses do you feel that you have the teeth and what are those teeth would they be with the fines or can you potentially stop the dividends going out if they are breaching the sewage outflows as well or is it more financial performance that you're going to be using that particular tooth um particularly I lost over to us to say but I would just say that yes we have got the power to enforce compliance to address any aspect of underperformance through either find withholding dividend payments if we think they are in breach of their obligations it's the underperformance it could be about sewage rather than financial underperformance yes yes okay so we have a set of performance groups we also have obligations that we enforce on companies in terms of the operation of their sewage systems and so that's what we're investigating with our six cases uh we will have the ability to impose Financial penalties we've imposed 250 million pounds of penalties on companies in the last five years we won't hesitate to use those Powers I reassure the committee and the public watching this that you'll use those teeth to hold those water companies to account I just had one extra thing when I did a pay-per-view before uh when I appeared to you before you're asking it's very similar questions so in the last 12 months what we have done we've secured additional funding uh from treasury into defra to allow us to ramp up our investigation capabilities that we are in empowering our people to be much much more intrusive on companies performance so it's a more muscular approach that when we see companies not performing below election we have had them in and we've said we would like a rectification plan from you your performance is not acceptable please give us a turn around plan to rectifying that is new we didn't do that before and uh in the first part of this year we had five companies in to say we are not satisfied please give us an improvement program and that's the result of the extra powers that we've we've secured in extra funds sorry data because of course yeah so we you know we think we do have the powers I mean as noted there's there is the role the environment agency in terms of the setting permits at sites but we have the powers we have the ability to to impose large Financial penalties up to 10 percent turnover on we've got the powers can you just reassure us and the public that you will use this yes we're we're taking we're taking enforcement we actually get six large Wastewater companies at present uh and I know these investigations do take time and people are impatient to see results I am as well uh but we are making good progress uh and we will have announcements to come with that I wanted to move back on to the the topic that we touched on earlier today in terms of Staffing and Leadership and and the relationship between the the regulator and the sector and we've we know that one of our previous Witnesses the uh um the new interim Chief joined to the Joint chief executive Thames water was formerly one of your predecessors uh Mr Black at off what um do you feel that there are other high numbers of of senior off-what staff moving to potentially higher paid positions in private water companies do you feel that that is problematic at all for your ability to main trust in off worlds off what's role and motives firstly just to reassure we do all departure small forward are covered by civil service business appointment rules uh which does do allow us to impose conditions on staff for up to two years after they leave in terms of the work they're Undertake and how they uh so that's important I think the point of makers in terms of contextualizing this where there's been lots of media reports on this issue but they're talking about numbers which amount to two or three staff members per year leaving our organization over 300 people at each one of the and a number of those members didn't go from off to watercolor they went off what to another employer to a water company you mentioned these media reports you recognize the figures of about 27 former off-what directors managers and Consultants who are now currently working with private water companies do you recognize those figures I recognize those figures but the point I wouldn't make is that a number of those people left off what to go to work you know within another sector or not for a water company and then later on some years later have gone to work for a water company and so I think it does need to be seen in that context we do have strict rules about what people do upon leaving off what uh and so you know I think these numbers uh you know do not support any kind of uh the contention that that's been made we recognize that in the public sector there are finite resources in terms of the salaries that can be paid and we understand that um Professor sadita Helm at Oxford University has said there is a merry-go-round between the core regulators and the regulated utilities Regulators are not paid well and if there is a potential of future jobs in the firms they regulate it creates potential conflicts of interest do you concur with that statement at all uh I you know I don't accept I mean I work with an incredible bunch of very dedicated people um as I say most of whom do not go to work for water companies uh so they uh so so I think they do a fantastic job uh they're very dedicated to to the public interest to protecting customers interests and it's probably worth noting that Professor Helm also works for these water companies and as engaged problems I have a question Fair thank you so Point um and and I do very much take on board what you say that that the people that work for your organization work so hard to try and do the best to to improve the water quality for our country but for you as two leaders of that regulator does it concern you that potential tool and drag into the private sector that it is draining you of the vital resource that you need to do the best job that you can going to contextualize that I think only one member of senior leadership team which is Catherine Ross you've seen earlier has left or fought to end she didn't go to water company she went to BT but has also ended up in a water company so uh it doesn't worry you then so no I think I I