Thank you very much for the opportunity to come and give evidence this morning. One objective of the interim report, which was not perfect, was to get feedback and enable people to react, so this is enormously helpful to us. There are two questions there, which are why I did it and why they asked me. They are separate things. My career has been in public policy. I am retired. I do some other bits of consulting. This will sound very sad, but it was in some ways a privilege to be asked to look at a really important public policy question. That is what I did for 43 years and people do different things in retirement. I thought that this would be an energising thing to do, and it has been. Also, I do not want to sound pompous, but there is a chance to give something back to the system after you have been in it for a long time and had the privilege to serve in a number of positions. I asked the Secretary of State, when he asked me to do it, “Why do you want me to do it, because I don’t know anything about the water industry?” I will put on the record that I was Nicholas Ridley’s private secretary, but that was when he was in transport and before he went to water, so I was not involved with that privatisation at all. I have not really followed the water industry, apart from my very first job in the civil service, where I dealt with bathing water and European directives. The answer that I got from the Secretary of State was, “We wanted somebody who didn’t have a history in the industry on the regulatory, industry or NGO side, who could have a fresh look at it”, and that was the reason.

I would not worry about sounding pompous; you are in the House of Commons. Pomposity rarely makes anybody stand out in this building. Can I look at the role that you have in terms of your relationship with the Department and setting the terms of reference? Were you involved with the setting of the terms of reference, or was that handed to you as a done piece of work?

I was handed a draft and asked to comment on it. I did comment on it, but it was more a question of understanding it, because, remember, I did not have close knowledge of all the issues in the industry. Broadly, that was the draft terms of reference that was handed to me. I made some changes. They were relatively minor.

You are supported with a secretariat drawn from Defra’s staff. You will have seen some of the commentary. There are those who are saying, “He might be the figurehead, but this is a piece of government work. It is not truly independent”. How do you answer that?

If you have been Sir Humphreyed, you do not know if you have been Sir Humphreyed, to quote one of the commentators. I would like to put this on the record if I can. I have been given a secretariat of high-quality Defra officials. They have assigned some of the highest-quality people they have to this and as this has expanded—and it has expanded—more people have been assigned to it. I have not felt in any way that I am being channelled down any particular route outside of my terms of reference. I would also say that they are incredibly hard-working and are in seeker‑after‑truth mode. The Department will have to decide what to do with my recommendations. We have had to draw on some departmental expertise that we do not have, such as environmental science and some of the things around regulation and planning for background. The recommendations and directions are my own. They will be my own to the end and I will be accountable for them. It was a bit unfair, to be honest, to criticise hard-working civil servants in that way.

You also have an expert panel that sits with you. Looking at that, it covers a wide range of different influences and expertise. There are a lot of professors. There is only one person, Douglas Millican, who would be from the operational end of the industry. How has that panel worked and do you think you got that balance right? Might you have had more people there who were grounded in the industry in terms of its provision, rather than necessarily the financial and regulatory management?

To state what the panel does, it is not required to endorse or support the recommendations. This is a panel that gives its advice. We have held a number of meetings with the panel. We circulated our draft call for evidence and the interim report in draft to it and took comments across a range of areas. In the end, as I said, the judgments are mine, not the panel’s. We have Douglas Millican. We also have Jon Loveday, who worked at Thames and has worked on the NIC. It is a very wide set of terms of reference and the panel would have been larger if we had had to go further. We talked to water company chief executives and others. We had a lot of interaction with them, so I feel we have had enough to draw on in that sense. One objective of the interim report, which sets out some broad ideas and directions, is to allow all the stakeholders—and there are a lot of different stakeholders, but the water industry in this case—to come back and say, “That is not workable” or “We don’t think you should do that”.

You have been talking to chief executives, as, you may have noticed, have we. What impression have you taken away of them as a cadre?

I read your report and some of the evidence. My questioning may have been a bit different to your questioning on some of the issues. They have all been constructive. They have all said, and I think believed, that they saw the commission as an opportunity to help. They all wanted to set out their problems as a sector and individually as companies. I can come back to that in questioning, because some of the company-specific material was quite powerful. I have met them en masse I think three times now. I will probably do it once more and see some of them again individually. The impression I got was that they were engaged with the commission. They saw it as an opportunity and actually were unhappy with the current situation. We can say, “Who was responsible for that?”, and I guess we will get into that, but this was, when I engaged with them, not a set of chief executives who felt satisfied with where they were at the moment.

If you look at your interim report and our report, one of the areas of divergence would be that we have very serious concerns about the culture within the industry, the lack of transparency and the lack of focus on customer service. Given that yours is an interim report, we are not seeing that. Do you think we might see more attention paid to that aspect of the industry and its outputs by the time we get to your final report?

I am not sure how big a difference there is, to be fair. Culture in an organisation—I have spent my career in large organisations—is a very difficult thing to get your arms around. It is the product of lots of different things. We tried to address the things that we think drive culture. It is difficult to measure, so measuring outcomes is important. You have to look at whether a particular structure drove better performance and whether you can put that down to culture. I would break it down into different components. What we have called the business model of the owners matters, because, in a system of privatised, regulated monopoly companies, which is the system my terms of reference asked me to look at, the messages that the owners set and the incentives that the owners put on senior management are important. Senior management are very important: their culture, the messages they transmit and the incentives they have. There is then middle management. This is how things transmit down the organisation: a sense of how we do things round here, what we do and do not want to do round here, all the way through the organisation. We have tried to look at the various factors that would drive a culture in a way that does not rule out private profit, because that is what private companies do, but aligns the incentives between the public goods that we need these companies to deliver and private profit.

We get the industry back to a low-risk, low-return model.

We have been bottom-up rather than top-down. We may say some more on culture, and there clearly have been cultural problems with this industry.

In terms of bonuses, dividends, public engagement and customer service, what would you like to see a post-Cunliffe water industry look like?

Restoring the underlying trust of billpayers, the public as environmental consumers, if I can put it that way, and investors, is going to take time. I was involved with the reset of the banking industry after the financial crisis and that has taken a long time to put in place, so changes will not happen overnight. I would like to see a company where the owners and senior management believe that the company will thrive, financially as well as in terms of restoring its public reputation, if it delivers the public goods it is supposed to deliver, and that it will fail in its performance if it does not.

You have published your interim report pretty close to your final report, if the deadlines are to be believed. What do you hope to achieve by publishing your five core themes at this point?

I thought quite carefully about whether it was worth doing. The original idea had been to do it a month or so earlier. We were delayed for about a month in putting out the call for evidence, simply because—I think I have had over 150 meetings with people—there was just so much that came out of it. When you opened the box, there was just so much in dimensions that came out. It was like getting a firehose back. It would have been possible to wait, but I thought that it was worth testing what people thought of the main ideas, even if I could not put that much flesh on the bones. We had not taken final decisions. We have had and looked at the 50,000 responses that have come into our call for evidence. Some of those are email campaigns that you can analyse en masse, but there have been a large number of very substantial submissions that have to be worked through. That has put us under real pressure for this period. We had to leave one or two important areas out of the call for evidence. Customer protection and social tariffs are probably the biggest ones of those. I still thought it was worth while to do that and get feedback. You have just given me some, Chair, on culture, or this report has, so it served its purpose, but it is a bit close to the final. If I might say one more thing on this, without sounding like a Treasury official, there is a trade-off here between how quickly we do this, how detailed we are and how much we leave with a direction for other people to do after us. We will probably be about eight months in total for a report this size. You could argue that you could take two or three years dealing in detail with everything that is here. The report itself is causing instability. On the investor side, companies are raising money, are raising debt and want to know what happens. Also, politically, the news is coming out every day about some of the problems in the industry. You have taken evidence on this. There is a benefit to being fast, but there is a cost. The Secretary of State was very clear that he wanted something quickly, so the Department could then think about legislating, potentially in the next session.

Fifty thousand submissions tells its own story. We are going to move on to questions around strategic direction and planning.

Morning, Sir Jon. You have criticised the large number of strategies and initiatives relating to the water sector. Indeed, the interim report states that there have been a large number of strategies, as you have just alluded to, to take some background. They fail to prioritise action or provide accountability or mechanisms to ensure they are delivered. What problems has this created and what steps are needed to resolve them?

