Changes to water regulation and HS2

0:00Darren:This is Business Live on this Monday morning with me, Darren McCaffrey, and we're going to start with water because the government has announced it will officially abolish Ofwad following a commission into the UK's water industry. The report makes a raft of recommendations to fix the embattled sector, including the abolishment of the regulator. The Commission Chair and former Bank of England Deputy Governor, Sir John Conliffe, concluded that the watchdog should be combined with the functions of the Environment Agency, the Drinking Water Inspectorate and parts of Natural England to form a single integrated water regulator.

0:33Darren:Well, our business correspondent, Paul Kelso, is with Sir John at the London Museum of Water and Steam in Kew. And as you can see, joins me now. Paul.

0:43David Henderson:Yes, Darren. So this review, nine months in the making. It was one of the first things the Labour government set in train was reform of the water sector. Today we get publication led by Sir John Cunliffe, a former deputy governor of the Bank of England. So no stranger to thorny issues. John, in your speech, we're in the London River and Steam Museum. This has a place in London's water history. You compared what you've had to look at as our great stink moment. Just tell people what that means.

1:14Ben Fletcher:Well, back in 1858, the Thames had become an open sewer. London's infrastructure hadn't kept up with population and economic development growth. And then hot, dry summer, the Thames just became, in the words of politicians, pestilential and the like. And it got to the point where Parliament was disabled by it. They could not operate. The stench was so great. And the newspapers called it the Great Stink of 1858. And I mentioned it because, look, we're much better off today. We've got a drinking water and sanitation unimaginable all those years ago. But when it happened in 1858, that's what launched the huge building of sewers and water mains in London.

2:06Ben Fletcher:It took a long time to build that infrastructure, but the health of London was transformed and its environment was transformed. and some ways what we see is similar at the moment. We have an infrastructure that is not coping with the demands we're putting on it. We have problems that keep happening. We have lots of debates and arguments about what's the right system, et cetera. And I think certainly the public anger about pollution in particular, we've reached a moment like that as well and I think that's what the government had in mind when it said it wanted a reset. So I compared it. It's different, of course.

2:46Ben Fletcher:But I hope this is a reset moment and I hope our report will contribute to that.

2:51David Henderson:So it's a metaphorical stink, at the very least. Your central recommendation, replacing the regulator. Is the regulator here, which has been trying to manage this industry, carrying the can?

3:02Ben Fletcher:So, first of all, that's one of our recommendations. We have... Look, we came to the conclusion and that there was no one thing you could fix, no matter how radical you were, that would suddenly transform the system overnight. You have to deal with a number of things. A lot of the responsibility lies with government. I think government for not setting direction, government for willing the ends without the means, and the government for not taking the decisions that would have allowed the regulators to balance their responsibilities. A lot of the responsibility is with companies. Some companies over past decades have acted, I said in the speech, have acted in line with their private interest, but not in line with the public interest.

3:47Ben Fletcher:The question is, in a system of regulated private monopolies, how do you ensure that those companies align with the public interest? And regulation is how one does that. And it has worked in the past in the water industry, but it needs to be reformed and to work again.

4:05David Henderson:How do you hold them to account? Because the government ruled out nationalisation, which many people think is the answer here. So you couldn't consider that. So how do you regulate companies that have shown that they have been happy to take money out of the system while not investing in its future?

4:22Ben Fletcher:So the first thing I'd say is I'm quite old and I can remember life before privatisation when the UK was the dirty man of Europe because we couldn't invest in our water systems and when leakage was high. So it's not, to me, axiomatic, you know, inevitable. The problems we face are the problems of privatisation. I think they're problems of failures in the system. Companies can be held to account. A lot of the powers that are now has will do that. They just haven't had the powers for a long time. And over the period we're talking about, remember, some of the problems we're seeing in companies didn't happen overnight.

5:00Ben Fletcher:I mean, these are deep-rooted problems, and the seeds of over-leverage and damage to financial resilience were sown quite a few years ago. At a time, the regulator was being encouraged to be light-touch, to be outcomes-focused, not to check. And the regulator didn't have the powers, and the space opened up, I think, for what we've seen.

5:22David Henderson:And one more, if I may. Bills, actually, in real terms, have stayed pretty low through that previous regime. Jim, you said this morning, and others agree, bills are going to rise, but you've also talked about the need to give investors a return. The market has changed in the last few years. Raising money is more expensive. Do the public have to accept that this investment is going to come at a price, and some of that price will go to investors, to the very companies with whom they're so angry?

