Public failed by water regulators and government as bills rise, spending watchdog says
Water regulators and the government have failed to provide a trusted and resilient industry at the same time as bills rise, the state spending watchdog has said.
Public trust in the water sector has reached a record low, according to a report from the National Audit Office (NAO) on the privatised industry.
Not since monitoring began in 2011 has consumer trust been at such a level, it said.
At the same time, households face double-digit bill hikes over the next five years.
The last time bills rose at this rate was just before the global financial crash, between 2004-05 and 2005-06.
Regulation failure
All three water regulators – Ofwat, the Environment Agency and Drinking Water Inspectorate – and the government department for environment, food and rural affairs (Defra) have played a role in the failure, the NAO said, adding they do not know enough about the condition or age of water infrastructure and the level of funding needed to maintain it.
Since the utilities were privatised in 1989, the average rate of replacement for water assets is 125 years, the watchdog said. If the current pace is maintained, it will take 700 years to replace the existing water mains.
The NAO said the government and regulators have failed to drive sufficient investment into the sector. File pic: PA
Water firms have grappled with leaky pipes and record sewage outflows into UK waterways in recent years, with enforcement action under way against all wastewater companies.
Despite there being three regulators tasked with water, there is no one responsible for proactively inspecting wastewater to prevent environmental harm, the report found.
Instead, regulation is reactive, fining firms when harm has already occurred.
Financial penalties and rewards, however, have not worked as water company performance hasn’t been “consistent or significantly improved” in recent years, the report said.
‘Gaps, inconsistencies, tension’
The NAO called for this to change and for a body to be tasked with the whole process and assets. At present, the Drinking Water Inspectorate monitors water coming into a house, but there is no entity looking at water leaving a property.
Similarly no body is tasked with cybersecurity for wastewater businesses.
As well as there being gaps, “inconsistent” watchdog responsibilities cause “tension” and overlap, the report found.
The Environment Agency has no obligation to balance customer affordability with its duty to the environment when it assesses plans, the NAO said.
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Company and investment criticism
Regulators have also been blamed for failing to drive enough funding into the water sector.
From having spoken to investors through numerous meetings, the NAO learnt that confidence had declined, which has made it more expensive to invest in companies providing water.
Even investors found Ofwat’s five-yearly price review process “complex and difficult”, the report said.
Financial resilience of the industry has “weakened” with Ofwat having signalled concerns about the financial resilience of 10 of the 16 major water companies.
Most notably, the UK’s largest provider, Thames Water, faced an uncertain future and potential nationalisation before securing an emergency £3bn loan, adding to its already massive £16bn debt pile.
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Water businesses have been overspending, with only some extra spending linked to high inflation in recent years, leading to rising bills, the NAO said.
Over the next 25 years, companies plan to spend £290bn on infrastructure and investment, while Ofwat estimates a further £52bn will be needed to deliver up to 30 water supply projects, including nine reservoirs.
The NAO said regulators do not have a good understanding of the condition of infrastructure assets
What else is going on?
From today, a new government law comes into effect which could see water bosses who cover up illegal sewage spills imprisoned for up to two years.
Such measures are necessary, Defra said, as some water companies have obstructed investigations and failed to hand over evidence on illegal sewage discharges, preventing crackdowns.
Meanwhile, the Independent Water Commission (IWC), led by former Bank of England deputy governor Sir Jon Cunliffe, is carrying out the largest review of the industry since privatisation.
What the regulators and government say?
In response to the report, Ofwat said: “The NAO’s report is an important contribution to the debate about the future of the water industry.
“We agree with the NAO’s recommendations for Ofwat and we continue to progress our work in these areas, and to contribute to the IWC’s wider review of the regulatory framework. We also look forward to the IWC’s recommendations and to working with government and other regulators to better deliver for customers and the environment.”
An Environment Agency spokesperson said: “We have worked closely with the National Audit Office in producing this report and welcome its substantial contribution to the debate on the future of water regulation.
“We recognise the significant challenges facing the water industry. That is why we will be working with Defra and other water regulators to implement the report’s recommendations and update our frameworks to reflect its findings.”
A Defra spokesperson said: “The government has taken urgent action to fix the water industry – but change will not happen overnight.
“We have put water companies under tough special measures through our landmark Water Act, with new powers to ban the payment of bonuses to polluting water bosses and bring tougher criminal charges against them if they break the law.”