The first thing I would say is that this looks tremendously easy: Government should set out their strategy. It is not. Early in my civil service career I said, “We need to set down the government objectives” and my boss said, “No, we need to put them in order”, and that is a much more difficult thing to do. Government have not set out priorities in terms of timescale, so what we do first, what is important to do first and what can wait, but also in terms of trade-offs, so how much of this you want as opposed to something else. The problem that that has created is that trade-offs do not disappear and prioritisation does not disappear because the Government do not set it. It will just happen as a product of the process. There have not been clear messages about what takes priority or the affordability, if I could put it not just in terms of actual bills but the nation’s ability to afford some of the changes. With different regulators charged with different remits and pursuing their remits, quite rightly, you have had a tension. Those trade‑offs have worked their ways out in—I think we use the word politely—suboptimal ways. The second thing is that there is not—I do not like the word “vision”—a long-term endpoint that Government set that says, “This is where we want to get to over a period, taking those into account, and here are the steps along the way”. I will give an example of a problem: the supply chain. We have been told that the workforce will have to go up by 30,000 skilled people to deliver this huge investment programme. That does not happen overnight. You need to be able to see that coming. You have commented in your report on the spending going from just under £6 billion on environmental investment to £24 billion. One does not wake up in the morning and discover that one needs four times as much environmental improvement. Somewhere along the line, milestones were not set and things were put off, and the result has been this enormous increase, in proportional terms, in customer bills. It is 36%, I think, in real terms. The system has to respond to those overall signals about what gets done over time and where we are going, but not inflexibly. You have to adjust it. While there have been some strategic steers, they have tended to be a list of the objectives without the ranking, prioritisation and timetabling, and that is a much bigger role for Government than Government have had in the past. I am not criticising any particular Government. There has just been an absence of that over this period.

You mentioned milestones not being hit and that closer monitoring. Just going back to the question, what do you think are the mechanisms that we need to put in place to resolve that lack of scrutiny?

We need to put in place a fairly extensive government plan for water that sets out the endpoints and has some milestones in it. This, by the way, is not just the water industry. My terms of reference go wider than the water industry. They are about strategic planning for water as a whole. There needs to be some idea of the contribution that needs to be made by different sectors—we will probably come on to the contribution of agriculture in a moment—and some idea of broad contours of affordability, or at least how smooth you want increases in customer bills to be, and the investment that will be needed past one five-year period. Beneath that, translating those broad objectives into investment planning happens at the moment through this rather layered planning process. Water companies, depending on how you count it, can have to produce up to nine different plans. We use the words “system planner”. It sounds very Stalinist, but system planning happens at the moment through these collections of plans. We need to bring that down to a regional level and to involve not just the water industry, which is very heavily planned, but to plan for the contribution of the other sectors, agriculture, urban transport, etc, and local authorities, so that we can bring growth and development into system planning. I would like to see those two things, so a high-level plan with guidance on trade-offs and priorities, then being translated into investment within whatever the national standards are, in a regional system. I can explain why regional and not national if you want me to go into it.

I was really interested in your recommendation to look at how local stakeholders and local authorities can be more involved. In Somerset, we have the Somerset Rivers Authority that was established in 2015 in response to the 2013 and 2014 floods. That is a partnership with the Environment Agency, IDBs, local councils and other stakeholders. The aim was to provide Somerset with that enhanced flood protection, additional to what those stakeholders were doing, and give that kind of water resilience. Do you feel that organisations such as the Somerset Rivers Authority, which has the name “authority” but currently is not an authority, would have a positive impact? Do you think that that is going to have a positive impact, in terms of extreme weather resilience, in an area such as Somerset that has such demands on its water resources?

Yes. We have looked at the flood committees of the EA and how they work, because they involve local authorities and an element of local precept, which is an accountability link. Flood is not in my terms of reference, so there is an issue about whether this regional system planner should include flood. We might make some comments on that, but we have not gone into the flood arrangements in detail. It is not enough to have another planner with another report to be taken into account by some other part of the system. Part of the problem in the system is that it is not very clear who is in charge of whom, if I can put it bluntly. Giving them the authority that the Environment Agency currently has in relation to the WINEP—the water industry national environment programme—and some agency over other funding streams that can deal with farming and the like is really important, as is creating transparency. We thought very carefully, and we are still thinking, about how we link this into local democracy. Can we map it on to mayors, or do we have to involve them in another way? The important thing is to establish it on a statutory basis, so they have real authority in the system, because that is what is lacking.

On that basis, do you think that there is an argument for reshaping the water companies on those geographical administrative boundaries?

I do not think that that is necessary, actually. You already have water companies that cover different areas. Affinity, for example, has different companies in different areas. It is quite possible for water companies to plan for different areas that they are involved in, but we have not decided the spatial scale at which this should happen. Current thinking is that it should follow the water, rather than follow the local authority lines, but we are still going backwards and forwards in the advisory committee as well on that. If a water company crosses the boundary of these regional planning authorities, its plan should work for both authorities. It will have to deal with two plans. At the moment, they would deal with a number of different Environment Agency area offices, which is where much of this planning is done, and I think that that is doable. I guess I might as well say this now, because I will probably have to say it later. I am interested in things that can be achieved within the current system quickly. Splitting up the water companies, to some extent, to make them map on to this would be neat, but then we would still have problems. You know the Severn. Water crosses from England to Wales. The Wye is a huge issue. We are always going to have to deal with joins between different areas. Our water resources are more of a national, rather than regional, thing, because we have to share water between parts of the country that have it and parts that will not have it.

That leads me very nicely on to my final question around the interim report drawing on the conclusions about how investment in the water sector in England and Wales should be planned. Why should these water resources in these two nations be governed differently?

The question of Welsh water and whether Welsh water goes to England has a long history, and a difficult political history, particularly in Wales.

We are needing to keep the questions and answers a bit more focused.

The question of what your priorities are is, in the end, a political choice, which is why that high-level strategy is so important. The Welsh Government have made different choices. In the devolution settlement, water is a devolved matter, so, if they have made different choices, the industry has to reflect that.

We are moving on to ownership.

I have a couple of questions to help tease out some of your thinking around ownership. With our work we have been doing, I very much agree that we have opened the box and seen that there is lots out there. One recurring theme that comes up a lot is around ownership of the water companies and what that means in terms of it being a public asset as well. You have talked about the importance of business models. Can you tell us a bit more about your thinking about the importance of ownership models?

Ownership models are difficult to define. If we say listed versus unlisted, is that an ownership model? If I look at unlisted, I can see very different owners in the unlisted box. Some owners under unlisted are global infrastructure companies. Their business model is basically to make a return on providing infrastructure. That is what they do. Northumbrian is the example. Their parents are international companies, so they sit as subsidiaries. They are not listed. Another is what we call private equity, but private equity can be very different. Private equity can be two or three investors, which can include pension funds and sovereign wealth funds. Look at the investors in Thames—the ones that have written their equity down to zero. Alternatively, it could be—there are fewer of them now—some of the consortia we saw in the middle of the last decade. That is lots and lots of investors in a consortium arrangement, where they all had to agree on something, and in a closed-end fund where, at the end of the fund, people wanted their return, whereas some of the private equity infrastructure funds and the like are open ended. We can look at Welsh Water, which is a very different model. It is unlisted but still takes debt from the market, even though it has no equity. I know that there has been some criticism. I have talked to some of the NGOs that brought this up. When we have looked at those, we did not find a hugely clear picture that one thing led to another and that you could join the dots as easily as that. When we look at how the unlisted market has developed over the last 10 or 15 years, it has become much bigger and more complex. We looked at other countries, but I can tell you that environmental performance in Scotland is worse than in England. What do I draw from that? I can tell you that Northumbrian, which is PE, has a higher customer satisfaction rating than Welsh Water. Can we find some things there in performance outcomes? There are a couple of things that we are looking at, but it was not a slam dunk that X leads to Y. As a result, the view has been, “Let us think about the investors, how they want to take their money out and whether they are prepared to put more equity in”. This is one of the problems in the industry, by the way. Are they prepared to put more equity in as investment goes up? Are they looking for capital gain? They will sell the company for capital gain. Are they looking for a stream of dividends over time? Are they going to gear the company up, leverage buyout and then take the money out in an intercompany loan? We have seen that happen. You have looked at that. That is why we have been more granular. The question then is how you set rules around that. The answer—it maybe looks weak, but I do not think that it is—is that you need a regulator with the judgment to be able to say, “This is not in the public interest”, and the powers to say, “No, you cannot do that”. The more that becomes apparent, the more the investors that look to take their return out in a way that is not in the public interest will say, “This is not an industry that fits within my investment scope”. Sorry, it is a long answer.

