The Cunliffe Review: identifying problems in the water system

Although few agree on what exactly is wrong with our public water system, everybody agrees that things need to change to improve environmental outcomes and increase efficiency.

Last October, Defra appointed Sir Jon Cunliffe – a distinguished ex-civil servant – to lead a review into how to fix the water industry in England and Wales, which will publish recommendations in June 2025. At the end of February, the Independent Water Commission led by Cunliffe published its initial diagnosis in the form of a 'Call for Evidence'.

The public water supply is important for diversified businesses. Whilst abstraction is often associated with farming, Defra data shows that around two-thirds of English farms rely on the public water supply. Many members receive funding from water companies to improve aquatic environments as land management interventions are often cheaper than retrospectively cleaning drinking water or storing floodwater. Water companies are keen to expand this approach, but regulation has prevented this. The Cunliffe Review is a key opportunity to address these barriers.

This summary focuses on the key aspects for members and covers sewage spills, Cunliffe’s diagnosis for the water environment, its initial thinking on solutions and the CLA’s areas of attention. 

In the first decade after water companies were privatised in 1989, there were genuine operation and environmental improvements. For example, leakage reduced by over 30% in four years. Since then, performance has stagnated and the gap between the best and worst performing companies has grown. Over the last 20 years, leakage has only reduced by 10%. Debt has substantially increased, water company ownership has become more complex, and the system has become overburdened with clunky, overlapping regulation.

The main narrative in the media is that water companies are not fixing spills of untreated sewage despite giving large bonuses to senior staff and dividends to shareholders. The call for evidence describes a more complex story about what is wrong. It notes that “untreated sewage makes up only a small portion of the water industry’s contribution to pressures affecting the water environment”. These spills only cause water quality failure in 7% of water bodies, according to Environment Agency (EA) data. It is also unclear to what extent they are water companies’ fault. The commission notes 40% of spills are from blockages largely caused by householders flushing wet wipes, sanitary products, and fats, oil and grease down drains. Nor do water companies have sole responsibility for improving drainage of newly urbanised areas; a complex web of organisations does not always slot together.

The government has required water companies to spend £60bn over the next 25 years to reduce these spills, but the commission presents evidence that for every £1 spent of this, only 11 pence in value is expected to be gained. In short, policymaking has become unduly influenced by single-issue pressure groups on this issue, notwithstanding its importance.

On ownership, the commission has found no evidence so far either within the UK or internationally that a particular ownership model delivers better performance. Whilst there is evidence for above-average dividend payments to shareholders and concerning amounts of debt, it is too complex for the commission to yet draw any conclusions. 

Lack of holistic, strategic direction: the UK Government does not plan the outcomes which it wants and expects from the water system in the round. Its strategic direction for the industry changes every five years and only applies to the economic regulator, Ofwat, rather than water companies themselves. The industry plans on a five-yearly cycle which does not match Defra’s six-yearly planning cycle at the river-basin scale required by the Water Framework Directive (WFD), despite WFD targets strongly influencing water company actions.

Overlapping plans: water companies must produce a multitude of plans (e.g., Water Resources Management Plans, Drought Plans, and Drainage and Wastewater Management Plans) which overlap. These are “resource-intensive, complex and do not always appear to add up to a coherent whole”. A total of 93 different statutory and non-statutory requirements drive water company investment, causing siloed investment and “single-outcome, end-of-pipe solutions ... being chosen over upstream or nature-based options which could have a wider range of benefits”. At the same time, many emerging environmental risks, like microplastics, pharmaceutical contamination, and PFAS (‘forever chemicals’), are unregulated.

Nature-based solutions are designed out: nature-based and catchment solutions often have a greater margin of uncertainty attached to them than grey options. The EA requires high certainty in water companies delivering their environmental targets, often by strict deadlines by which point some nature-based options would not have matured. Consequently, nature-based options often get ruled out at this stage. Only £3bn of the £104bn in the most recent round of investment between 2025 and 2030 (known as Price Review 2024, or PR24) will deliver nature-based solutions. The supply chain is also unequipped to deal with the demands of PR24 more generally. The five-yearly planning cycle potentially creates boom-and-bust problems in the industry, and overloads regulators. CLA members are the delivery partners for many of these nature-based and catchment solutions, so this means less funding than water companies would like being channelled into land management.

