Former Minister writes damning report about Dŵr Cymru Welsh Water

Martin Shipton

Major failures of governance at Dŵr Cymru Welsh Water including excessive and undeserved levels of high executive pay proves that the light touch regulation of the industry isn’t working, according to a former senior Welsh Government Minister.

Andrew Davies, who served as Economy Minister under former First Minister Rhodri Morgan, has written a report that examines the history of the water company and concludes that inadequate regulation by Ofwat and Natural Resources Wales has seriously let down the Welsh public.

Finance

Mr Davies writes: “Glas Cymru, a not-for-profit, or more accurately a not-for-dividend public benefit company limited by guarantee, was established in April 2000 with the specific purpose of buying Welsh Water from Western Power Distribution (WPD). WPD kept its electricity distribution business but sold off [its] other assets including Dŵr Cymru Welsh Water.

“Glas Cymru bought Welsh Water for £1.9bn in January 2001 and later that year raised finance of £1.9bn on the bond markets to cover the purchase. As a company limited by guarantee, there are no shareholders in Glas Cymru and therefore no dividends are paid.

“The idea of creating a not-for-dividend company was the brainchild of Nigel Annett and Chris Jones, two former Welsh Water executives who later became its Chief Executive and Finance Director respectively. Other key figures in the birth of Glas Cymru were Sir Terry Burns, former Treasury Permanent Secretary, who became the first Chair of Glas Cymru, and Geraint Talfan Davies, Controller of BBC Wales and Chair of the Institute of Welsh Affairs think-tank. The fact that Terry Burns (later to become Lord Burns, a Conservative peer) had been a senior Treasury civil servant at the time of water privatisation was no doubt not unhelpful!

“I was a Welsh Government Minister at the time Glas Cymru was formed and it was an interesting example of how deeply ingrained neoliberal thinking was within the New Labour government [at Westminster]. Water services were a non-devolved and therefore a reserved function and any decisions about the water industry in Wales were for the UK Government and the economic regulator Ofwat. Nevertheless, given that re-nationalisation was not on the New Labour government agenda, Welsh Ministers were very supportive of the not-for-dividend model as preferable to the for-profit business model that was used in all water companies in England. Consequently, we lobbied strongly for Glas Cymru to be allowed to run Dŵr Cymru Welsh Water, especially as private equity companies like Guy Hands’ Nomura were circling.

“We encountered scepticism if not opposition from New Labour government Ministers who clearly preferred the existing for-profit private sector model operating in England and the Environment Minister who we had most difficulty persuading was none other than that well known left-winger Michael Meacher. It is important to stress that while Welsh Government supported the proposed Glas Cymru not-for-dividend model for Welsh Water, the decision was one for the UK Government.

“Through its not-for-dividend company limited by guarantee model, Dwr Cymru Welsh Water has avoided the worst financial excesses of the privatised water companies in England which, through opaque ownership and highly complex financial engineering, have become highly leveraged, accumulating massive levels of debt and paying large dividends to their shareholders and owners.

“What Welsh Water senior executives do however share with their opposite numbers in England is what is widely viewed by the public as unwarranted levels of personal remuneration.

“Although privatisation was intended to stimulate investment in the water industry, it has fallen by almost a fifth in the past 30 years, from £2.9bn a year in the 1990s to £2.4bn in 2022. A Financial Times article showed how water companies cut their investment in infrastructure since the 1990s, with most companies, including Dŵr Cymru Welsh Water, investing less in the 2020s than they did in the 1990s.”

Governance

Turning to the governance of the company, Mr Davies writes: “One of the primary and most noticeable features of the regulation of the privatised utilities is the very ‘light touch’ nature of this, whether water services, energy, telecommunications or broadcasting. This light touch regulation was one of the fundamental principles of the small-state, market-driven, neoliberal philosophy that guided post-1979 Conservative governments, an approach that was largely unaltered by the Labour government from 1997-2010. It is an approach that has also been implicitly adopted by the Welsh Government in its approach to regulation of water services in Wales.

“[One] of the major problems of the current water industry in England and Wales is the ineffective system of light touch regulation and the imperative is to have a much more effective system of regulation and oversight. The economic regulator for water companies in England and Wales is the Water Services Regulation Authority, more commonly known as Ofwat, with the environmental regulator in England being the Environment Agency and in Wales Natural Resources Wales.

“The Ofwat Board does however have a non-executive representative from Wales and for three years (November 2020 – December 2023,) it was the same person on the UK Boards of both Ofwat and Ofcom, namely David Jones. (Ofwat November 2020 – present day; Ofcom April 2019 – December 2023.) It is unclear whether his Ofwat role has any specific Welsh responsibilities, and what governance and communication structures exist for him to carry out his functions in Wales. An internet search has failed to find any communication or information about him and his activities other than his appointment in November 2020.