No, it is useful to hear your thinking. One criticism of the work you have done so far is that it focuses too much on the regulated, privatised model. I can see some elements of that on first reading. I ask it as an open question, but I can see where some of that criticism is coming from. It feels like, to some extent, it could be a bias, because most of the system is provided through private ownership in different forms. Taking a very granular approach looks predominantly at what is in front of you, which is how you reform the current model as is. You have talked about an evolutionary approach. There is some public concern that this is public interest infrastructure, and I am really interested—I come from work within the mutual movement and co-operative movement—in different forms of public ownership. If we end up with such a granular focus on what already exists, how can you assure us you will give fair hearing to other forms of ownership within your reporting?

We do not have many models. We have Scotland. We have Welsh Water in Wales. The international comparisons are quite difficult, because they use different measurements, but we have made some of the international comparisons. I gave you the outcomes. In the end, when they said, “Look at different models”, you have to ask, “Is there a clear case that a different model is providing consistently better results?” We will look at different models to the extent, if they can be achieved, of whether they should be allowed or encouraged. Let us talk about not-for-profit, because that is the model that they have in Wales. It depends how you get there, if I can put it that way.

Can I interject at this point? Does it not depend on where you want to get to first? Are we not in danger here of setting up a regulatory structure and saying, “That is where it gets to”? Instead of saying, “This is the sort of water industry we want to see. It is one that is customer-focused and takes environmental protection seriously. Here is the regulatory framework and corporate governance that will allow that to happen”, we are becoming mired in the details of derivatives and debt management.

I agree, but there is an intermediate step. This is the sort of water performance we want. Now we look at different models. How have they performed? If we want to get to that outcome, what does the experience that we have and can gain—as I say, some of these things are difficult to compare—tell us about whether different models can produce what we want? If I wanted customer satisfaction, I would look to the highest performing company in terms of customer satisfaction, Northumbrian, which is an unlisted company. I would just draw an idea that that must be the best way to do things. You need to look at the range of models. Maybe this is a philosophical difference. It is possible for the regulatory system that sits outside what is in the company, if you like, to set the incentives that align the private outcomes with the public goods. I agree with you that, in the end, that is what we want. The question is whether there is evidence that different models actually produce that.

Having intervened, I am now going to say that we need to keep things moving along a little more sharply. Andrew, apologies.

That picks up the point I was trying to raise with more focus, in the way the Chair can do it. I think there is a risk. Do you accept that there could be a risk that we have a report that is tinkering, given the dominance in the market of private regulated, whether it is listed or unlisted?

No, I do not accept that at all. No, I just do not; I am sorry. You would not expect me to accept that this was a report that was tinkering. Moving past that, I do not think that the problems you see in the culture of the water companies that you have identified, and the problems we have seen in performance, are the inevitable consequence of the ownership model that we have. We can look at different ownership models. It matters how you get there; it really does. A proposal for Yorkshire Water to go to not-for-profit was turned down by Ofwat, quite rightly, because it would have loaded the company up with debt. That model can operate, if you can get there. If you can get to a mutual, that is fine, but you have to get there. The question is how you are going to get there. My terms of reference rule out spending public money to get there, so I am looking within the structures that we have about how we get there. If there are other ownership models—and we will talk about this—that can be achieved, we will talk about whether they deliver something. We have not found that link where this ownership model produces the culture that we want. We just have not.

There is a challenge within that. I fully understand that you want to get from where we are. The starting point you have inherited is a private model that has largely failed on a range of measures. We can pick individual metrics where different companies are league tabled, but the water system is failing. It is failing the needs of the British public, the needs of the environment and public satisfaction. There is a risk within a evolutionary model. We get that where we are starting from is the inheritance of failure. If that is your only starting point, I can see why it may not lead to other models. It is about making sure there is due regard within your reporting to understand that acknowledgement, because this is about public acceptance and recognition of what you are doing as well.

You used the term “British”. If I look at the Scottish water system, which was not privatised, its environmental performance on good environmental standard is not up to some of the performance of the English water companies. Its performance is stronger on public trust. Its performance on metering and other areas is weaker. Implicit in what you said is that, because we have a water system that has failed, it is the private element of it that has caused the failure and, unless we deal with that in some way, okay, we are not there.

My question is slightly different. I worry that your report so far, because it starts from the point you have described today as well, in the private model, does not give due regard to how other models could be accepted or provide alternative routes. It is about the purpose point of the sector.

We will talk about whether other models can be accepted. If the question is whether we will recommend a wholesale move to another model, we will talk about how, if you can do that, that is a model that can be accepted in certain circumstances. As I said, the Yorkshire proposal was not acceptable for not-for-profit. We will not say that we need to move the whole sector to a different model, for two reasons. One is that I am not sure how you get there without spending a very large amount of public money to buy the assets, and that is not within my terms of reference. The other question is that, if I had to look at the evidential link between models and outcomes, I do not find a strong correlation as underlies your question. It is not tinkering. It is trying to be evidence-based.

I think that we have got the message here. The model of ownership, in and of itself, is not going to be the determinant of the outcomes. It surely has to be ownership plus then a strong regulatory environment. For that, you have to decide what you want to achieve in the first place.

I would go further. It is not just the model of ownership. It is the model of the investors who own it, what they want out and the incentives they put on the company.

Can I ask you another question about what risks you think are posed by significant levels of overseas ownership of our water companies?

To be clear, in security terms, we have not looked at the security of overseas ownership. There is a Government committee that looks at whether strategic UK assets can be owned abroad. I would leave it to them if there is an issue about ownership there in security terms. If it is in terms of investment and whether we are happy to see non-UK investors, in an open global capital market, if there is a pension fund in Canada or Australia that wants to invest in water, that might be the sort of owner I want, because it is looking for a stream of dividends to match a stream of liabilities. If there is a very short-term hedge fund that wants to own it and flip it, even though it is British, I do not want that. I will confess that we have not looked at the security aspects of foreign ownership. We have looked at whether we have enough authority in the regulator—and this is the Drinking Water Inspectorate—on cyber, for example, and whether we should bring the waste water up to the critical national infrastructure level that we have on the drinking water side. We are looking at it from that end, but we have not looked at state actors and those sorts of issues.

Can I ask you one final question, because I am conscious of the time, building on the theme? As a Committee, we believe that greater powers to vet or veto owners of companies may be necessary because this is a critical national infrastructure, even though that is slightly different in terms of security. What assessment have you made of that proposal?

It is a very important proposal. If we approach it bottom up, the way I am suggesting, which is that it matters with the owners, you would look at the owners. You would look to say, “Are you prepared to put in further equity? Is it a closed holding period? What are the voting arrangements?” I think we had the situation in the middle of last decade where no equity could go in because there were dozens of different partners. They all had a veto. They all had to agree, and some were prepared to put more capital in and some were not. Also, “What is your history as an owner?” The regulator should have more powers. It did not get some of these powers, in the defence of Ofwat, until, I think, 2021. There is a question about whether we should go further. Yes, we are very much looking at that.

I wanted to go back very quickly to other types of ownership, because we understood it that state nationalisation had basically been ruled out in the scope of your report, but there were other things we could look at, be it employee ownership, consumer ownership, CICs, not-for-profit, etc. Some of those are, in other sectors, publicly owned things. If you think about social housing, trains now, or the electricity network and NESO, there are other ways of doing things. It was just to press you again on how much you were going to consider those other ways of doing things, or whether you have narrowed your scope to looking at regulation of the private sector as it stands and as it exists.

It depends on what you mean by consider. We will consider whether those models can work or what evidence there is that they could work in water, if they can be achieved.

You will look outside the water industry.

In some areas, such as community interest companies, there are not big examples, but yes, we will look at different models and different countries to some extent. That “if it can be achieved” is important. If the only way you can achieve them is for the public sector to buy the assets—and remember that these are water companies that are owned privately, so they have to own the assets—that is outside my terms of reference. I am not going to recommend that wholesale shift, that assets are bought and transferred to a different model, because, as I say, those are not the constraints within which I am working. There is a separate question about whether you believe that that would be the big change that would deliver the outcomes. As I say, looking at the models, it is not a big dataset but I do not think the conclusive evidence is there to make a big change like that. If this involves the purchase of the assets by the public sector, that is not in the terms of reference.

That is the line of your inquiry.

Yes.

It is quite clearly set out that, even if nationalisation is not part of it, public confidence is very much part of your terms of reference. We have Canadian pension funds taking big dividends. We have Australian private equity companies. We have the complexity around water companies effectively becoming financial vehicles held in Malaysia or Cayman. In terms of trying to restore public confidence, do you think that that is something your commission should try to address head on?