think people okay what do you it doesn't look good I accept that um but you know I'd like to assure the committee to anybody you know we have um processes and governance regimes to make sure that decisions are are syndicated they're taken thoughtfully in considering that no one individual really has the powers to make decisions which uh may be biased or whatever it may be so I'm I'm reasonably reassured that the decision-making process we've got protects that but I do accept that on the face of it people could ask questions but for David's reasons it's it it's not real an issue there's a small number of people they tend to be more Junior people and they tend to end up in the regulatory Departments of these big organizations which tends to be a bit of a specialist skill so understandably they've got skills knowledge and capabilities about the process which is available to companies but I do accept your your observation thank you thank you very very briefly I'm just following that at that point up just for the avoidance of doubt and for clarity and reassuring the public can you confirm that you in have no financial interest in a water company or a company which is a major supplier to water company I have got no interests at all in any water company any supply to the water industry thank you and David could you give us the same reassurance yes that's right I have no interest in any water company thank you and for anybody you bring into the company but whether an executive or non-executive into offwatch right around the company you receive a similar Assurance yes yeah it's very clear upon entering employment at off what you're not allowed to own shares an auto company thank you David you talked about obviously you produce a financial monitoring report which uh delves into some of the way these um companies are funny but you also said that sometimes they were fairly opaque mechanisms do you think having more powers to sort of delve into some of these opaque funding streams would oh you or do you feel you've got enough Powers at the moment I think we have adequate powers to require information from companies and there is a question about level resources and expertise required and so we are looking to and beef up our resources in that space and so I guess my my key question is you know do we have the the resources in that space and that's why I'm pleased we've got the additional funding to strengthen our capabilities but it is a you know it is a it is a complex area it's an area of specialist expertise as it's not just about having the information it's about having the expertise to understand what's going on to ask the right questions to companies and just following on from Neil's point you said only one person has moved from off what to I think figure whistle is 20 is it one member of the senior leadership team which is Catherine Ross so the 27 people are referred to and pretty soon over the period of time I think is about two to three employees a year we'd have that figure before um sorry chair that I don't think that's accurately there's six of the nine uh companies in England have hired directors of corporate strategy or heads of Regulation who previously worked off what um Andrew Beaver uh in the Thundering water former director's strategy and planning Ian mcguffic at Southern water um Ross at Thames water Jonathan Reed director of regulatory policy there's another none of those were members of our fought senior leadership team just to be clear did you have senior leadership positions you've gone on to senior positions within their company within the companies that they've joined uh half of the 27 have gone on to senior leadership positions in the companies that they've water off what they weren't a member of the leadership team there they were lower down the higher okay well we're bang on the time I had in the back of my mind for moving on to the final evidence session so thank you very much indeed and thank you David for coming and giving us such useful evidence thank you very much for your interest the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently suspended the proceeding is currently well thank you and um Welcome to our panel for the second session uh if that could ask you to introduce yourself starting with the minister I think environment minister also water Minister comes under my portfolio and I'm David Hill I'm the director general for the environment in defra perfect thank you if I could start minister with the question we heard how you know in the worst scenario if there was a failure you know we've been looking at some of the energy companies the banks if there was a failure and the water companies have to go into special Administration How concerned you are you about the potential failure at Thames water and other providers in the sector is it on your radar well as the water Minister obviously uh I'm looking at all the water companies and working very closely to make sure offworks are doing their job as the regulator so they would be highlighting things to us constantly of course and we were very mindful of their resilience report they came out with earlier in the year in terms of the special Administration order that you're referring to of course should a water company no longer be able to fulfill its Financial Obligations the Secretary of State and Norfolk have got powers to apply for this on insolvency grounds but I've been made fully aware and in fact the new chairman sir Adrian came in to see the Secretary of State just yesterday who gave absolute assurances that we are nowhere near that that situation but a government would always have to have the measures in place should they ever be required would you agree that they've been skating on dangerously thin ice with 80 gearing and half their debt linked to inflation with inflation rate Rising you know obviously that they there's been alarm bells ringing all around not just Thames water but other water companies also highly geared and so exposed to debt repayments well obviously we look really closely at this whole issue of debt and gearing and how the whole all system works in terms of attracting outside funding in terms of equity or raising debt because obviously the water companies have got to pay for all