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Water (Special Measures) Bill [HL]

My Lords, I declare an interest as having been a non-executive director of Severn Trent, the largest of the listed water companies, for eight years between 2014 and 2022. I chaired the board’s remuneration committee for that time.

I thank the Minister for taking the time to meet me last week to discuss my concerns about key aspects of this Bill. I am only sorry that her apparent sympathy for at least some of my arguments has not translated into accepting any of my amendments. I have three amendments in this first group. I will be as brief as I can, but each addresses a completely separate issue.

I will take them in order. My first is Amendment 4. New Section 35B(2)(a) addresses performance-related pay. The rules will set standards that companies will have to meet in a financial year in order to be able to make awards of performance-related pay to chief executives and directors for that year. However, the Bill extends the scope of this section, in new subsection (5)(c), to holders of such other description of role with the water company as Ofwat may specify.

My Amendment 4 would remove this extended application to individuals below board level. This extension will be difficult to implement in practice, as different water companies will have individuals described differently by title and role. Nor would such an extension be consistent with general remuneration under the corporate governance rules for listed companies, which do not extend to individuals below board level. If we wish to attract and support the next generation of leaders in this vital industry from middle management, this will not be achieved by extending these restrictive remuneration practices to them.

As the noble Duke, the Duke of Wellington, has just said, those in this House are better qualified than Ofwat in certain aspects, and this is one of them: to decide on how far down the management chain these rules should apply. My amendment draws the appropriate and proportionate line in balancing the objectives of the Bill with the interests of those most directly impacted by it.

I appreciate that Ofwat is consulting on the scope of the Bill and its application to individuals. It asserts that it is minded to apply the rule to any executive director who is a member of the regulated company

board in receipt of performance-related pay, because that is where ultimate accountability and leadership responsibilities lie. I look forward to the Minister’s response to my concerns in tabling this amendment. In particular, I would be interested to know whether she agrees with Ofwat’s current stance that only executive directors should be brought within the scope of the performance-related pay prohibition, and, if so, whether she will communicate that view to Ofwat.

Amendment 7 is my second amendment and very much relates to what the noble Duke, the Duke of Wellington, has just been talking about: the duty for water companies to have arrangements in place to involve consumers in decisions. New subsection (6) in Clause 1 allows this in regard for

“persons representing the views of consumers to be members of a board, committee or panel”,

as we have heard. My amendment adds a sentence which ensures that it is for the boards of water companies, not Ofwat—for very much the reasons that the noble Duke raised—to decide on which of those three forums best suits their own requirements. I am grateful to him for adding his name to this amendment, and I agree with all his arguments in support of it and his own amendment. The Minister commented at Second Reading that it always pains her to disagree with him on anything, so I am working on the assumption that she will wish to spare herself further agony by accepting this amendment. I fully support strengthening the voice of consumers. This can be achieved in a number of different ways, as the Bill accepts, but each company in the sector is best placed to judge what is most appropriate for its own circumstances.

I was surprised to read in the Explanatory Notes to the Bill, in the overview prepared by Defra, that one of its provisions is to

“ensure consumer representation on water company boards”.

I should be grateful, when the Minister responds, if she could confirm that this is not indeed the position of the Government, irrespective of the choices which this Bill purports to give and the consultation exercise to be conducted by Ofwat.

There should be no highly prescriptive one-size-fits-all approach. Those best equipped to represent consumer interest may not wish to, or be equipped to, sit on corporate boards, with all the responsibilities and liabilities that entails. For Ofwat even to be given the option of this route risks alienating such experts and losing completely their valuable contribution. Nowhere in its consultation document does Ofwat point to the disadvantages of consumers sitting on boards, to which I have drawn your Lordships’ attention. I am therefore concerned that prospective respondents to the consultation may be being given an unbalanced view of the options.

We should not give Ofwat the power to require companies to appoint representatives of the consumer interest to their boards. Maybe some companies would opt for this route, but equally they may feel that stakeholder interest would be better served through the mechanism of panels or committees. My amendment would ensure that it was the boards of water companies which made that decision, not Ofwat. It would be helpful if the Minister, in her reply, could confirm not only that all identified options are, in reality, properly

on the table, but that she recognises the disadvantages of board representation in this regard, which would represent a very suboptimal solution.

My final amendment in this group is Amendment 10. Clause 1(4) provides that the rules about performance-related pay can be applied in respect of the financial year beginning 1 April 2024 and for subsequent years. In effect, they can be applied retroactively. My amendment would change that date from 2024 to 2025 so that they would first be applied from the financial year beginning 1 April 2025. If we do something today, we believe that the law applying to it should be the law enforced today, not tomorrow’s backward adjustment of it. I would argue that the application of these rules retroactively is even more egregious.

One might at least expect your Lordships to know precisely what it is that they are passing and the resultant retrospective impact, but that is not the case. We are delegating the power to make such rules under this legislation to a third party, Ofwat, and I have already expressed severe reservations about its expertise in doing so, given that this is outside the core competence of an economic regulator. We know not what the rules will be, how they will be applied and what impact they will have. Further, it is not intended that they be subject to further scrutiny by this House before being brought into force, as I say, with retrospective effect.

The retroactive application of rules yet to be drafted will undermine investment and increase the cost of capital, raising prices for consumers. Over the next five years, the sector needs to raise £20 billion of new finance, much of it equity, to deliver the largest investment programme in the sector’s history. Investors are already nervous and can earn better returns in other sectors and in other countries. We need to provide confidence that the UK is open for business. Retrospective action destroys that by creating uncertainty about how their investments will be treated.

It will undermine new talent and the sector clearly needs talented individuals to deliver the amount of improvement we all want. Retroactive changes of this sort will undermine employees’ trust in a career. Why choose water when other sectors do not face this risk? If we cannot attract the best people into the water sector, we will not see best performance.

This Water (Special Measures) Bill is designed to drive better future performance. It is too late to change performance by applying rules to a year when two-thirds of it is already over. The water sector is characterised by assets, with 100-year asset lives and performance challenges that require multiyear investment programmes. That is what we should be concentrating on and incentivising management to achieve, not changing the rules of the game retrospectively as punishment for perceived failings. Many noble Lords, including the Minister herself, have made the point that not all water companies are the same—there are good ones and bad ones. I am concerned that the effect of these rules, when drawn up, will draw no such distinction.

Amendment 10 is about as simple as it gets. It requires the replacement of the number 4 with the number 5 so that the performance-related pay provisions come into effect for the beginning of the next financial year, 1 April 2025, and not the beginning of the current

financial year, 1 April 2024. Can the noble Baroness confirm whether these rules are intended to apply to three-year LTIPs, not only those beginning in 2024 but also those beginning as far back as 2022 and 2023, of which 2024 is a part? Her reply on this will be important to me. I urge the Minister to accept this amendment. If she does not, I am minded to test the opinion of the House.