The way to restore public confidence in water is, in part, performance, and it will take time to change that. On dividends, actually the dividend performance, as your report notes, over the last five years has been pretty poor compared to other sectors. If it were not for a quirk of the way in which Ofwat set the regulated capital value, if you look at the National Audit Office, returns would have been quite close to zero over the five-year period. The dividend chart is quite interesting, because it goes up and down over five or six-year periods, which suggests that there is a stimulus-response spiral going on. If the only way to restore public confidence is to say, “You cannot have dividends”, no, we are not looking at that. The way to restore public confidence is to tell them that there is a regulator that can look at what is and is not in the public interest as water companies operate—that is the supervision model that we have talked about a lot—and that there is a quality regulator of drinking water and environmental regulators that have the capability to enforce legislation. Then I think public confidence will be restored by actually seeing improvements. I do not think banning dividends, or banning dividends for overseas companies, is the way to restore public confidence. On the question about the Caymans and the like, holding companies and holding company structures, I kind of agree with you. The regulator needs to be able to understand what is happening within the group and have the authority within the group. I come from the world of banking regulation, which is in the private sector. Banks are in the private sector completely. It is different and it gets even more complex than water, but the regulator has the authority to say no to certain group transactions, or, if there is obscurity, to say, “We do not want a model where we do not understand what is happening above a certain level”. The level of scrutiny increases with the size and importance of the bank.

We had fascinating evidence from Severn Trent, when it was explaining its Trimpley model.

I read the evidence, Chair.

Is it fair to say that, if you cannot explain what you have done, it is too complicated?

I am not an accountant, but in broad principle I agree.

We are going to move on.

I found that evidence session very interesting.

We have not had any boring ones yet. We have left some of the customer-facing work to the end of the session and I really do not want that to be squeezed out, so we will need to keep questions and answers all very tight. We are moving on to governance and bonuses.

We need to talk about bonuses, which has been a big theme publicly and caused lots of concern. The CEO of United Utilities, which caused more raw sewage spills than anyone else in 2024, received a bonus of £440,000. The Severn Trent CEO received £584,000. All these figures are last year. For Yorkshire Water it was £371,000. You know that it goes on and on. Our report and your report so far have drawn slightly different conclusions and recommendations on how we tackle this issue. How would you respond to some concerns that these are unjustifiably large bonuses and it is more than just a cultural issue that we have seen within the sector so far?

I do not know that our reports have drawn different conclusions. I do not think we drew a conclusion in the interim report on bonuses. We made a comment about “Do not just concentrate on bonuses”, because, if I can go back to the start of this session, culture is really important. Bonuses signal what is important to the company and the board or ownership of the company. It is a very powerful signal.

The people getting bonuses now are getting them because they are doing clever things to manage debt and the rest of it. It is not bonuses around the delivery of water and sewage services.

I talked about aligning public goods with private incentives and private goods. The question is whether the bonuses are sufficiently lined up on the public objectives. There is a question about what the public objectives are. To go back to the session you had with Liv Garfield, it was an interesting discussion about why it is a four-star rating if you fail this or whatever. Some of this is to do with how, if the Environment Agency sets a certain standard of good, it is reasonable to attach the bonus to good. The standard might be wrong. That is what came out of some of that discussion. The standards of the public goods have to be perhaps a lot clearer and maybe a lot simpler in that sense. I do not have a problem with there being bonuses for the private performance or the financial performance etc, provided they are not at the expense of the public goods and the like. On whether those chief executives have deserved the bonuses they have earned and whether they were too large, we are not looking at individual companies and the report will not make judgments about whether particular bonuses in the past were justified. We will say that, to get the right culture, the bonus mechanism is a very important signal of what matters round here and what we are here to do. It is very important that it is not just lined up at the chief executive level but cascaded down through the middle management. I have been in organisations. That is one way you signal what we are here to do.

Can I pick you up on the point that you have mentioned? I understand that you are not going to touch on specific water companies. We of course have and will. What is your comment on the overall balance so far that the sector has? Do you think that the balance is out of kilter and can you comment on that? While you hesitate to think, I will go into the specifics. You can call Thames Water “Thames river” if it makes you more comfortable to talk about the specifics of it. In January 2025, so this year, it threatened to increase base salaries of execs in response to proposals from Ofwat to limit bonuses. The CEO has a total pay package of up to £2.3 million, with a comparatively small bonus of just £195,000. This is clearly done this year. From January, it moved that pay package and that issue into May of this year, clearly in response to where it knew Ofwat was going to land. I understand that you do not want to make comments on specifics, but this is a systemic cultural issue within a sector that feels it needs to reward poor performance with an extortionately high remuneration package. It then gets around bonuses to justify giant, colossal pay packages. There is clearly a cultural issue here. It is more than just one organisation, but Thames Water really exemplifies the challenges.

We are not going to make recommendations on a particular pay policy or level of remuneration for water company chief executives or where the bonuses should lie. There is a tension here between people taking pay packages they do not deserve and recruiting and retaining. That will require quite a lot of work in the market where you find people to do these jobs. These are very big companies. The penalties for failure are pretty enormous in reputational terms, if only because you have to appear before this Committee. No, but that makes a difference, and some of our water companies need good managers who can lead. I do not think that we will get into whether this is excessive or not excessive. We will get into whether the incentives are right. Bonuses are one way of providing incentives to management. There are other ways, and I will go into this. We reference the senior managers regime, which was brought in after the financial crisis to deal with cultural issues in banks. That is a rather different thing. That does not say that you get money for doing something. That says that you have some statutory duties as a manager and, as a senior manager, you are responsible for putting in place a system that does that. If there are failures, you are accountable. It goes with a code of conduct and vetting. There are other things. When we speak in the report about too narrow a focus on bonuses, we mean that the incentives that you need should be a combination of things that bring the public goods to the fore in what the company is doing.

I understand that, and I understand and appreciate the recommendations that you will be making around senior managers regime. There needs to be some recognition and acknowledgement that, in a sector that prioritises bonuses, it therefore attracts a certain talent pool and certain people who have left other industries, financial industries, and not focused on the human issue, the human capital, and the public good and need of water. Until we acknowledge that and say, “This is a fundamentally different sector and we need a different talent set”, we attract a pool that perhaps is not suited and best placed to be working and operating in the water industry.

We now have a fit and proper test. I saw a report saying that there is evidence it has not gone far enough. If there is, asking, “Do you have experience and knowledge of this industry, or similar? Have you run a large public service industry before?” is one way of getting at what sort of people you attract. This Committee may want to comment on, in societal terms, whether it thinks these pay packages are excessive in light of the average wages or whatever, but the commission is not going to.

Yes, understood. I will move on. The last thing I will say on that is that, if the recruitment committee asks about experience, that experience of the water industry is so often built and based on debt management, rather than water management, because that is how the water industry has been set up to operate, effectively. The final question I will ask before we move on is around data transparency. A lot of us in our constituencies work with citizen scientists, and they do incredible work to gather the data, share the data and talk the story about water quality. We are calling for better and more collaboration between local communities and water companies. Will this feature in your final proposals?

This is one of the areas where we did not get into detail in the interim report, but we will get into in more detail in the actual. There are two dimensions to data transparency. One is between the company and the regulator. I do not want to go into the whole operator self-monitoring, but there is also the question of whether the regulator should have up-to-date information from the monitoring systems that exist, for example, within treatment works or continuous water quality monitoring around the company. There is then the information that is provided to the public. There are a number of strands to that. We talked about ownership models. I do not want to go back into that discussion, but there is a question about whether listed companies produce more information, and, if you are going to be unlisted but operating a water company, whether you should be producing more information in that sense. Then there is the question of the public and what the public can see or whatever. I read the evidence of United Utilities a little bit more, and I have to say—this is the reason why I say we are looking at it—that I am still a bit puzzled by this whole area, as to why the information is not released. It may be a cultural issue. It may be that they are hiding something, although that is more, I think, about the regulator. To give you an example, I went to a beach where there is bathing water and they have sewage spills from the storm overflow when they cannot surf and whatever. You can guess where it was. Their problem is that they need an extra pump to pump the sewage up the hill so that it can get to the treatment works more quickly. There is a big investment programme for that water company. When I asked them, “Do you know whether your sewage pump is in the investment programme?”, they said no. If you are investing large amounts as a water company, why do you not want to go and say, “You are not next, but we will do this in this year”? I do not really understand. We are still trying to get to the bottom of that, to be honest, but we will say more in the report.