of the investment the huge investment in infrastructure and let's not forget that since privatization investment has actually doubled compared to what it was before privatization and it's attracted in 190 billion pounds OHS twos or maybe money yeah money which um you know what one might say would we would have struggled to have attracted uh had we not gone through this process of privatization because if you talk to people we might call it back in the old days Roberts I think you and I were around and I've I've met with a whole lot of people actually um who who um were involved pre-privatization and then saw the system through and now privatization to for them to reflect on their thoughts on it you know and the water system was in a terrible State you know we did have terrible leakage we did we have had masses of interruptions to supply um and we cut leakage by I think a third we cut Supply outages by fit you know so there's been huge um improvements so I honestly think we must not forget to tell that story that's not to say there is not an awful lot we have to keep our eye on and we have to make sure our water companies are delivering what we need now you know and also a changing world I think the um the chair of Buffalo referred to that we got huge demands on us and that because also climate change and so forth but the in terms of that I think you asked the question about the gearing uh well um uh obviously off what did indicate in their financial resilience report that they had some concerns about Thames that's why um you know they're working with them very very closely but I think and I'd like to draw the committee's attention to those statements that we've had from or fought and Thames water so on the 29th of June we had a statement that emphasized that terms water had a strong liquidity position which included 4.4 billion pounds of cash and committed funding and we just had the Thames water announcement haven't we this week with the accounts via the annual report that they've secured a further that was and that some money was was committed earlier in the year but we've had a further 750 million pounds of equity that was a shortfall on the billion that was suggested needed and injected though wasn't it yeah but I think they gave some adequate answers I've been listening to you know this is the money that needs to be spent soon soon and they need to know that they got it and the company um is uh is is knows that little shareholders know that they'll be seeking another 2.5 billion pounds and they've given a statement of intent of that and actually you asked about the gearing so with this injection of funds it's just dropped to 77.4 so it's coming down um I have to um I have to just get this in there chairman that it was actually under the labor party uh in the sort of mid-2000s that this debt if you look at a graph started to go like this in the water companies uh and it's stabilized under this government what we've been talking about today is the difference between um raising debt to pay dividends and raising debt to invest in infrastructure which are two completely different things yeah well I think you've had a lot of discussion and answers about that and about about you know where the money goes but equally um terms haven't paid what they call dividends for six years but they completely admitted in their accounts um that um the shareholders haven't been paid the dividends but the money has gone to that um that service holding committee and I'll bring David in here if you want more detail on that I think the question I was going to ask maybe David could could come if Nessie you know are you prepared for a potential failure and if so could you reassure the committee and indeed the taxpayers that this wouldn't be about bailing out the shareholders but about ensuring that service continues to be supplied oh absolutely I think that's a really clear message we have to give customers uh this will not affect customers the whole point if it was ever needed uh would be and it's not a form of renationalization just to get that absolute on the record it's actually it's a tool that's used to ensure that the services can continue and that new owners can be found um bulb has been referred to a number of times in the work with designers so um you know lessons can be learned from that obviously water companies are different in the way they're structured but we can give absolute assurances that if necessary uh the system is there but also I'd really like to assure the committee that we will keep the community informed as and when and if necessary but as I said in speaking to the chairman yesterday we we would be it's not it's not on the cards we're a long way from that there's a lot of work underway already returns uh to to sort the gearing out and to ensure that um the company can continue to deliver the services customers need okay did you want to come in just add a little to that uh chair so as the minister said should a special Administration order ever be needed um for a water company the the statutory purpose of the order uh would be to ensure that customers continue to receive their water and their Wastewater services and that's that's um that public interest test is really the reason we have is a special Administration regime on the statute book in the in the 1991 water industry Act as I think um David black was saying earlier um uh in terms of taxpayer liabilities uh important to to note that this is a company in the case of Thames with uh 19 billion pounds worth of assets so in the first instance the task of the administrator if appointed would be to work with uh uh uh debt holders and the company to protect the interests of the taxpayer on your question about preparedness obviously we need to keep all of our preparations for a whole range of scenarios up to date and that's what that's what we will do um but as I think um sir Adrian indicated earlier the liquidity statement from the company was important because I think that's the company very clearly signaling that with 4.4 billion pounds of liquidity was some way off some of these more uh some of these more uh some of these scenarios okay thank you Julian story yeah thank you chair um I just wanted to administer I just wanted to touch