Water UK, which represents the water firms, has been contacted for comment.
When it comes to the drugs industry, Britain is suffering withdrawal symptoms.
This year, three of the world’s biggest pharmaceutical companies – Merck, AstraZeneca, and Eli Lilly – have pulled or paused UK investments worth almost £2bn, diagnosing that market conditions, specifically the NHS drugs pricing regime, make the UK a “contagion risk”.
The issue will be highlighted this week as Donald Trump begins his state visit, with executives called to give evidence to a parliamentary select committee on Tuesday, along with science minister Lord Vallance, a veteran of the pandemic, when government worked closely with pharmaceutical companies to speed up vaccine development.
How has this come about?
The UK pharmaceutical industry is one of those caught in the crossfire of Trump’s trade war.
In the trade deal agreed by the president and Sir Keir Starmer in May, the prime minister committed to “improve the overall environment for pharmaceutical companies in the United Kingdom”.
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What does the UK-US trade deal involve?
Four months later, those companies – under pressure from Trump to charge US consumers the same as those in Europe, and to invest in US production and research – say the opposite is the case.
They argue the British market is becoming unviable to pharmaceutical investors, at a cost to patients, jobs, and the economy.
Data from the Association of British Pharmaceutical Industries bear this out; R&D investment growth has fallen below the global average and foreign inward investment has declined almost 60% since 2020.
Why the corporate backlash?
To understand why an industry long regarded as a domestic strength has turned against the UK, it is necessary to understand the complexities of medicines pricing.
The NHS is one of the largest “single buyers” of medicines in the world, a position that has long given it clout when it comes to negotiating prices. In the last two decades, however, strict conditions on what drugs are approved for use, and at what price, have brought down the price of the medicines but eroded the value of the UK to the companies that provide them.
Simply put, the industry believes the NHS has been getting too good a deal for too long and argues the terms are no longer sustainable.
In the last decade, the proportion of the NHS budget spent on medicines has fallen to just 9%, below the EU average of 13%. Meanwhile, the amount of revenue returned by companies to the government under complex “clawback” arrangements has jumped to more than 23%, more than three times the EU average.
Under these complex rules, a form of price control that offers a uniform discount to the health service, manufacturers return revenue equal to the value of any overspend by the NHS on its total medicines budget.
The figure has risen rapidly in the UK in the last five years as the NHS has exceeded its medicines budget faster than it has risen. This year it was supposed to be 15%, already double the EU average, but has already risen to 23.5%.
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Can this all be resolved?
The industry is demanding a commitment to return to single figures by the end of this parliament. Emergency talks with the health department broke up in the summer, and it is unclear when they will resume.
It also wants the threshold at which new drugs are admitted to the NHS marketplace, currently £20,000-£30,000 and unchanged since 1999, increased. Had it risen in line with inflation, it would be £40,000-£60,000 today.
As a consequence of these downward pressures on price, the industry says the number of new and innovative medicines offered to patients has fallen, with only 37% of available drugs accessed by the NHS, compared to 90% in Germany.
Why so much is in the gift of the chancellor
Paying higher prices to hugely profitable pharmaceutical giants was not part of Labour’s electoral promises for the NHS, and Health Secretary Wes Streeting says he is committed to getting the best deal for patients, but the UK discount may no longer be sustainable.
The issue also highlights a tension between the government’s desire for economic growth and greater efficiency in its key public service.
As one executive put it, as the UK accounts for only 2.5% of the global medicines market, which meant for a long time the lower margins doing business in Britain could be swallowed. With Trump demanding price parity for the US, which accounts for 40%, that is no longer the case.
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Life sciences are at the heart of the government’s new industrial strategy and the UK still has much to commend it, with world-leading research and skills and a track record of spinning biotech innovation into the private sector. But the withdrawal of big pharma investment tells a different story.
Johan Kahlstrom, country president of Novartis UK and Ireland, said: “The UK is fast becoming uninvestable for life sciences companies.
“High clawback taxes that take almost a quarter of revenues, combined with outdated cost-effectiveness thresholds that haven’t changed in over 25 years, are eroding the UK’s position as a global life sciences hub.”
Resolving the pricing row will require compromise and money, with the health secretary’s room for manoeuvre ultimately resting on the Treasury, and the balance between losing jobs and investment from a growth industry, and a drugs budget the NHS has long taken for granted.
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