These companies are alive to the reputational dangers. You get the letterheads. Severn Trent has a strapline: “Wonderful on tap”. So does Northumbrian Water Group: “Living water”. God knows how much they have spent with some marketing company to come up with that sort of thing. That is why they do not want people to know the truth of what they are doing. I can see no other real reason for it. I take your point that, on bonuses, it is not the job of the commission to say, “You should set bonuses at this level, that level or the other”. The payment of bonuses, when the environmental performance and customer service experience is so poor, is one of the major reasons why people no longer have confidence in this issue. Surely there has to be a regulatory framework put in place to ensure that that does not happen again in the future.

I would agree that, if bonuses are not lined up with—sorry, economist past—the public goods that the public wants these companies to deliver, you will get the loss of confidence we have had. There are powers in the special measures Act on bonuses. The Secretary of State just blocked six, I think.

He says he has blocked. Thames says that they are paused. Does that not tell you quite a lot about the attitude of the industry here?

The question, though, for me is whether those powers go far enough, or whether there needs to be more. The regulatory system has evolved. It has been playing catch-up. That is one of the reasons why it features so heavily in our report. Does it have enough powers? Behind that, there is another really important question: does the regulator have the expertise to apply those powers? We have not really talked about the expertise of the economic regulators.

There is something of a revolving door between companies and regulators. If they do not have the expertise, it is not clear why.

I think that it is clear why, actually, if I might say so. The economic regulator has two functions. It was set up, first, generally to oversee the licence conditions and, secondly, to ensure competition, efficiency and protect the billpayer from abuse of monopoly. To do the latter, it has evolved this whole econometric modelling, the benchmarking, etc. That is the lens primarily through which it looks at water companies. Over the last 10 or 15 years, it has had to develop the ability to oversee the licence conditions, which I call supervision, but I do not think that it has given enough attention to doing that, either in the amount of revenue it allows companies—it is on both sides of the equation—or in terms of understanding what the companies were doing. I have been involved with supervisors. You need detailed knowledge. Ofwat got rid of its engineering capability. Okay, you use consultants, but you do not have in-house engineers. It is now trying to rebuild it. Does it have the ability to understand what happened at Severn Trent? Part of the capability is to apply tools on bonuses and to block a dividend if you think that a dividend is not in the public interest. You have not asked me about gearing, “Do you have a gearing standard?”

We have a gearing standard that nobody pays any attention to.

It is not a standard for gearing; it is a standard for the amount of money you get in revenues. It carries within it a perverse incentive to issue more debt than the standard because that is cheaper in the hope that your debt costs will not go up because you have less equity. Do I think there need to be some standards on capital? Yes, I think so.

These are the financial geniuses who then get the bonuses.

The question is, “Why is that allowed in the regulatory system?”

That brings us back to the regulator.

First, you have different types of remuneration at different levels in an organisation.

It is right to the extent that you want to put less income at risk for people at the bottom of organisations who do not have control of the risk. What proportion of pay should be at risk for people at the bottom of the pay scale? You need to think about that differently. You might want to put more at risk for people at the top of the pay scale. We could argue whether too much has been put at risk or whether it is not properly put at risk because they have not performed.

The signals that you send right through the organisation, through bonus, performance, appraisal and management, matter hugely. I would not want a system at the bottom that has a similar proportion of pay at risk as I have at the top. Yes, it matters, but what matters at the bottom particularly is, “Are my pay and conditions good enough to attract the people I want?” By the way, the water industry has a real issue because it is losing a lot of experienced staff who are retiring and it is not managing to attract, etc. Does the pay structure at the bottom matter? Absolutely. Do you want to send signals through bonuses? Yes, but you might send signals through lots of other things and you may not want to put very large amounts of remuneration at risk at the bottom of the wage structure.

It is 3%, I thought.

It would depend on what the base level of pay is at the bottom as well as the bonus. Again, it is the entire remuneration package that matters. The people who have more control over what happens should be more at risk. That is how the bonuses work. Looking at just bonuses irrespective of base pay as you go down is potentially misleading.

The customers will look at this and shake their heads in absolute bewilderment. They see a failed sector where people at the top are still getting the bonuses, and they will ask, “Where is the risk? They get their bonuses no matter how badly they do”. You have to address that, surely, do you not?

Yes, I agree. The issue is whether bonuses should be paid for poor performance.

The people at the bottom are focusing on the delivery. They are focusing on dealing with outages in a timely way, the proper passing of information and the other things. Do that well, surely, and you would see an improvement in customer confidence.

You would. Would I make 20% or 30% of the annual pay of somebody at the bottom of the pay scale related to a bonus?

The percentage is not meaningful here because 20% to 30% of something at the top of the pay scale is very different from 20% to 30% in terms of what you take home to pay your mortgage and your electricity bill at the end of the month.

I am sorry, but, if you are at the bottom of the pay scale, it might make more sense to have higher base pay and smaller bonuses. It is not about 3% or 150%. For me, you need to look at what is necessary to incentivise down the organisation.

Okay, we need to move on. I am going to jump ahead to the questions around the legislative framework.

One thing that we propose is that the regulatory system could be clearer about what debt and bill revenues will be used for. Could or should debt be reserved for enhancement expenditure rather than day-to-day spending?

In the main, yes. You can use debt to smooth. Over a five-year ramp, you will find that companies will frontload or backload their investment. By and large, the purpose of debt in the industry is to spread the cost of investment over generations.

I have another very quick question. One thing that the Committee is looking at is, if dividends are going to be a future of the water sector, whether there might need to be a floor and a ceiling on dividends as well as on bonuses. Is it feasible to have a ceiling on dividend payments in the future?

We need to narrow the variability of returns in the industry. That is primarily about dividends, but this question goes back to the business models of investors, if I might. It should be a low-risk industry. It should be fairly secure over time. It should offer something over gilts because there are risks. The more the investment programme goes up, the more construction they do and the more the risk goes up. You have to accept that. You should not be expecting stunning returns from what is a monopoly utility. On the same side, you should not be expecting stunning losses either. If you have to write off your whole investment, university teaches, that is a bad thing. What has caused the variability in performance? That dividend chart goes up and down. Can we constrain it? All the investors I talk to say they would happily give up the upside to limit the downside. That just may be where they are now. They might have answered differently 15 years ago. We are looking at ways in which you can do that, whether that be a dividend cap or whether you look at some of the risk-sharing mechanisms that exist. The higher the returns get, the less you keep and the more goes back to the customer; the worse it gets, the more you are protected from the tail risk. There is something in that, and we are exploring it. It is difficult to do, which is why it was not in the interim report, but compressing that variable range is important to get the investors in that you want.

Just to come to debt specifically, I get the impression, Sir Jon, from your answer just then that you are relatively comfortable with the overall debt level across the water companies. Are you concerned about some of the opaque structures that are being used in order to gear up? Do you share the concerns of customers that such a relatively high percentage of bills is being used to service those debts?

I do not think I said I was relatively happy with the debt levels. I said that debt should be used for investment. Anyway, that is what I meant, if I did not say it. I said this publicly when we issued the call for evidence. I look at equity—how much equity you have is the counterpart to debt—through a financial resilience lens. That comes from a banking sector history. The equity is there to absorb risk. It needs to be enough. Some companies have taken it beyond the point where there is resilience, and Ofwat has commented on that. We have a stunning example in Thames. You are so highly geared and then, when interest rates go up or there is inflation, etc, it is one of the reasons—it is not the only reason—why you fail. There has to be enough equity to cover risk. If you are doing more construction, there is more risk in the company. Operating generally has less risk than doing large infrastructure projects. The regulator needs to be able to set a level of equity and, by implication, a level of debt. That will not be in terms of a notional level, “We will give you remuneration for so much equity and we will hope the market disciplines you”, but by saying, “You need this much capital to operate”. Should it be sector-wide? Is it a minimum? In the banking sector, it is sector-wide, but then we add capital if we think there are particular risks that need to be there. How long do you have to get there? How do you get there? Do you do it through retaining returns? Do you do it through issuing equity? How Anglian brought its debt down is an interesting example. Another example is Welsh Water. Those are all issues that need to be discussed with the company by a competent regulator that understands resilience. We are not in a position to say, “The level of debt should be X rather than Y”. We are certainly in a position to say that it is too high in some companies. One of the things that will have to be done for the future is that the level of capital in the industry will need to be determined. I have been involved in determining the level of capital in banks, which by the way is a hugely contested issue and banks are not very happy about, and the socially optimal level of capital in banks. It is not something that we have time to do, but it needs to be done. There need to be limits on how far you can go.