on worst case scenarios I've already you've already mentioned that you've we're some way off this um which is good news but if it was a worst case scenario how advanced are plans to potentially nationalize Thames water and have you estimated any costs of doing that well reiterate we know we're near that and what we don't want to do is is you know is scare people we this is being closely monitored by terms they're working incredibly closely uh with um off what uh to steer through this uh and and also it's not nationalization I think you you said that um and and government has the process you know it has the powers if they're needed and won't hesitate to use them of course um and so I think you know I need to give assurances that that is what would happen um you know we go and what you know government the Secretary of State and of what have the powers to um to place a company in special Administration effectively um and and the point of it would be that it so that it could be transferred as a going concern to new owners uh and um either on insolvency grounds uh because they're unable to pay their debts or the other way it would happen would be if it was on enforcement grounds if they were in a serious breach of um of one of their duties I understand all that and I understand that this is I'm talking about worst case scenario yeah but it's just really what planning has been done if this scenario does come up and also what ability is it to put would it be to pass it on to a another another buyer basically and have you looked at those options going forward and what and I suppose also what conversations have you had with treasury about this as well should I take that so um as I say we keep all our preparations up to date for a range of scenarios up to and including special Administration should there ever be required and so it doesn't look uh it doesn't look uh imminent at this point in time as I think both the company and the regulator said earlier we would do all of that work jointly with the treasury and indeed with ukgi um as well and so should it be required um we would be prepared for that um that said the company just signed off its accounts and it's returned its various statements to off what giving Assurance the Judgment of the directors that it's a going concern independently validated by the Auditors the focus now is on the company's business plan that's the critical thing that The Regulators need to see is the company bring forward its business plan I think you heard some sir Adrian Montague talking about this earlier the company does need to prioritize as part of its business plan um there are performance issues the company needs to address and that's the thing I think our principal focuses on for the foreseeable but I still haven't really you still haven't you still haven't given me the confidence that in this worst case scenario that those those plans are there in the background ready to go you can you confirm that we have all we keep all of our preparations up to date uh up to and including preparations for a special Administration order should we ever need to to apply to the court for one okay thank you last point if I can share very quickly um in the some of the previous uh discussion um Thames water it was discussed about Thames water having a an immediate uh payoff of around uh 560 million of their debt in case of a nationalization um now they say they don't recognize that Clause I don't know have you could you put shed any light on that at all we saw that earlier exchange I'm afraid we didn't recognize the figure either so we will do a bit of um we'll check in with the regulator and indeed with the company after this committee and I think um the committee committed to right on that point uh me commit to write on that point yeah could you share that information with us when you of course thank you happy too okay thank you very much yeah thanks Jay the minister England Wales an international outliers on the level of water industry privatization since 1989 privatization since 1989 to give us 72 billion pounds gone to shareholders water companies are built up with that mountain the 60 billion users to finance dividends to shareholders our bills have gone up 40 in real time teams since prioritization the environmental agency is set by 2050 some Rivers will see 50 to 80 percent less water during the summer months because of the climate disaster water companies are now actually leaking away 2.4 billion liters of water every day every day the water companies discharged we're all sewage into our rivers and seas over 9 million hours since 2016 and we know the consequences of that catastrophically 14 percent of English rivers are considered to have good ecological status not one reservoir has been built since 1989. and nearly 70 of the British public want water back into public ownership so would you not agree with the vast majority of the British public the experiments of privatization is safely not saved the best interest in this country at Large thank you for your list sir um I just want to put something on the record chair actually if you take inflation into account since 2020 uh our water bills have been pretty static 2020 20 it's uh that's 2010 sorry 2010 2010 to 11. it was uh 427 pounds on average and 2020 to 21 it would be 426 pounds so I think we have to uh look at that in perspective and take inflation into account so I think your main question was about privatization though yes um and I would uh reiterate that and actually um you know England is relatively unusual in terms of its privatization model compared to other countries but actually the UK invests small per inhabitant than most of our comparable countries and that does include Germany and France and actually we've had increased levels of investment since privatization as I said at the beginning which has results and this is an ideological this is this is a lot of conservative vultures they're the same mindsets why did someone happy with the current system why do they want it to bring back into public ownership in terms of any uh just um you know errors that water companies have made I've made it absolutely clear many many times standing at the dispatch books that they need to be held to account for example