“An issue that has dominated much recent media and public attention has been that of remuneration for senior executives, considered excessive by many.”

In 2021 Dŵr Cymru Welsh Water Chief Executive Peter Perry’s Total Fixed Pay amounted to £652,000, including pension and pension accrual of £337,000. His Total Variable Pay [bonus] was £240,000, making his total remuneration £892,000.

Poor performance

Mr Davies states: “Despite the poor performance of Welsh Water on a range of indicators, in 2024 the directors received annual variable pay, i.e. performance against targets. Peter Perry was awarded £91,364.62 (25.77% of his salary) paid in July 2024.

“To provide further context and comparison for Welsh Water senior executive pay, the remuneration of the Chief Executive of Cardiff council which has a workforce of 14,757 and a budget of £1.9bn was £229,440 in 2022-23.

“The performance of Welsh Water has come under increasing public and media criticism and scrutiny, and belatedly, attention from the regulators, Ofwat and Natural Resources Wales (NRW), which has led to a series of ‘fines’ by Ofwat and a downgrading of its overall environmental performance assessment from 4 to 2 stars by NRW. The reaction of the company to this increased scrutiny and criticism has been defensive and reactive and often included statements to the effect that its executive remuneration is lower than other privately owned water companies in England.

“Alastair Lyons was appointed a Non-Executive Director of Welsh Water in May 2016 and Chair in July 2016. He had previously been Chair of the Admiral Insurance Group from 2000-2017 but more controversially from 2010 – 2015 was Chair of SERCO, the outsourcing company, from which he resigned (effectively sacked) in 2014 after the company was caught, amongst other things, attempting to defraud the Ministry of Justice, which eventually cost the company over £90m in penalties. SERCO’s shareholders clearly ensured the company was cleaned up and a new Board appointed.

“SERCO of course also ran the #BorisBikes scheme in London (where SERCO was fined on its delivery record) and regularly ‘lost’ prisoners on delivery which they covered up with false records. However that lamentable, very public and spectacularly poor performance at SERCO clearly was no hindrance to him subsequently being appointed as chair of Welsh Water less than two years later.

“Alastair Lyons announced his retirement as Chair earlier this year and his replacement is Jane Hanson, the Chair of Welsh Water’s Audit Committee and a member of the DCWW board since 2021; a Board which had presided over the decline of the company’s performance, and a period during which, as the Chief Executive of Ofwat said in March this year: ‘For five years, Welsh Water misled customers and regulators on its record of tackling leakage and saving water. It is simply indefensible and that is why we are making Welsh Water pay this £40m to benefit its customers.’

“To be accused of misleading customers and regulators would indicate a serious failure of corporate or board governance and could be interpreted as the familiar characteristic of ‘wilful blindness’; of an organisation that is in denial about its systemic failure. Despite its claims to the contrary, along with many other criticisms by the regulators, this is a major failure of corporate governance and the board of Welsh Water appears to have failed in its basic duty.”

Pollution record

Mr Davies also draws attention to Dŵr Cymru’s pollution record, stating: “Welsh Water”s poor performance on a range of indicators, including record levels of sewage discharge, has led to a series of fines by Ofwat as well as a downgrading by Natural Resources Wales of its overall environmental performance assessment from 4-Star to 2-Star.

“The fine of £40m in March this year was just the latest in an extended series of sanctions by regulators in recent years, a sequence that began in October 2022 when Ofwat ‘fined’ Welsh Water £8m; one of 11 water suppliers forced by Ofwat to reduce their water bills after missing targets in areas such as water supply interruptions.

“In October this year Ofwat instructed Welsh Water to lower its water bills for 2025 by £24.1m, as a result of the company failing to reach its targets following Ofwat’s annual review of water companies’ performance. And in November this year, Dŵr Cymru Welsh Water was one of three water companies in England and Wales prevented from using customers’ money to pay senior executives’ bonus remuneration, in the case of Welsh Water, £163,000.

“Unfortunately, the data shows that of the 10 water companies in England and Wales, Dwr Cymru Welsh Water is consistently the worst performing company, with the worst record in terms of sewage discharge – an unenviable record it’s held for a few years now. Six of the 10 worst affected parliamentary constituencies for sewage discharges in England and Wales are in Wales.”

Priorities

A Dŵr Cymru Welsh Water spokesperson responded: “As a not-for-profit company, delivering the best possible service to our customers and protecting the environment are our two main priorities.

“We take our responsibility for protecting the environment seriously but understand the concerns of our customers and we apologise when our performance falls short.

“Our business plan for 2025-2030 includes a record investment package of £4bn, with £2.5bn to improve the environment, subject to Ofwat approval.

“Last year, through our not-for-profit business model, £14m that would have been paid out as dividends in other companies, was put into support for our most vulnerable customers.

“We are doing the same this year and this will allow us to provide financial assistance to more than 180,000 households.”