It sounds like you are suggesting that you would go and discuss with each company what its levels of debt would be. Going back to the public confidence thing, if we are talking about changing thresholds, discussing them with each company or setting the thresholds slightly differently than in the past, the confidence that the public have that the water companies will do what they are asked to do, seeing as they have not done it up to now, is not very strong. If we are just talking about that kind of thing, how do we restore public confidence—back to that again—in a sector that has been so damaged for so long?

We are not just talking about that sort of thing. The areas that we laid out in the—

It is that big change.

Let me answer you a different way. We have to come up with things that will work and will address the issues in the industry. We also have to try to change or start to change public perception. Those two things overlap, but they are not the same. We need to suggest things that can work. I do not want to come out with a report that suggests a bunch of stuff that is not implementable or does not happen, even though it may sound great on the day and people say, “You have changed something that we recognise”. On the other hand, I recognise that it has to be a big enough change for the public to start to believe. I think—I may be wrong, but this goes back to the banking experience post the crisis—whatever we say, public confidence will not come back quickly to this industry. It just will not because some of the things we have been talking about have left such a deep impression. It is going to take time to get there. That is why the things that we suggest have to make the performance better. For us, it is about balancing those two things.

We have talked a lot about the banking crisis. You have referenced it a lot. The 2008 crisis is a shadow that hangs over this country. It lives long in the memory of taxpayers, who effectively bailed out banks. The taxpayer is not bailing out the water companies in this instance in respect of nationalisation, but they are paying through the nose in respect of their water bills. They effectively are in that position. Does it worry you that the instances that we are having in respect of the public’s experience with the water industry will replicate the scars on the back that the public feel in respect of the banking crisis?

You are entirely right that in this case it is billpayers, not taxpayers, but it is the same public concern and public sentiment. You are entirely right that what we have seen over the last decade, or decade and a half, will leave scars. I cannot rewrite the past. That is the situation in which we find ourselves. We need to find a way to get the industry back. Your report acknowledges that at the beginning of privatisation—returns were high, mind you; the risk free rate was high—there was a lot more investment and environmental improvement. We need to get back to that. It will take time. What we have been through and what Thames is going through now leaves enormous scars. The issue for me is, “What is the best way to get this industry to where we want it to be?” How much of that is about not stopping things from happening? We can argue about why things are allowed to happen, but when you look at some of it you think, “Well, that is just not in the public interest”. It is also about the incentives for the companies and the managements, which goes back to bonuses and the like, and how we deal with those things. If you are asking me whether we are in a position where we will carry the legacy of this period with us whatever we do, the answer is yes.

I want to rattle quickly through a couple of questions, starting with the price review process. We have concluded that there is a broader culture about lower bills and lower investment. I was wondering whether you recognised that and, if so, how do you propose to tackle the problem?

Yes, I recognise it. I was interested in your report. You said it was almost a conspiracy of Government, the regulator and the companies. I am not sure that the companies would quite agree with that. First of all, Government have to be—I was going to say “honest”; Government, of course, are always honest—upfront about what they think billpayers should pay for going forward. There is the issue about whether they are paying for performance or whether they are paying for too‑high dividends, but, generally speaking, the costs of some of these things have to be acknowledged. You only have to look at that WINEP chart about the quadrupling of investment to see that that has not happened. Secondly, we have to sort out the way in which the regulators with different remits go backwards and forwards over cost on the one hand and, if you like, benefit on the other. We do not bring cost into the equation soon enough, so we do not have to front up to the costs that things will have. Thirdly, if you read the NAO report—I am sure you have—we have some pretty compelling evidence that the industry has been under-resourced, certainly for some years. Part of that is the way in which the economic regulation has been applied. It has not taken enough notice of company circumstance and the pressures on companies. That is why company-specific supervision, although it may seem like a small thing, is hugely important to balance what comes out of these econometric models. It is important to have those models because you need to have an objective test of whether you are efficient. That methodology has been applied to too great an extent to try to achieve improvements, which it has not achieved.

On the company point, though, they have often failed to contest those previous determinations, which means that, coming back to the culture that we have been talking about, effectively there is an acceptance that those previous levels of investment are tolerable.

Doing this report is a bit like doing a truth and reconciliation commission, if I can put it that way.

You are setting yourself up as the new Desmond Tutu.

The companies say that they are discouraged from not accepting because of the ambition element of the planning, and then it costs to go to the CMA and the like. Ofwat says, “Well, they accepted it, so it must be okay”. When I come to the question of whether Ofwat can take things out of the plan that the EA has said should go into the plan, the companies and the regulators all tell me different things. I have found it very hard to establish where truth lies in this. What I have established, though, is that we are not taking an in-the-round view of companies. Given that we want them to perform on a variety of things, not just efficiency or whatever, we do not have a single view of companies that comes together. Those planning processes allow trade-offs to be made somewhere in the interstices of the process rather than someone saying at the top, “This is what you give priority to”. I will not say I have given up trying to find the truth, but the time and resource that we have available has been focused on saying, “Well, this is the problem. What would deal with it?” rather than, “Who is more responsible?” There is quite a blame game that goes on, as you have probably heard.

Just finally, you talked about the supervisory role in your commission and how Ofwat could play that role. I was wondering about the conclusions in respect to the financial incentives, particularly the outcome delivery incentives.

First, “supervisory role” maybe understates it. It is a different approach. It is a different sort of capability looking at companies through a different lens. Ofwat has been pushed into that in terms of its oversight of licence, but it does not have the capability and the approach to do it. Because of the dominance of the price review process based on the modelling, that is effectively the lens. They will say, “We take company circumstances into account”, but it accounts for 4% of the final total. This is not just an extra bit on the side. This is a fundamental rebalancing of that approach to regulation, which is more company-specific and looks at that. Your question was about the financial incentives—

What is your assessment of these financial incentives?

We will look at the ODIs in the final report and at whether they are lined up with the environmental side. There are some arguments about that. There is a big question here, which is not going to be very popular, but I will raise it anyway. What do you do with a company that is stuck at below-average performance? The variation in performance has widened since we brought in these incentives. Do I reward a company that is towards the bottom for getting up, even though it is not upper quartile, or do I say, “Because you are not at the top or above the median, I will take money away from you”? If I take money away from you, you have less to invest, so you get trapped below that. There is some evidence that companies do get trapped there. Some spin into a doom loop because they do not have enough resilience, etc. How would you reward a company? Do you say, “You are here. We will reward you if you can get from here to there this time, and next time above” or do you say, “You are there and, if you cannot get in one go to the highest performance standard, you lose money”? We need to look at the ODIs in that way. Again, the figure from the National Audit Office was quite interesting. The worst-performing companies improved water efficiency by 26% in the 2019 to 2024 period and were penalised. How do we drag those poorly performing companies back? The ODIs have a lot to say on that.

The public are difficult to get all in one room, if I can put it that way. We have engaged with Citizens Advice and CCW. We have engaged through the consultation process. I have done visits and I have tried to talk to people there, but the public will not get—

I have done a visit with Thames Water to Oxford. I did a visit to Manchester. I did a visit to St Ives, Cornwall. I have a couple more to do. The team has also been out on visits.

I will look at whether we can make more visits. I have had lots of requests from a number of MPs and I need to deal with them equally. I will say this. I have heard, both in terms of the recreational use of water, and in terms of bills and the like, a lot of public discontent. I will not speak to everybody in the country, for fairly obvious reasons. If the question is, “Do I appreciate the public concern and the impact?” I think I do, but I will not be able to go to every part of the country that has suffered environmental degradation or that has high bills. Thank you for the offer. I will see whether we can fit it in, but I cannot make a promise.

I have spent more time with environmental NGOs than I have with the company chief executives.

I have spent a lot of time with the other authorities. I have done over 150 meetings. The argument may be that this commission is on the wrong timetable and we should visit every part of the country where people feel that the water industry has let them down. I talked at the beginning about the balance between trying to do this in time to make changes and trying to see everything. If the question is, “Have we tried to understand the public anger?”—remember that we get a lot of that back through the 50,000 responses to the call for evidence—the answer is yes.