whether it's the uh use of their storm sewage overflows way above what their permits allow that's why we brought in the storm sewage overflow reduction plan that's why we've asked every single company to produce the plan for all of their store the relevant storm surgeon because they are now with our department they have already come in but I think you know it has to be said since privatization we've attracted 190 billion pounds that's about 5 billion a year which arguably would have been very very difficult levels of this satisfaction why so many people so angry about what's happening we want satisfaction as well don't we and and I think we also and I would be the first to say all the companies have to get in their house in order and that's why we're coming down so hard on them but also why we have put so much in the environment act while we've got our integrated plan for water why we had our storm sewage overflows reduction plan and while you've got all our targets that they're going to have to deliver on but I think we do also have to say that um we've had some successes under privatization leakage has been cut by a third outages have been cut by fit and I'm not defending any of the recent outages we've had from some water companies they have to get their house in order and and they are and that's what off what has to do and that's what we have to oversee and I think we have to demonstrate to the public that a lot of good is being done for water and water is the most critical thing going forward that's why we brought out our integrated plan for water and why is the government we have actually we're backing it all up with legislation and indeed enforcement and higher penalties and so forth maybe we have to seek the ideological State alternative models of ownership because many would save being a catastrophic decision to to leave a public good in that at the mercy of the markets something which actually sustains life so we looked at all today there's some models of ownership and governments such as Welsh Scottish and Northern Irish Waters well well obviously it's really sensible to learn from other people but in terms of um Scotland I think David will back me here up here so in our in England we're now monitoring and it's this government that's brought in all the monitoring that's why we really know what's happening this happened under the conservative government not the previous labor government I think it was four percent of storm surge overflows monitoring when we took over now it's 93 and it will be 100 by the end of the year now in Scotland uh they actually only monitor four percent of their storm surge overflows and in Wales I believe I'm right and we can send you the stats chair uh their illegal use basically of storm sewage overflows is much higher than it is in England I think David you might be able to background into a quite an ideological debate which you know this particular looking at the issue of Thames water the problems they face at the moment so I understand that I think probably the next general election will be a good opportunity to exercise as issues good so okay so if we move on to uh Derek Thomas thank you very much um so actually I'm sadly picking up from that and it is you're right about the monitoring the reason people might be dissatisfied is because actually we have provided some very transparent information about what's actually going on and then how we fix it I completely get the weave engaged with the consumers told them customers told them what uh is expected and that's why they're um much more aware what's going on but the concern I've got is that much of the water industry is owned by oversea Financial investors I wonder if you think uh with that responsibility in your portfolio portfolio whether actually that's a an acceptable thing to have for the UK customer and whether they should be strict to ownership criteria um yes thank you thank you for um for that and yes we we do have a lot of overseas investment but I think in a way that's one of the strengths of the system despite all of the conversations that have been going on we've still continued to attract a great deal of overseas investment and we need to attract in overseas investment uh so that we've got the funding that we require obviously um a strict eye needs to be kept on on that and where it's where it is coming from um but we do actually uh just to give reassurances we do have a power to intervene um in Investments uh through the um National Security investment Act and indeed we would have the power to look an investment if it was deemed necessary David might want to add to that that's certainly true on uh National Security grounds under under the ACT to be familiar to Mr Jones uh I think I think the other point to make in terms of um uh foreign investment is there's no differentiation in terms of awful lot's ability to regulate and take enforcement action whether the investor is a domestic investor or an overseas investor so what we'll regulate as it were sort of blind to the provenance of the the investment and we'll go through a process of of testing in dialogue with prospective investors any Acquisitions yeah thanks and so we had a lot of them how much you caught of the role of Macquarie earlier on in the session um and given the issues caused by macquarie's ownership of Thames water should we have concerns about the ownership of Southern water and other in essential infrastructure such as Gas Distribution infrastructure in the UK by that company um yes I did I overheard a bit of it we were just waiting outside the door at that bit but um you know I suppose I suppose we you know I would reiterate that we are still continuing to attract this overseas Capital which we really need um and we do have the powers you know to intervene if necessary um and um and there's been very close oversight of Macquarie and its involvement with Southern uh Southern itself you know is it's it's actually doing uh the right the sort of self-monitoring it actually needs to do it's just put a stop on paying out any dividends as a result of one of the recent credit ratings that didn't come from what that didn't come from us you know they did their boards did that themselves um and um and you know if the and if