Disconnect between environmental and economic regulation: the EA and Natural Resources Wales (NRW) set environmental enhancement requirements without considering the cost of delivering this work. Ofwat is not involved when options are evaluated, and it cannot undo these environmental requirements, even if it feels there is insufficient budget to deliver them, or they are unaffordable for bill payers. Ofwat’s caps on spending and delivery deadlines for these objectives force water companies to exclude many nature-based and catchment solutions.

Ofwat’s regulation: water companies are monopolies, so Ofwat has an important role to ensure fairness. Ofwat uses past spending across the industry to set allowances for acceptable spend on individual items. However, this can trap water companies into patterns of underspend and insufficient investment in resilience, e.g., proactive replacement of old, leaking pipes. The Competition and Markets Authority increasingly rules in water companies favour when they appeal Ofwat’s decisions. No regulator is responsible for examining the overall state of water company assets and their future resilience, nor is there a common standard for resilience. The result is over-prescriptive regulation in some areas, duplication in others, and under-regulation elsewhere.

Regulators’ operational challenges: the EA is underfunded and stretched too thin; its budget for environmental protection was cut threefold in the decade from 2009/10 and 2019/20 in real terms. It suffers recruitment and retention issues, struggles to attract qualified staff as private-sector salaries are more attractive, and has legacy IT systems. Ofwat lacks sufficient engineering expertise. The Drinking Water Inspectorate is insufficiently independent of Defra. Overall, the commission diagnoses a risk-averse regulatory culture. It acknowledges this is natural given the complex job that regulators do under substantial public and political scrutiny, but suggests regulators are not incentivised to consider the bigger picture, innovate, or find more cost-effective solutions. 

Numerous other issues are raised by the call for evidence, many of which are technical or concern sectors which the CLA is not directly connected to, such as cybersecurity risks, company debt, and protecting bill payers in vulnerable circumstances.

At this stage, the commission has not committed to any solutions or recommendations. However, we can tell what alternatives have caught their attention.

On governance of water, it is sympathetic to a three-tier model proposed by various environmental groups. At the top, government would set strategic direction nationally; in the middle, regional water authorities; and locally, catchment partnerships, likely to be a beefed-up version of catchment-based approach groups that many CLA members sit on. The middle tier, or ‘system planner’, is the novel piece. The commission notes a more radical version could pool and distribute funding together across different water users to tackle catchment-wide issues like flooding and drought. It could copy aspects of the Dutch Regional Water Authority model. At this stage, the commission’s main question is whether a hydrological or administrative boundary would be more appropriate.

The commission is also interested in the possibility of evolving regulation towards a more outcome-based approach. This recognises that giving water companies an envelope of spending and setting penalties for not delivering targets may be more efficient than setting cost allowances for individual targets and prescribing how they should be met. One way to stimulate innovation might be a ‘regulatory sandbox’, a bounded area in which water companies are allowed to innovate without fear of regulatory reprisal if their trial fails.

The CLA is working to maximise the potential of water companies to use catchment and nature-based solutions, and to partner with land managers to deliver these. For the last year, the CLA has been a member of SSWAN, a partnership with environmental NGOs and the water industry to change regulation towards a more outcomes-based approach with more catchment and nature-based solutions. Alongside benefits for the water environment, it would cut carbon emissions from wastewater management and would reduce the disruption and expense of repeatedly trucking in chemicals into remote rural areas.

The CLA is exploring the implications of a regional water authority for its members. We are curious about how it could better channel funding for land management and unlock cross-sector solutions, but concerned about overreach. One precedent, Regional Water Resources Groups, has not been as multi-sector as envisaged. We will also represent members on water abstraction and supply, such as new reservoirs.

If you have any specific comments, please get in touch with matthew.doran@cla.org.uk.