The answer is that we are looking at that. It comes, in my mind, to some extent under resilience. We did not get into resilience standards more generally; that is a much bigger issue. It is about not just how you stop things going wrong, but what you do when things do go wrong, how quickly you can recover and the like. Your report suggested statutory standards for that. I do not know whether by “statutory” you meant in primary law, in the regulator’s guidance or whatever, but we will look at the case for there being some standards in the industry for recovery times, etc. You have to accept that there are different challenges depending on topography or demography, etc, but there is a question about whether there could be some consistent standards for what you do when things go wrong, which is what you are talking about.

Yes, we will look at that.

Yes.

Yes, due to cryptosporidium.

Standards about whether you appear before the media is one thing, but companies should have rehearsed plans for what you do when it goes wrong. In more than one sector I have been involved in stress testing and war games. What do we do when it goes wrong? A huge part of that is how we handle the media. Believe me, when you come to banks and financial crises, this becomes hugely important. Water companies need to do that preparation. The question is whether there needs to be some guidance from the regulator about what the expectations should be.

Communication is hugely important.

I have a couple of points. First, it is important to state for the record—you talked about cryptosporidium and the outbreak, etc—that public health in terms of the Drinking Water Inspectorate and the safety of our drinking water is top class in the world. We sometimes lose sight of that. A worry that I have is that, because of the attention on the failures in the quality of waste water, people start to assume—this has happened with some social influencers and other people marketing products—there is a relationship between storm overflows and what comes out the tap. There is not. We have an excellent record on public health and drinking water. It is very important that we stress that. The cryptosporidium incident was pretty bad, but I came back recently from Washington DC, where they have boil notices about once a month. We have to acknowledge that. On the waste water side, what we said in the interim report—and we will deal with this—is that the recreational use of water has grown enormously since our environmental legislation was put in place. The water framework directive in particular does not have a public health set of objectives. It is all about the ecological and chemical quality of the water, not about public health. We have the bathing water regulations that deal with a limited subset of that. There is an issue about whether we should bring public health into the legislation, which is at the base level where it starts. You have to look at what the implications for that would be. We did not talk about the legislative review, but the water framework directive will have to be reviewed anyway. When it is reviewed, we have suggested that public health should be brought into the legislation on the environmental protection of water. I do not think one just does it. Sir Chris Whitty is one of the members of the advisory panel. He feels very passionately about this. In public health terms, we have to recognise that the way people use water in recreational terms has just changed. It is used much more widely. Again, on a visit I was told about “aggy belly”, I think it was called, which was the stomach upset that surfers knew they would get for years. The standards now are above that, and we have to deal with it. It is something that has to be brought in. It is not a small thing. I go back to my earlier point. If you will the ends, you have to will the means. You do have to take that into account. My guess is that the amount of public health protection that we now want in water, as a society, has gone up.

It is.

There are lots of urgent tasks in the water world. In the end, it is for Government, not the commission, to set those priorities about what you do in one area rather than another. When it comes to improving the public health aspect of water, some of that goes to storm overflows, reservoirs and spills, etc, and some of it goes to warnings and what people know in advance. Some of that will take a lot of investment to achieve. That has to go into programmes. It will take time. Do I think there is a societal pressure that this is something people want? Yes. Are we going to get to where we want to be overnight? No. Are there choices that the Government have to make at the highest level? Yes.

That was given to me by the supply chain. It is not my estimate.

Yes.

Lou Beardmore told you she thought it was a mistake when she was here. Yes, I do not understand what is behind it. That is the point that I was making. Is this culture? Is something being hidden? Is it reputation, as the Chair suggested? My guess is that the reputation is damaged even more by doing what they did. We are trying to work out a little bit more what is there. I gave one instance of why I did not understand why people who wanted an improvement were not being told when that improvement would come.

Was it just human nature? People in big companies think, “Who the hell are you to tell me what I am going to do?” Was it culture?

Okay, but that is not in their long-term interest. They also want to rebuild their relationship with customers. The answer is that we are trying to dig in to find out a bit more about what is behind that.

If I may, I would just like to follow up quickly on one line of questioning from Andrew and Jane. For transparency, I would like to declare that I am also a member of the Co-operative party. For me, this question goes beyond just the legal status of ownership. It is also cultural. From the Water (Special Measures) Act, we know that water companies are going to have to have customer panels. To build on that, is your review going to look at other ways that the public could be empowered? Will you make recommendations to the Government about expanding good practice in that space?

We are looking at that whole area. This is the area, as I said, that we left out of the interim because we are still working on it and because some of Ofwat’s use of the special measures Act powers is still not clear. I do not know where we are going to land. If the question is, “Are we looking at it?” the answer is yes. Can I say now where we are? No, that is not clear. The Ofwat proposal is quite outcomes-based. That is how we explain it. You can do different things. I am interested—this is something that we did not put in the interim report—in the negotiated settlement approach, which they took in Scotland. However, the first and second runs of that were different. I do not know to what extent you can empower a committee on behalf of consumers to do what Ofwat does in terms of cost-efficiency. Some of that regional planning that we talked about is also designed. We talked about local authorities, but it is quite possible that you would want consumer groups on that panel along with environmental groups because there are choices to be made. One of the attractions that we saw in bringing the planning system—by the way, it is responsible for £44 billion worth of plans, so it is not small—closer to communities and catchments, which is quite important, is this ownership link and this feeling that these things are not just being planned somewhere way above my head. That is one reason why Wales does better because people feel closer in Wales to the authorities that decide these things. Yes, we will look at it, but I could not say today where we are going to come out.

What you have just said is very reassuring. Some campaign groups and citizen scientists have raised the concern that your interim report is very focused on investor confidence and less focused on things such as reforming governance and enforcing environmental protection. Could you give us your response to that?

Some respondents thought we focus too much on bearing down on companies, regulation and the regulator trying to deal with the company. A lot of my report is focused on strategic direction by Government around choices. A lot is focused on providing this missing middle, as a lot of the NGOs called it, in terms of planning. A lot is focused on legislation. There is one part at the end of section 4 that talks about the fair bet for investors. People view these things through the lens of what they care about most. The important statement in the interim report is that there is not one answer to getting to where we want to be. No matter how radical we are or how much it changes public perception, this is not one of those problems where we can have one answer that gets us there. These issues interlock. They really do. We talked about bills, how that feeds down into investment and what that does to the maintenance of sewers. I did not expect that the report would please everybody. We will do another round of consultation, but I would refute the fact that it is about investors. It is about 100 pages, and you will probably find investors on about five or six of them. The Mandy Rice-Davies test applies here as well, does it not?

I very much agree with you that there are no silver bullets and a need for realism, certainly. Both our report and your interim report talk about the resourcing of regulators, which has clearly been hamstringing action for many years. To what extent has poor monitoring and enforcement been at the heart of the poor performance and environmental issues that we have seen in the sector?

There are lots of things at the heart of this problem. It is a fairly crowded heart. It is one of those things. It goes to public confidence. It is like confidence in the police, is it not? Will things be followed up? How long does enforcement take? That is a separate set of issues. You only have to look at the cutbacks in the Environment Agency budget to see the impact that those have had. It has been given not just more resource, but the ability to charge the industry directly. I am talking about the EA now, not Natural Resources Wales and certainly not Ofwat. With its £15 million data transformation plan, it is trying to be smarter in the way it works. You asked me what would restore public confidence. Part of it is confidence in the Environment Agency being able to monitor and hold to account. The EA sometimes has gone for full criminal enforcement when it might have been better to go for something quicker and sharper. That has led to these very long delays, which means the public see something happen and then four years later you get a result. Even though things may have improved, everyone is brought back into that thing. Enforcement is an important part of it.

If I could just pick up on a couple of things there, you mentioned the steps that are being taken to increase funding from permits and licences. Will that alone be enough to fully fund the monitoring and the enforcement that we need in the sector, particularly given that we know from the spending review that there is going to be a real-terms cut to day-to-day Defra spending?

Because more of it is now charged directly to the industry, the spending of the EA is insulated to some extent from that cut. Secondly, as I said at the beginning, we have to have a trade-off between how much we can do and how much we move on. They want to increase inspections from just under 1,000 to 10,000. That seems like a big increase. Whether it is enough I do not know. Will we be able to come to a number and say, “You need X thousand”? No, I do not think so. Do we think that the ability of the regulator to monitor should be kept under review and looked at? It is important. Stable funding is also important. When you cut back, suddenly you lose experience and the like. You must have seen the Corry report. If they just invested, they could use technology to make those resources much more effective, including trying to ascertain from the data that they have where the biggest risks are and focusing that inspection and audit capability on the biggest risks.