there were concerns this is why offwatch had got this very clear oversight why they've really ramped up their um monitoring uh and their um their assessments of financial resilience uh and why we put new powers in the environment act you know which they wanted uh so that they can change licenses and in fact uh what happened with that change over at Southern of course was there was an opportunity with a new company coming in to change the license uh so uh so that they can uh get these resilience measures firmly embedded and for example you know dividends now cannot be paid if there's any issue about financial and the credit rating or environmental performance and in fact that all backs up what we said to you or for in our strategic policy statements which we give to all for and they have to act in accordance with it if I may just just briefly build on that answer I mean I think the important change that the environment act brought in is that whilst previously off what occurred very licensed conditions it had to be done with the agreement of the company and what the ACT does is it strengthens it so off what can now impose licensed conditions on the company and two other and two other sort of first uses of those powers are one as I think of what we're explaining earlier um preventing money flowing out of the regulated company and circumstances where the credit rating of the regulated company is reduced and two much more explicit enforcement of a linkage between dividend payment and input and performance and so that's that is a distinct shift with more legal backing for off what compared to when Macquarie first entered the sector and also um a treasury of just agreed that of what I've basically got another 11.3 million for enforcement so that's going to go on more monitoring more reporting this you know much uh much more forensic oversight well thanks Ali for that concept thank you very much I think your office indicates you need to be working half past 12 but if you're not catching a train could we Prevail upon you for a little bit longer I mean obviously I'm sorry 11. sorry half a cylinder can we Prevail upon you feel we will we will we'll do our best to a short answers would probably help in that regard as well Darren just a short question for me on that on that basis the UK is about to join the comprehensive and Progressive trans-pacific partnership cptpp um where companies from those member countries can sue the British government in a private Interstate dispute settlement scheme for loss of expected earnings because of the actions of the British government Canada and Australia are both members of cptpp if we end up in an environment where the government has to take action on Thames water for example and the Canadian shareholder loses out could they bring action against the British government to recover that amount and has that legal risk assessment being done as part of your planning well let me I think I should take it away and give you a fuller response but of course the decision for the decision to enter an Administration and let's rest with the court so the government the Secretary of State or off what with the consent of the secretary state would apply to the court so in those circumstances it would be the court making Administration order so I will talk to my lawyers but um in effect they would be seeking to bring action against a a court order you could write to us with your assessment that would be helpful happy to know the answer which is why I'm asking I think some lawyers will get quite rich on this particular point just following up on the issue of uh foreign investors yesterday the Deputy Prime Minister identified China as the top security concern now you have said today that it's a good thing that we have foreign investors in our intense water but of course the Chinese Investment corporation earns 8.7 of that do you think that that's a good thing or is it something that the Deputy Prime Minister should be concerned about I'll just refer you back to my previous answer if there were any concerns um that there are powers to intervene to block investment and we do have the National Security investment act and we you know could act according to that so unless David wants to say anymore I think I'll leave it at that I don't think there's any more we can say here about that no thank you Neil Hudson thank you chair um today we've been looking at the the example of Thames water but also as its broader implications for the resilience of the the water sector across the country now the government has said that that through what's going on with Thames there is no risk of water bills going up but given that huge infrastructure investment is required do you feel that that position can hold can you reassure the public that that bills will not be affected well as he will know bills are capped until 2025 anyway uh there's no expectation that bills will be rising in the short term they actually are subject to inflation that's completely separate from what's Happening to the water companies but in terms of any potential um Rises to to bills that will all come out in the wash once uh off what have gone through all of the the business plans for the water companies so um and and you know you know how they work they look at what uh water companies are required to deliver or expectations with a government have put on them through our targets and through the Public's expectations In fairness uh the huge investment that we'll have have to happen in future um and uh and then decisions will be made but I would really add that we're always mindful of the effect on consumers we do have a sound system for looking after the vulnerable and we have our watershaw system I think already 1.3 million people have been helped through that so that is always there that our social tariffs payment holidays and so forth and we'll continue to be there um and uh and indeed you know we will we will consider considerations will be made about whether there might be some um impact on customer Mills but we can't say what that will be yet broadly you feel that that hopefully the the five yearly you know water bill review the these events shouldn't Buffet them too significantly well well also the whole reason why we have