The Cunliffe report into our failing water industry will make a splash

Independent

2 days ago

We live in a deeply polarised, politicised world, where anything from changing rooms to the Motability scheme can be subjected to the most extreme invective and propagandised argument. One exception to this is the state of the water industry. This is something that can unite the nation.
We can all now agree – Tim Farron, Nigel Farage, Surfers Against Sewage … – that the model introduced when the sector was privatised in 1989 has failed, and that it needs some radical restructuring. Something better needs to be put in place, and it should not actually make matters even worse by costing the taxpayer billions to bail out the shareholders and bondholders invested in companies such as Thames Water, which has all but gone bust.
Step forward, then, Sir Jon Cunliffe, career civil servant and practical economist, who has produced an excellent report on reforming the industry at minimal cost to the state and maximum cost to those who got us into this mess. This is a fundamental review that should, in truth, have been undertaken decades ago. We should be grateful to environment secretary Steve Reed for commissioning him to do the work, and for completing it so speedily.
Reed has today responded to the report with a bold move of his own, announcing plans to abolish water regulator Ofwat in its current form. However, he has not recommended immediate nationalisation of the industry, which has disappointed some, such as the redoubtable Feargal Sharkey, former Undertones frontman turned clean rivers campaigner who has done more than anyone – sadly, including the politicians – to bring the water companies to account.
Sharkey is so apoplectic about what he sees as the failures of the report – essentially, another missed opportunity – that he has already called for Reed to resign. Meanwhile, the aforementioned Surfers Against Sewage say of Cunliffe's report and his 88 recommendations for the government to transform the water industry that 'this is putting lipstick on a pig'. The Labour left, as ever, want water brought back into public ownership immediately. Such critics need to hose themselves down a bit.
There's nothing in Cunliffe's report that would prevent any water company that is going bust from being rescued by the taxpayer or the water bill payer, and thus nothing to stop such companies going into a transitional regime that would almost certainly mean nationalisation anyway.
This is, in fact, the current situation, and it is probably what will happen to Thames Water – deeply in the debt doo-doo itself – before much longer. It is vastly superior to Rachel Reeves nationalising the firm now and taking on its £15bn in debt. Apart from anything else, there's no room in the public finances for such a move. And that's just one company – there are many more in varying states of financial peril.
Of course, Parliament could just pass a bill that takes control of the assets without compensation, but that Bolshevik approach wouldn't encourage private investment in the UK, and would in any case violate human rights – the right not to have property arbitrarily confiscated by the state. Not even the great post-war Attlee administration did that when it took over our run-down utilities.
Cunliffe's report therefore leaves the door wide open for nationalisation of the individual companies in the future, but in an orderly manner that doesn't take money off, say, the schools or the welfare budget. That seems eminently sensible and un-ideological. It's a clever approach, but what I like best about Cunliffe's work is that he is telling the nation the hard truth: that someone, somewhere, has to pay for water and to repair the huge underinvestment over decades in what is still basically a Victorian system.
Indeed, it is only fair to point out that one of the attractions for the Thatcher government in privatising water all those years ago was that it would avoid the need for the Treasury to pay for the wholesale rebuilding of the pipework and treatment plants that was becoming necessary and increasingly urgent. As with the soon-to-be-privatised railways, the magic of free-market forces would renew the industry, reduce costs and charges, and lead to a lovely sparkling Panglossian future pouring out of every tap and toilet cistern in our kingdom.
Now, four decades on, the investment is still needed, and if the private sector can't do it in an acceptable fashion, then taxpayers and bill payers will have to do so. Someone will have to finance all the new reservoirs we haven't built since 1992. Someone will have to find the money to stop the sewage dumps and plug the leaks. They're the same people, of course, and there's a political decision to be made about how the burden is distributed – through a progressive tax system or, more regressively, by hiking water bills. It's unavoidable, whoever owns the networks.
On that point, Cunliffe also makes the startling observation that only 12 per cent of households have smart meters, so it's difficult to follow the usual rule that those who consume the most water should pay for it. He's also right to suggest that the water companies should receive some payment from the housebuilders for connecting the planned 1.5 million new homes to the already overstressed water and sewage networks.
In the end, it may well be that the supply of such a basic public service as delivering clean running water and removing sewage is incompatible with market forces – especially where this is the only economic activity where a company is not allowed to withhold its product or service.
By law, no water company can cut a household off – unlike gas and electricity, or anything else out there. Rightly so, I should hastily add – and nationalisation may well be inevitable, financially and politically.
A system where, as in water and the railways, the state sets the standards and dictates what's delivered, regulates the charges and monitors the pay of the directors in a monopoly framework isn't really free enterprise at all – and, as we've seen, works rather unsatisfactorily for all concerned.
Strengthening regulation – and, crucially, including financial viability as we do with our banks – is vital, even if it pushes these companies closer to insolvency. Sir Jon, and the government, understand that there's more than one way to skin a water company, and it would be an even greater outrage if the water companies and their owners were to be rewarded for abject failure with a handsome payout from hard-pressed taxpayers.
With patience, it will resolve itself.