Yes, absolutely. On data and the Environment Agency’s transformation programme, we know that data is an increasingly valuable currency and it can spotlight good practice and bad. Should the regulators have better access to the data that is held by water companies? Should they have a right to that?

That is one of the things that we are looking at. It is a question of right, but it is also a question of transmission. I made the point before about the extent to which it is possible. This point has been made to me by a number of people on the environmental side. The water companies have lots of monitoring equipment in water treatment plants, etc. Can the regulator be given access to that, which would then inform that? I do not know how long that would take, but there should be potential in moving down that route. Again, in the financial sector what is called reg tech and sup tech, so regulatory and supervisory technology, is being developed to give the regulator better access to data to see patterns and the like. Yes, there is potential there.

I am conscious of time, so I just have one final question. One thing that we noted as a Committee when we started was the sheer number of regulators and quangos under Defra, including in the water space. We have heard complaints that there are both duplications and gaps. What are your thoughts so far about the case for reshaping or merging regulators?

I was hoping you were not going to ask me that. No, I thought you might. You will have seen that Dan Corry said, “I’m not going to go there”, etc. We will have a recommendation on that. I cannot tell you what it is. I should say on this point about the merging of regulators that it is not straightforward. People talk about whether we should merge into one water regulator and put the focus on water regulation. I talked about having an in-the-round view of a company. Given that so much of what we care about is on the environmental side and so much of the way of dealing with that is how the money is spent and the financial engineering going into investment, do you get that holistic view? There are drawbacks to doing it, though. First of all, a lot of the trade-offs would now become internalised. There is a question about how those are made. Would it make more sense to bring all of the bodies involved in environmental regulation together across air, land and water? Natural Resources Wales has gone down that path. There is also cost, culture and distraction. All organisational structures are suboptimal in some way because everything is joined to everything else. By putting organisations together, you emphasise one thing. There is a cost of that. The question is whether we would get more benefit than cost. In wider terms—this is not for me; it is more for Defra Ministers—would it be a more optimal solution to join things up the other way? There is a review of Defra’s arm’s-length bodies going on at the same time. This is difficult. It would be irresponsible of us to make a judgment without understanding. We are engaged with the regulators and we are trying to understand. This will be one of the final things that we come down on. There are other ways of bringing them together. There are co-ordination mechanisms that you can do. There are escalation mechanisms. There are structures to make different regulators work better and align together without putting them together. Again, we are trying to look at those and work out what is there. It is a really difficult issue and I cannot tell you what the outcome will be.

Watch this space.

We are on the home straight, I promise you. To round off, we have a few questions from Jayne on infrastructure and asset health.

I have about two minutes. I was going to ask about resilience standards, a potential resilience framework and what that would look like in the context of the communities as well as the assets that are in the ground. Just picking my constituency, we have had repeated water outages. We have an issue at the moment with the problems with the sewage in a large commercial street in Penrhyn. The South West Water workers have come back three, or now it will be up to four, times to try to fix this. There are problems with resilience. You have touched on this, and I think our reports agree that there should be some sort of resilience framework or standard. What do you see that looking like?

I will go bottom-up rather than top-down. In order to have resilience, you need to know where your assets are and what they are.

That was my next question.

They are not fully mapped.

Some water companies do not even know where they are.

They are not fully mapped. They are not required to be fully mapped, to be clear. The water ones are; the waste water ones are not. The water companies took over a lot of private sewerage networks, etc, which are not easy to map. Of course, a lot of the assets are underground. Understanding your asset register and its health is really difficult for a lot of the assets in this industry. None the less, we think we need better mapping of where they are. Secondly, it is not just where they are. What condition are they in? Again, that is difficult. There is a much better view on the above-ground assets than the underground ones. All the water companies do their asset health in different ways. Many of them use an ISO standard that is quite high, wide and handsome. The question is whether we have a good grip of where we are in assets, where the assets are and what condition they are in, even before we get to the question of what the standard should be. The framework will have some recommendations on asset management, understanding where they are and understanding their health, which will require investment because it is expensive to do that, although technology makes some things easier now than they were some time ago. Resilience is more than asset health. Asset health is a component of it. You then have the expected life of assets and the renewal rates. You have the same renewal rates in your report as we have in the interim report and the call for evidence. They are pretty worrying. Resilience is about more than that. It is about what happens when the system fails, where the critical points of failure are and whether you have redundancy in the system. The standards need to deal with that. The resilience standards should be at that level. This is about not just what your failure rates are expected to be, but whether you can deal with failure and whether you can deal with the most critical points of failure. There are some classic examples, including one water pumping station serving a large chunk of London where there is no redundancy and the like. That needs to be factored into what you do. Lastly, if you have those standards and companies are able then to evidence the condition of their assets, we come back to the choices about the funding. The regulator needs to provide the funding to do that. Rather worryingly, in Scotland Scottish Water and the regulator did a much more extensive asset health assessment, which did not look at failure rates. The current assessment is backward looking and this was a prognostic look forward. The figure that they came up with was that they were spending less than half on the maintenance and renewal of assets of what they think they need to spend under this new framework. It is a really big issue. We will be quite detailed in what the standards will be. We will not develop the standards any more than we will develop the standards on capital. That is probably for the NIC to do.

As a Committee, we suggested that bill revenue should be enough to cover day-to-day maintenance with the capital expenditure being left to the equity and the debt. Is that something you would agree with? There is a lot that needs to be done. There is a lot of maintenance and repair that needs to be caught up on.

For the so-called base expenditure, in principle, yes. The reason I hesitate is that there is a part of maintenance called capital maintenance, which is in quite a grey area. At what point does replacing a pump become investment? At what point does it just become day-to-day maintenance? If it is capital maintenance, which is replacing a big part, that would go into the investment programme, not the base operating programme. Generally speaking, the revenue should be enough to maintain and run the system. This should be an easier area to set revenues than some of the investment side.

Just building on that, it is really concerning for me and, I know, for many of my constituents that, when we talk about water companies and holding them to account, we continue to allow them to accumulate these really high debt levels where money is wasted on fines and interest repayments, etc, rather than the money going to modernise the infrastructure, improve capacity in sewage treatment works, improve customer service levels and, importantly, clean up our rivers, lakes and streams, as we have already heard. What steps should be taken to ensure that this situation is fixed? That is right at the root of how we resolve many of the other challenges that you are considering in your review.

The answer that I gave before about whether debt should be used primarily to fund investment is the answer to that. Debt interest payments do go on bills, but the reason that they do that is to spread the cost of the investment over time so it is not just current generations in the five-year period that will pay. If an asset has a 50-year life, intergenerational equity suggests you want to spread the cost. The Government do that through funding with gilts. Here you do it with debt. There is risk there, which is why you need some equity as well. Spreading the cost of investment over generations is the right thing to do. Ofwat has a formula about how much is just recovered completely in five years, which it calls fast money, and how much should be recovered over time through bills. The debt interest should be the billpayers’ share of that investment through time rather than having to pay the capital in one go over one period. The question is how much of that debt has gone to investment. Has that debt gone into dividends? I saw your interaction with one water company chief executive—I forget which one—on this. To what extent have we chosen the right amount of debt and the right amount of risk capital? That goes to capital standards and gearing, which I talked about, and having a good idea of where the debt is going in the cash flow. That requires financial supervision. Ofwat has come to this game over time, but this is where a much deeper engagement with companies and their boards, and understanding their business models, is necessary. I know banks are more complicated, but these are not easy issues. It is not easy to track whether a whole business securitisation is in the public interest or whether it is not. You cannot set a rule. You need a judgment. I do not think there is enough judgment-based supervision in the current system.

Sir Jon, it has been something of a marathon, but we are very grateful to you. We will leave you with two thoughts. First of all, you will have seen that our report was addressed to you.

I saw that.

Come the point where you wish to refresh your already ridiculously overachieving curriculum vitae, you can add that as being something of a distinction. There are very few people in that position. Finally, you referred to your work as being a bit like the truth and reconciliation commission. The late Archbishop Tutu was a great man and very quote-rich. It was in the context of the truth and reconciliation commission that he said, “The universe can take quite a while to deliver”. You have another five or six weeks by my reckoning, after which we may well want to renew some of our questioning. In the meantime, understanding the constraints in which you are working in taking on a massive piece of work in a very short period, we are very grateful to you for the interaction we have had from time to time throughout the course of your work and again today. We are grateful to you. We await your further deliberations with very great interest, as indeed do many other people around the country. Thank you for your attendance. We will conclude proceedings for today.