5:48Ben Fletcher:So, infrastructure has to be paid for, and ultimately it's paid for by the bill payers and the like, But we want to finance it so that we spread those costs over time. If you're building for 60 years, you don't really want to charge people over the next five years for that. So we need to spread it over time. And there are risks in running a water company. Yes, it's a regulated monopoly. But yes, things can go wrong. And capital has to bear that risk. So I think when companies are delivering what they're set up to do, when the private interests of the shareholders are lined up with the public interests in producing water, sanitation, respecting the environment, those returns will come out.

6:33Ben Fletcher:And whether it's public, the owned or privately owned, there will need to be borrowing to finance this and borrowing costs go up. But that is part of it's like your mortgage. you're spreading the cost of something that you hope to enjoy for a long time over a long period. And those costs will have to be paid.

6:57David Henderson:And to the focus on the regular, Sir John Cunliffe, thank you very much for joining us here on Sky News. We will be joined at any moment now. Sir John's going to step out and David Henderson, who's chief executive of Water UK, who speaks for the industry about which Sir John has been speaking, is going to join us. just letting him step in now. He's been listening to Sir John. David, if you could step in here. Good morning. Good morning. At Hands of Water UK, you represent the companies with whom so many people have lost patience, to put it blindly. What's your reaction to what you've heard from Sir John?

7:28Darren:I think people have lost patience with the whole system. Anybody who looks at it can see that it's not working. It's completely broken down. And today I think we have a really, really excellent opportunity to make radical reforms that are needed to give us the environment that we need and the economy that we need too, because water is increasingly important for economic growth as it is for the quality of our environment.

7:48David Henderson:We've spoken before, you've been very frustrated as an industry with the regulator, with Off-Off, with the long process about setting prices and how you're managed. You must be pleased, your members must be pleased that the regulator appears to be paying the price here.

8:01Darren:Well, we've had a series of recommendations that I think are going to give us the shake-up that's required. Our system is too slow, it's too expensive, and it's far, far too complicated. So I think I'm very pleased the government has accepted the recommendation to abolish off-wall and have one single regulator so that we can have decisions about what sort of environment we need and what investment we need all taken in the one place. And that should make a really big difference so that we can get investment faster. And overall, this should actually put less pressure on bills. Because we've had a complicated system of regulators that often disagree with each other, that take their time arguing, it's delayed necessary investment, which ultimately has meant it's cost more than it should have.

8:37Darren:And that is one of the reasons why we've not built a reservoir in more than 30 years.

8:40David Henderson:Sir John talks about private companies acting in private interest, not acting in the public interest. Do your members, and we kind of know the companies he's talking about, I'll make it easier for you to answer by not naming them, do some of them accept, or do you accept, that the industry has not acted in the public interest all the time?

8:55Darren:We've been very open about the failings of the industry in the past. Some companies have behaved poorly, and we've apologised for that, and we've put a plan to put things right. But we can only invest what we're allowed to by the regulator. And for too long, as we've talked about in the past, Offward has denied vital investment. So these reforms are a crucial part to ensure that the whole system, companies and regulators, can work together to give people the investment that they need so that we can end sewage flowing into our rivers and seas, so they can build more houses, allow businesses to expand, especially those that use data centres, that use a lot of water.

9:25Darren:And I think these reforms mark a major moment for our whole country so that we can get the sort of system that we need.

9:31David Henderson:People who might be watching this, they'll be concerned about the state of rivers, They'll be concerned about the money that has flowed out of private companies to shareholders and to investors in dividends and executive pay. And they will be thinking, hang on, the regulator is the one that pays the price. How do you convince them that they should be paying yet more money, watching bills rise, so your investors can get a better return?

9:55Darren:It's our estimate that the complexity of the regulatory system right now is adding£27 to every single family's bill on their water bill. And that is far too much. We need a simpler system that is cheaper. Now, Sir John Cunoff has looked in detail at whether there is a difference in performance between privately owned companies and state owned companies. And he has concluded there is no link. I represent companies in Northern Ireland, Scotland, Wales and England, and you have different models, publicly owned, state run, mutual and private. And the performance across the whole of the country is broadly comparable because the challenges are the same.

10:27Darren:Look across France and Germany, they have many, many more overflows of sewage than we do. And that's because across the Western world, we have not been investing enough. And with the pressures of climate change, population growth and business needs for water changing, it's crucial that we invest now.

10:42David Henderson:David, I will let you clear your throat. Thank you very much for making time for us this morning. So there you go. Darren, we've heard from the industry that's now facing different, potentially more intrusive regulation. They believe they can deliver as bill payers, as users of rivers. We'll have to make up our own mind in due course.

