Labour’s change to Ofwat doesn’t hold water

This article is the third in a fortnightly series of policy proposals from John Penrose and the Centre for Small State Conservatives. You can read the previous instalments here:

1. Only Thatcher-sized reforms will end Britain’s malaise
2. Britain’s benefits system is unfair for all involved

Sewage in rivers, hosepipe bans, spiralling bills, fat cat bonuses for water company bosses and floods. The water industry’s list of problems is as toxic as it gets and so, for a Government that says it wants to be judged on delivery, there was a lot riding on the showpiece set of water reforms announced earlier this week.

Ministers had nimbly skipped past the most serious pitfall by excluding renationalisation completely. The political Left loves the idea, of course, but Chancellor Rachel Reeves knows the bond markets would take fright at the monumental amount of extra borrowing it would add to our already-scary levels of national debt. And without a proper government balance sheet to shine a light on changes in the value of key infrastructure as I outlined in CapX last year, renationalisation would delay much-needed long term investments in sewer pipes or flood defences every time the public finances are tight, which they always are. 

So if not renationalisation, then what? They’ve sensibly reannounced most of the last Conservative government’s sewage-solving changes, breezily ignoring the exasperated raspberries from Tory shadow ministers who remember how Labour rubbished the same ideas before last year’s election. 

But the biggest and most important change is the end of Ofwat, the unloved and struggling economic regulator, which is expected to be merged with parts of the equally-unloved and struggling Environment Agency.  

As any business leader will tell you, merging two poorly-performing divisions doesn’t automatically produce a single good one. So the Government’s Independent Water Report has over 80 more worthily-sensible, detailed recommendations for pruning overlapping thickets of red tape, reducing duplication, closing gaps and improving certainty for investors. 

That’s a lot, but it isn’t enough. Because, at their core, the reforms assume the answer to the old regime’s slow, ultra-detailed, ponderous and expensive regulatory failures is just for a bright-eyed new team of regulators to tweak a few detailed rules here and there, in an even bigger and more complicated combined organisation, and suddenly the elephant will start to dance. 

It’s clever and well-meaning incrementalism, but it doesn’t face up to the underlying reasons which got the water industry into this mess in the first place. As the Independent Water Report’s author Jon Cunliffe pointed out, those same regulators worked pretty well to begin with.  Things only started to go wrong later, when they were lent on by politicians, water company bosses and investors. And when nobody worked out what to do when one regulator’s priorities contradicted another’s. 

How do we to fix those fundamental underlying issues, so the new water super-regulator doesn’t fall victim to the same problems as its predecessors? By marshalling all those clever, well-meaning incremental reforms behind a new, simple, overarching mission to define what Parliament expects it to do with its newly-combined suite of legal powers. 

That means simplifying and rationalising the current jumble of different regulators’ competing goals and duties into no more than four new ones. If the list is any longer than that, one or more of them won’t really be a priority at all.

Equally importantly, the four priorities need to be ranked in order of importance so Parliament provides a democratic mandate for the tradeoffs that regulators will inevitably face whenever their new goals conflict.  

The new priorities should be locked in statute, so it’s harder for politicians to muddy the waters or dilute the new organisation’s focus by adding more  in future, and so regulators have a clear and democratically-approved mandate to protect them from political or commercial pressures when – not if – they get lent on by someone heavy. 

Finally, the priorities should define outcomes and results the super-regulator must deliver, so they can’t just follow box-ticking processes regardless of whether they work or not. And their successes or failures should appear in an independently-audited annual report so Parliament can hold them clearly to account if their performance starts to slide too.  

What should the four priorities be? Parliament must decide the final list, but one of them must definitely be finding cheaper ways to deliver high environmental standards and improved customer choice, by slashing the gigantic bureaucratic red tape costs which are pushing up everyone’s water bills. It would force regulators to re-engineer all those regulatory approaches that failed so badly last time. It’s the best way of avoiding the mistakes of the past, and of teaching the elephant to dance.

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