the debt and the equity of course is to get the big cash injection into build the infrastructure as fast as we can uh within the limits of you know have you got the people available to build the stuff uh in particular uh have we got the materials but also so you don't get sudden impacts on Bill payers and it's always got to be smoothed out I mean I I I I think it wouldn't be wrong to say that of course Thames tied away tunnel you know that has been factored into bills that was all completely understood by the people of London uh and I think that's due to open next year um and that's the way that's worked and that's a completely separate private partnership and private public partnership separates of that the government's announced a very welcome that that there will be potentially unlimited fines on water companies that don't um play according to the rules and and and and and not fulfilling their their capabilities can you give reassurances that if those fines are enacted and we welcome that those teeth are now being given to the regulators and the enforcing agencies can you give reassurance to the public that that will not have any effect on on water bills with the fines if if we no well the fines have got to come out of you know from shareholders then no money will should ever come from customers to pay for these um fines they should have no effect on customers and uh you know we we've also um set up our water restoration fund so that money from fines go into that that money will go back into the environment and uh you know we I think you are referring to our announcement that we've just made about the variable monetary um penalties um shall I talk about that now chair if you want to briefly give it a plug it's very exciting coincidental it was announced just before this well you know chair that we've been working on this and indeed um Mr the rice honorable uh Philip Dunn has worked very hard on this particular issue uh as have many others to see if we could the common current limits you know on the cap for um civil penalty penalties is 250 000 pounds uh today we've announced that will be unlimited and um that's for uh people contributing their permits and it's you know will be used as in one appropriate but you can still there will still be obviously criminal opportunity to go to the criminal court but if appropriate these civil penalties can be used I'm getting Alan wanted to come in briefly on the back of that question yeah thanks share um I should say I work for Scottish water so just a bit like an record of the months to referred to Scottish water and about your private investment being the way forward but it's worth pointing out Scottish Waters invested 35 more per head on average since privatization compared to England and the Bowser law office or investment can be done through the public body but just as Minister do you believe in the political peace principle in the polluter pays principle yes yeah and I think I would take issue potentially on some of the Scottish stats so I think chair we need to just look at those because I did give the statue yeah but so for me I'm very quiet for moving principle yeah um and Ingrid in Wales are still all right to connect 12 housing developers last year something like 200 out 200 000 houses were built in England Wales connected to sewer system if they cause any overloading of research system cause any additional overflow discharges then it falls in the water companies and the bill payers to upgrade the sewers so in effect that's not that that's the opposite of the political Place principle what are Bill pairs in England Wales are paying a subsidy their housing developers because Normal practice would be housing developers have to pay for upgrades for the sewer before the houses are constructed so why is the government not changing I would refer him to integrated plan for water where we cover this specifically in terms of all new houses separate connections and I would also uh refer to the work we're doing with the Dulux department and the Housing Industry uh to separate out these systems it's not well yet is that correct it's starting to practice yet uh well in many new developments already do it uh but you know going online this will be what will happen and your housing developer can come along connect 5 000 houses to the sewer and it's not mandatory to do sustain award-winning drainage and it's not mandated for them to do it when it will be and we will give you chapter and verse chairman uh subsidizing housing developers isn't that the case uh no I've answered the question we you know this is being addressed uh we got you know hundreds of thousands of Victorian houses in this country uh and that's one of the problems uh that's why we have storm City overflows is because of this system and that they had to be an extra emergency Fail-Safe measure we're addressing all this now um of course it's the existing housing stock that caused problems with stormwater outflows new housing has separate hot Waters so exactly uses inundate the system we're also putting in sustainable Urban drainage which will also address the Fallen here is addressing last question so just following up uh Neil Hudson's comments about the regulator and the licensing regime um we've we heard from offwa earlier uh that they are part of the investigation they are investigating Thames water permit breaches alongside the environment agency over 2 000 of them that was something that was initiated in response to a report from the environmental audit committee on the one hand and the new office Environmental Protection focused on water issues it was not stimulated by their own action and recognition of problems do you believe that the powers that they've now got that you've just been referring to and the actual resource you've just been referring to will allow the armed agency and off what to do their job properly and investigate permanent breaches as a matter of routine course rather than proper to do so parliamentary and other interaction well obviously we want them to be fully functioning enforcing we want clean water I said all the way along the line that you know sewage in rivers is unacceptable uh uh you know some of the stats we've had for water companies are unacceptable