11:00Darren:OK, Paul, as always, thank you very much indeed, Paul Kelso. They're at the London Museum of Water and Steam. Let's bring in John Phillips, Chief Executive of Global Infrastructure Investor Association, who is in central London. John, very good morning to you. Just give us a sense of how bad things are out there in terms of our water infrastructure. We keep getting told, don't we, that we've got Victorian infrastructure, pipes dating back 150 years or whatever. Is that really the case? Is that genuinely widespread?

11:34Sir Jon Cunliffe:Well, I think you've just heard from David Henderson from Water UK. It's characterised, I think, the state of the challenge facing the industry right now. And absolutely, much of the core infrastructure dates back for many, many decades. And in some cases, yes, back to the Victorians. So there is a huge challenge facing the industry. There's no doubt about it. But I think, you know, I speak on behalf of investors, international investors, and about 30 of my members have got a stake in a UK water company. And I can tell you from the conversations we have with many of them that they've lost confidence.

12:11Sir Jon Cunliffe:They had lost confidence in the UK's water sector and its regulation. And that was in danger of spilling over into a wider sort of concerns about the investment opportunity in the UK full stop. So because water in the UK is meant to be one of the lower risk opportunities for investors. So that's not where it is right now. And that's why we've been calling for a reset. And that's that looks like what we've got.

12:37Darren:Well, I was going to say, I mean, do you think this goes far enough? I mean, is this report, the recommendations, the government say they're going to fast track some of them enough to attract back those investors again?

12:50Sir Jon Cunliffe:Well, I think I have to give credit to Steve Reid and some of his cabinet colleagues, because I think investment sentiment is impacted by a number of things. So it was very important that the government sent a signal early to investors that they were going to take a really hard look at water because of the problems that was creating. But I think they've also come forward with some ambitious changes to the planning regime. They've also published a 10-year infrastructure strategy, which is something else that we've been encouraging them to do. So when you kind of build a picture across the wider kind of brief, the government put private investment at the heart of its growth agenda.

13:35Sir Jon Cunliffe:And that's a fine aspiration to have, but it needs to be backed up with clear policy and sending a signal to international investors that can take a decision on where to deploy their capital anywhere around the world in any kind of sector. So, you know, I think it's a very, it's a step forward without doubt today. What we now want to do is to ensure that the government acts with pace to put in place the new arrangements in the shortest possible timescale.

14:06Darren:John, I mean, you know, this is going to cost a lot of money, north of£100 billion we're talking about, but I'm just about to talk about HS2, which is a reminder that British infrastructure is always way more expensive than we think it is going to be and always way more troublesome. In essence, I suppose my question is, do we have any guarantees that even with the political initiative this actually can be done, that we can sort this problem out?

14:35Sir Jon Cunliffe:Well, as you say,£100 billion of infrastructure investment in water alone in the next five years is certainly a challenge. and there will be delivery challenges. There's no doubt about that. Does the country have the right skills in the construction workforce and other such things? But I think it's an ambition that needs to be addressed, and I think it can be with the right enabling environment that the government and the new regulatory arrangement are there to help deliver.

15:08Darren:John, we appreciate your time this morning. Thank you very much indeed. John Phillips there. Thank you.

15:12Sir Jon Cunliffe:Thank you.

15:14Darren:Now, a group of manufacturers are calling for the original route of HS2 to Leeds and Manchester to be resurrected. A survey conducted by Make UK and Barclays UK Corporate Bank suggests almost nine in ten companies believe the original high-speed rail link should still go ahead. Well, delighted to say we can speak to Ben Fletcher, who is the Chief Operating Officer of Make UK and joins us now live. Ben, what are you guys proposing this morning?

15:41David Henderson:Morning, Darren, and thanks very much for the chance to talk about it. We are very keen to bring the original plan for HS2 back to the forefront of the debate. We understand that there have been some real issues and some real challenges, but as the project gets a serious look at, we need a big investment in infrastructure for many reasons. There's a great economic benefit of linking those fantastic cities up, but at its core for us, what we've always been keen to get out of high-speed rail is a massive expansion in capacity so that we can move much more freight onto the line. We can move passenger traffic from the traditional line to the high-speed line, and that frees up an enormous opportunity to put a lot more freight onto the older lines.

16:21David Henderson:We can move the product between the big cities. And what we want to do is to really invest in things like digital technology so that firms can book onto those spaces much more easily, and logistics hotels so that we can bring together all the different modes of transport in some of those really big hubs around the spine of the country, so we can make it much easier to put manufactured goods on the backs of trains, get them around the country and then get them onto HGVs, get them onto planes, get them onto other forms of transport.