Baroness Hayman of Ullock (Lab)

I thank all noble Lords for the constructive discussion on the important topic of ownership and management structures of water companies. I turn first to Amendment 50, tabled by the noble Lord, Lord Remnant. I understand his concern about the aspect of the clause that allows for socialisation of shortfall recovery. We had some discussion around that, as he mentioned. However, I reassure him again that this element is necessary for the shortfall recovery power to function effectively and safeguard the interests of taxpayers and water customers. We do not expect to have to use this power—the noble Lord mentioned that we had talked about this—and I stress that it would be utilised only if it were not possible to recover all the funding provided by Government over the course of a special administration; that is, in the event of a shortfall. It is only at that point that Ministers would decide whether to exercise the shortfall recovery power. Water sector stakeholders, including the Consumer Council for Water, would be consulted about any decision to exercise the power. It is therefore not entered into lightly. All water customers benefit from the use of a special administration regime, as it ensures that services continue in the event that a water company fails. This power already exists within special administration regime frameworks for other essential service sectors, such as energy, where there is a well-established principle of socialising these costs across the sector. The noble Lord, Lord Remnant, asked specifically about why we think the powers are needed, so I will provide an example. There may be an occasion where government funding, provided during a special administration regime, contributes towards water sector infrastructure—such as a reservoir—that goes on to benefit several different water companies. In other cases, a particularly small water company, with a limited number of customers, may enter special administration. In this scenario, it is vital that a decision can be made about recovering a shortfall from more than one company, to ensure fair allocation of costs and to prevent customers of a single, small company facing unmanageably huge bill increases. In all scenarios, a failure to deal with a shortfall fairly, or to prevent impacts unduly falling on a single company, risks increasing the cost of capital for the whole sector. This is because investors will price in the risks of excessive shortfall costs falling on a single company. The ability to recover a shortfall from multiple companies is therefore necessary both to ensure that it is possible to recover government funding in the event of a shortfall and to safeguard the sector from any wider cost impacts. I reiterate that we see it as very unlikely that this will ever happen. For this reason, the Government will not accept the amendment. I turn next to Amendment 53 tabled by the noble Baroness, Lady Jones of Moulsecoomb. While I thank her for her engagement on this clause, the Government must reject this amendment because it would jeopardise the main purpose of the water special administration regime, which is to ensure the continuation of water and sewerage functions in the event of a water company insolvency or failure. The role of the special administrator, once appointed, does not include a power to cancel debt, so does not serve to bail out water company creditors or shareholders. When a water company exits from special administration, via either a rescue or a transfer, the special administrator determines the level of repayment to creditors in accordance with the statutory order of priority. The level of repayment that creditors and shareholders may expect will be in accordance with the order of repayment clearly set out in statute. Any power to cancel debts outside of a restructuring plan agreed as part of a special administration, or a scheme where there is built-in court supervision, would be a material departure from long-established insolvency principles of fairness and treating creditors equally according to their rights. I hope that the noble Baroness understands why the Government must therefore reject this amendment. I will turn next to Amendment 54, also tabled by the noble Baroness, and Amendment 56 tabled by my noble friend Lord Sikka. He mentioned dividends. I assure him that Ofwat is able to stop the payment of dividends if they would risk the company’s financial resilience, and can take enforcement action against water companies that do not link dividend payments to performance. I just wanted to make that point clear. Amendments 54 and 56 are already covered by the existing legal framework for insolvency and special administration regimes. The noble Baroness, Lady Jones, specifically asked why a SAR can be used in only financial circumstances. However, that is not the case. A water company can already be placed in special administration on performance grounds where it is in such serious breach of its principal statutory duties, or an enforcement order, that it is inappropriate for the company to retain its licence. Both the amendments would limit the powers of the Secretary of State and Ofwat by forcing their hand to take specific action, thereby limiting their ability to respond appropriately to individual situations. As part of an application to the court for a special administration on performance grounds, the Secretary of State and Ofwat must consider all aspects of a company’s performance and enforcement record, including its record of criminal convictions. Under the current framework, a company must take actions to address performance issues, including those involved with poor performance. Any failure to do so would form part of any assessment by the Secretary of State, or Ofwat, of the appropriateness of that special administration in the first place. Special administration must be a last resort, and proportional and appropriate to the circumstances. An automatic threshold for special administration, such as outlined in these amendments, would limit the ability of the Government or regulators to act. It would also likely undermine the confidence of actual and potential investors, and bring instability to the wider sector. The Government are already taking action to strengthen the regulatory system through the recently launched independent commission into the water sector and its regulation. The regulators’ roles and responsibilities, including on enforcement, will be reviewed as part of this. We expect that recommendations from this review will form the basis of future legislation. The rigid approach in these amendments would prevent the Secretary of State from exercising their powers to respond to the details of individual cases. For this reason, the Government will not accept these amendments. However, I hope that noble Lords are reassured by my explanation. Regarding Amendment 59 tabled by the noble Lady, Baroness Jones of Moulsecoomb, I have already spoken at length about the costs of nationalising the water sector. It would require a fair price to be paid to shareholders and debt holders. This would come to over £90 billion. I know that noble Lords have disputed this figure, but it is based on Ofwat’s regulatory capital value figures for 2024. I have also spoken about the benefits—or lack thereof—of nationalisation. Research commissioned by the Consumer Council for Water, an independent organisation that represents customer interests, found that a substantial change to the industry and company ownership would not address the main problems experienced. We also see a variety of ownership models in the UK and internationally, with clear mixed performance. For these reasons, the Government have been clear that nationalisation is not on the table.