and that's why we've been tightening step by step by step uh The Regulators Powers uh why we brought forward those measures in the environment act uh which will enable licenses to be um much more altered so that dividends cannot be paid out if there's any environmental damage or if there's a financial um issue with the credit rating but it's also why um off what have now got this extra 11.3 million on the enforcement it's why we've introduced these variable monetary penalties that are uncapped and it's also In fairness it's because of the money monitoring we're doing as a government that all of this has actually come to light I know that the EAC did a lot of really useful work if I'm honest and this Committee in you know in in helping gather the evidence for lots of these things but it's the monitoring that's bringing it all to light and it was actually um our monitoring that showed that lots of these water companies were breaching their permits and actually some of them they did put their hands up and say we admit we are using our storm sewage overflows too much and that's true we've got this huge investigation that's been underway and we're wading through all of those and people will be taken hell to account you know if they are responsible so the outcomes from those investigations will be subject to this now new as we've just said uncapped finding regimes people with permits that that comes under the permitting regime but they but they could there are two courses the Civil penalties which will be quicker to operate but there is still the recourse to go to the court yeah the EA investigation into um potential permit breaches at wastewater treatment works is a criminal investigation so wouldn't be subject to today's announcement which is um essentially giving them more more Tools in relation to civil sanctions but for the most egregious cases there's still a criminal route and that's that's the route they've gone then the Civil sanction can be applied for by the environment agency and are fought or just environment agencies these environment agency and natural management so it's powers for the environmental regulators and that would apply for example where a campaign group identified a problem drew it to the attention of either National environment agency and then instead of being treated as a routine expense of doing business which is how water companies have been operating there will be a scale of fines are you in are you providing advice on the level of fine for the level of severity problem or going to be up to the ear you've highlighted a very good a very good point in that um the system was slow you know before if you had to go to court obviously it's all based on evidence that you know whichever whichever method you use uh but this could be more flexible and quicker providing you've got the evidence uh to actually hold on to the account so the police does pay uh and obviously there will be there will be um uh you know guidance on these tools so there so just two points for me just to supplement that well one is there are sentencing Council guidelines as a reference point for for the environment agency or indeed any other environmental regulator and then just on a point of clarification the uh the cap lifted today it doesn't just relate to water companies it relates to any operator within scope of the environmental permitting regulation so actually waste and other other potential um Mis malpractice could be caught by that excellent final question if I'm a chairman the water restoration fund which I welcome uh without reservation I think it's an excellent way of ensuring that some of the issues that Alan was Raising that the funds raised from fines does go into resolving the issues not necessarily the immediate issue but improving water quality in the area can you give us any more um indication of how that will work and does that that presumably only applies in relation to fines on from arising at water pollution yeah well uh the uh the criteria you know being worked on now about exactly you know what would be most helpful for the water this fund to go into but obviously it's going to improving the environment and we've got a big emphasis on catchments now through everything we're doing through the integrated plan for water uh and because really we need to work at a catchment level if we're really gonna you know have the cleanest most wonderful water and uh ecologically healthy Rivers we need to work right the way up the catchment so there'll be a focus on it going into to things like catchment restoration and they're already some great projects to share but you know many more of those this would be a good use for the money determined by defra but there will be other other um quite you know categories um uh that are being looked at right now to make sure that the money is channeled to the most useful place to have the quickest impact as well and potentially to be used in the area where it was raised where the money came from sorry I said it was the last question says it's supplementary to the last question so will there be some guidance coming out of defer as to how these will be deployed they will yeah and we've actually we've actually saw lots of views on this so we've been talking to lots of different organizations and groups about where they think the best use of the money would be thank you very much thank you very much so I think we'll draw stumps now if we make because I think Mr Hill Minister for your time could also thank our colleagues from the business and energy committee and the environmental audit Select Committee for their Cameo roles this morning and uh order foreign the proceeding has ended the proceeding has ended the proceeding has ended the proceeding has ended

Channel: Guardian News

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Keywords: economy, economy news, guardian, mps, parliament, parliament committee live, parliament live, thames water, thames water finances, thames water latest, thames water live, thames water money, thames water news, the guardian, uk economy, uk news, uk recession, uk water, uk water bill, uk water company, water, water bill, water company

Id: XksWTVuVPVc

Length: 140min 40sec (8440 seconds)

Published: Wed Jul 12 2023