Can water regulation be ‘reset’?

The IWC’s interim report ⁶ Independent Water Commission, Interim Report, GOV.UK. 3 June 2025, https://www.gov.uk/government/publications/independent-water-commission-review-of-the-water-sector  rightly calls for a reset moment, including an overhaul of the way that strategic direction is set and infrastructure needs are planned for in water. It also suggests that legislation and the regulatory system will need major changes to deliver the government’s objectives to deliver high quality, reliable water services while protecting the environment. But when the specifics are set out in the Commission’s final report, due this summer, there will be a tightrope to walk: simultaneously restoring confidence among the general public, water companies and investors will require difficult trade-offs.

The IWC is right to propose major changes to strategic planning

One of the biggest problems in the water sector has been a lack of clarity about how priorities are set and who makes which decision. This has contributed to a historical lack of investment in new and existing infrastructure that now needs to be reversed.

The IWC is right to recommend the government does more to set out how regulators should prioritise among desired outcomes. Strategic policy statements from government should be a powerful tool to set goals for the sector, but have too often turned into a shopping list of priorities that Ofwat must consider but that don’t bind in other regulators or help with prioritisation.

Proposals to strengthen regional planning should also help align water plans with local areas’ needs. But government needs to think through clearly whether each decision is being made at the right level. Plans for water need to be developed consistently with the government’s objectives for housebuilding and industrial strategy, as well as local government priorities. As the IWC recognises, this will require a fresh look at how decisions are made across the piece, rather than just layering new processes on top of an already creaking system.

The IWC chair’s experience of the finance sector brings a valuable focus – and lessons 

The IWC has not yet determined how the mix of responsibilities across environmental and economic regulators in the water sector should change. But its interim report argues for a strengthening of supervisory regulation on the economic side, with Ofwat engaging more closely with the specific challenges individual companies face in terms of infrastructure, geography and financing.

This would represent a shift towards how financial firms are regulated, reflecting the experience of the IWC’s chair, Sir Jon Cunliffe, a former deputy governor at the Bank of England. Backed by appropriate legislation, such an approach might have helped to prevent the destabilising build-up of debt in some water companies. However, making it work will not only require specialist skills – which Ofwat has already been recruiting for – but also an approach to regulated firms that is collaborative and principles-based while avoiding regulatory capture. Supervisory regulation in financial services now has a long enough history to offer lessons on both how to do this well – and badly. 

Success will depend on widespread commitment to a clear and settled direction 

The IWC recognises that rebuilding confidence that the sector will be put back on a stable footing is crucial, both to bring the public on board with the government’s approach and to ensure the sector can attract private investment (which the government still expects to finance most of the extensive capital expenditure required).

Private investors will need to be convinced that investment in water can offer low risk, predictable returns. But as the loss of KKR’s investment shows, this might not be straightforward. Potential investors are wary that ongoing political attention could lead to unpredictable – and for them costly – meddling in the sector. ⁸ Jolly J, ‘A race against time: what now for Thames Water after rescue deal collapses?’, Guardian, 4 June 2025, https://www.gov.uk/government/publications/independent-water-commission-review-of-the-water-sector  At the same time, public concern about both bills and environmental protection must be addressed. 

Whatever the appetite for a reset, it does not begin from a blank slate. Change itself will take some time to bear fruit, so the IWC’s final report maps a clear end state, and pathway to it, that can command political, public and industry support over the long term. Once the stall is set out, success will depend on moving from a highly critical public and political narrative about the water sector to a more positive and constructive one. That narrative could itself enhance stability and therefore investment – but political as well as regulatory and sector leadership will be required to achieve it.