The Government is right to prioritise growing the UK’s economy, but if it wants to really tackle the issues preventing it from prospering, it needs to address the way our regulators are limiting the ability for businesses in the UK to innovate and thrive. Regulation in this country is clearly broken and it’s doing more than anything to hold back the growth we so desperately need.
In the last parliament, I worked with colleagues to establish the Regulatory Reform Group, with the intention to improve the UK’s regulatory system so we could drive better outcomes for consumers and businesses alike. Through our work, we identified that regulators lack clear strategic direction which has led to bad decision making and put off investors. There are incomplete lines of accountability around the objectives set for regulators and the measurement of regulatory performance, which means they are not contributing to growth but restricting it. It is bureaucracy at its worst.
Nowhere is this more evident than the water regulator, Ofwat. I am no apologist for the water companies. Over many years, under bad management, the water companies over-leveraged and racked up enormous debts, while handing out generous dividends. But where was Ofwat? For years, Ofwat saw companies behaving badly and failed to hold them to account. At the same time, the regulator blocked investment in improving the handling of sewage and upgrading the nation’s leaking, creaking water infrastructure. Ofwat must take its share of responsibility for the state of our rivers, which is rightly causing so much public indignation.
Today, Ofwat is asking companies to upgrade infrastructure and meet environmental standards, while simultaneously preventing them from achieving the returns they need to attract investment. As part of the current price review, which sets investment plans up to 2030, Ofwat is seeking to cut a record £16 billion from the £105 billion investment proposed by the sector. The regulator says this can help reduce inefficiency and prevent customers from paying twice. But their demands are surely unrealistic, and risk forcing the entire UK water sector to continue to overspend massively on its allowances and borrow even more heavily, further damaging investor returns. These are precisely the conditions a regulator should be looking to avoid, not encourage.
After years of questionable practice, we now have the absurd situation where the regulator could bring down the whole sector. Independent analysis by credit agency Moody’s has found that Ofwat’s approach is a “credit negative” for the sector and will increase the risk that water companies cannot attract the equity they need.
Thames Water is in the most precarious position – in large part due to appalling behaviour by its previous management – but the risk of contagion is real. A collapse of one or more water companies would not only undermine the Government’s ambition for investment and growth, it would mean the British public has to cover the costs – either through higher taxes or water bills.
This situation can be avoided if Ofwat puts in place the right conditions for a private sector-led solution, but time is running short. The window to shift course is a matter of weeks, with Ofwat due to publish its Final Determinations in December. The regulator has to demonstrate a dynamism and appreciation of investor needs which it has hitherto lacked. If Ofwat doesn’t course correct this time, it risks trying to reform when it is too late.
Ofwat is just one of the regulators holding Britain back. We can and must do better than this. The UK should be aiming for the best regulators in the world, which address the significant problems we are facing and provide the right conditions for investment and growth.
There is a way forward. First, regulators need to bring in expertise who truly understand how investment works. Second, the Government must issue regulators with a growth mandate, so they are required to support business. Third, the Government should ensure there is more parliamentary oversight so that regulators are held properly to account. That’s how we can secure the jobs and growth of the future.
Sir Robert Buckland is a former Lord Chancellor and Secretary of State for Justice