Changes to insolvency laws not pre-empting water company failures

Changes to the special administration process for water companies does not mean the government is pre-empting corporate failures, the parliamentary under secretary of state for environment has said.

Robbie Douglas-Miller played down fears that the number of suppliers on the verge of bankruptcy might be in “double figures”, when challenged in the House of Lords.

He said the Department for environment, food and rural affairs (Defra) was led to carry out the due diligence around insolvency legislation due to “some recent instability and speculation around financial resilience” of some in the sector.

However, when challenged by Peers he insisted the work would have been undertaken regardless and the government does not believe any water company is about to fail.

The debate considered recent updates made to the special administration regime, which had not been changed since privatisation in 1989.

The SAR is intended to ensure that services are not interrupted in the event that a water company becomes unviable either due to insolvency or performance grounds. That could mean there was a serious breach of statutory duties or an enforcement order that makes it inappropriate for a company to continue to hold its licence.

Updated terms include allowing all or part of a water company’s undertakings to be transferred to a subsidiary and for securities to be passed over to another water company, ostensibly to make it more attractive to a buyer.

Baroness McIntosh of Pickering, who also chairs the APPG water group, queried the timing of the changes and what this implied for the state of the water sector. She asked if it was due to the level of investment the sector is scaling up to undertake was making government consider changes to the SAR.

“Might these additional responsibilities on water companies be causing the government some concern, or is it literally about putting in and updating the background?” Pickering mused.

She also pushed that if government had found the time and opportunity to amend legislation relating to SARs, then when would it implement the long-awaited Schedule 3 pertaining to sustainable drainage and connections.

Her scepticism about the timing of the changes was echoed by Baroness Bakewell of Hardington Mandeville.

“How many of the country’s water companies are on the verge of bankruptcy?” she asked. “Is it a couple or is the prediction in double figures? Is the number of water companies struggling confined to England or are there similar threats of insolvency in Wales, Scotland, and Northern Ireland?”

Douglas-Miller refuted that he was not aware of any companies that are about to fail, and that was not the reason for the changes being made now.

He stressed that customers’ interests would be prioritised and that “any intervention that puts pressure on the public purse would be considered very seriously and as a last resort”.

Earlier this month, government updated rules around SAR for the water sector, which it said brought it in line with other regulated industries. On going troubles at Thames Water prompted discussions about its resilience and potential route of special administration. The company said in December it had insufficient funds to service loans that would mature from April this year through to 2028.

These fears relating to corporate failure in the water sector are shared by the Environment, food and rural affairs (Efra) committee’s chair, Robert Goodwill. He wrote to Ofwat chief executive David Black about the reach of the regulator and the corporate structures of companies, which fall beyond the oversight of Ofwat.

“We feel it is imperative that you, along with this committee and others involved in regulating the sector, continue to press government to ensure that the burden of risk falls on the shareholders of those companies in the case of corporate failure. Furthermore, steps should be taken wherever possible to increase the transparency of corporate structures that have shielded the ultimate owners of our public utilities from scrutiny.”

Black and Ofwat chair Iain Coucher appeared before the Efra Committee in December when Black insisted Ofwat’s role was not to protect a water company or its parent from failure.