Water industry misses ‘once-in-a-generation’ opportunity for radical reform as commission’s recommendations ignore social enterprise solutions for England and Wales

The recommendations of a landmark water industry review for England and Wales merely enable the continuation of traditional profit-making business models that have proven themselves “fundamentally unfit for purpose”, say experts.

The 465-page report, published yesterday, marked the completion of the Independent Water Commission which was set up in October 2024, the most significant review of the water industry in England and Wales since the 10 water and sewerage companies were privatised in 1989. 

The report focuses on strengthening government regulation to improve water services, but impact economy specialists said the commission should have considered reforms to water companies’ ownership structures, such as exploring social enterprise and co-operative models, instead of just suggesting “better regulated failure”. 

We encourage this government to be brave in seeking real solutions, rather than hoping that a bit of tinkering around the edges will deliver needed change

The UK’s water industry has been swamped by scandal and criticism in recent years, due to widespread sewage pollution of the nation’s seas and rivers, crippling underinvestment in infrastructure, multimillion pound shareholder payouts and sharp increases in customer bills. 

At the launch of the report Sir John Cunliffe, who led the commission, said the UK was facing another ‘Great Stink moment’, referring to the summer of 1858 when London’s River Thames was overwhelmed by waste, causing a smell so strong that people were said to vomit if they ventured too near. This event led to the creation of the UK capital’s sewer system. Cunliffe described the modern day water sector as “broken”.

The commission’s 88 wide-ranging recommendations include the scrapping of industry regulator Ofwat, compulsory smart metering (which automatically measures how much water households use) and a nationwide social tariff to help consumers who cannot afford their bills. But critics said the review was hamstrung by being prevented from recommending alternative business models for water companies, and the recommendations risk failing to deliver the ‘public benefit’ it seeks to achieve. 

‘No clear relationship between ownership models and outcomes’

When setting up the commission in October 2024, the terms of reference set out by the government prevented it from considering using public funds to restructure England’s water companies into alternative ownership models like social enterprises, or nationalising them. Ministers had concluded that such restructuring would be unaffordable. (The commission, however, could consider changes to business models where no public funds were needed to either purchase shares from, or compensate existing owners.)

The commission does acknowledge that many respondents to the call for evidence believed there is a conflict between the profit-making incentive of companies and their environmental and customer-focused duties.

• Read more: Privatise, nationalise, or social enterprise? Is a purpose-led ownership model the way to fix the UK’s water company crisis?

The commission examines “the extent to which there is evidence of a causal relationship between ownership models and performance”. It concludes that there is no clear relationship between ownership models and outcomes – including customer service levels and environmental impact – but that alternative ownership models are viable and proposals to change ownership models (not using public funds) should be considered on a case-by-case basis. It gave the example of Welsh Water (Glas Cymru), which has a not-for-profit structure.

The report instead considers regulation to be the most important influence on performance, rather than business model, saying: “Strong and evidence-based regulation is critical in ensuring customers and the environment are protected, regardless of ownership model.”

Speaking to Pioneers Post, Emily Darko (pictured), director of research at Social Enterprise UK, welcomed the commission’s recognition of alternative business models, including Welsh Water (Glas Cymru). 

But she pushed back against the commission’s argument that there was no causal relationship between ownership and performance, and pointed to work by the Future Economy Alliance, the Better Business Act movement and Social Value International’s True & Fair Legal Opinion as evidence of the benefits of stakeholder-focused business models.

She said: “Any move towards mainstreaming social enterprise and other mission-led business models will only benefit people and planet, putting the ‘public’ back into public services. We encourage this government to be brave in seeking real solutions, rather than hoping that a bit of tinkering around the edges will deliver needed change.”

Darko urged the government to focus on how to develop stakeholder business models, rather than adopting the commission’s recommendations and “expect existing models that have proven themselves fundamentally unfit for purpose to change”.

We urgently need to explore co-operative and mutual solutions – not just better regulated failure

Co-operatives UK, the representative body for co-operatives in the country, criticised the lack of consideration of alternative business models.

“Today’s report… touches on affordability, public health and environmental oversight – all important,” the organisation said in a statement on Monday.

It added: “Still, there’s no ownership, voice or power for the very people and communities who rely on and pay for this essential service…

“Where is the conversation about mutual ownership, community accountability, and member-first governance? Where are the models that reinvest, not extract?

“We urgently need to explore co-operative and mutual solutions – not just better regulated failure.”

A ‘vaguely worded’ public benefit clause

The commission does recommend adding a ‘public benefit clause’ to the licences that the government issues to water companies. 

As an example, the commission suggests that in England, a public benefit clause could require each company to “conduct its business to deliver long-term value to customers, communities and the environment, taken as a whole”.

The addition would mirror language in the water companies’ articles of association (the rules governing each company), which they all agreed to change a year ago to “make the interests of customers and the environment a primary objective” – meaning that companies should already be meeting these requirements, the commission acknowledges.

But the commission  argues a public benefit clause in water companies’ licences would “strengthen [the requirement’s] prominence within the company and enable regulatory enforcement” – giving the newly formed regulator (Ofwat’s replacement) a direct means of holding the licensee company to account for breach of the condition. 

This would be done without displacing companies and directors’ broader obligations, adds the commission, with new regulation to sit “alongside, and not override, other legal duties on companies and directors, including in relation to shareholders”. This means that this would not remove company boards’ fiduciary duty, which requires directors to seek to maximise shareholder profit.

Speaking to Pioneers Post, Philip Kirkpatrick (pictured), charity and social enterprise lawyer, partner at Bates Wells, questioned whether this change would result in any notable difference in how water companies were regulated, as Ofwat already had enforcement powers in relation to environmental and societal matters.

As an example, Kirkpatrick pointed to a May 2025 Ofwat enforcement order against Thames Water. Ofwat imposed a £104.5m penalty on the company following an investigation into whether the firm had managed its wastewater treatment works and networks appropriately, so as to limit spills and environmental harm from storm overflows. 

Kirkpatrick said: “That was a very significant use of regulatory powers in relation to the matter that seems to be of greatest public concern at present and it is hard to see how a vaguely worded public benefit clause in the licence conditions would have assisted Ofwat in its regulation.”

Old prejudices and a lack of understanding

The commission expresses concerns regarding alternative ownership models on the grounds of financial stability and governance and management competence. It said: “Company management needs to be skilled and incentivised to perform.”

Kirkpatrick said the suggestion that for-profit businesses were more likely than alternative ownership models to be well-governed and well-managed, and that the latter were less likely to have a skilled and incentivised workforce, was an “old prejudice” and showed a lack of understanding of the sector that “many will find grating”. 

He added: “As to financial resilience, the commission is concerned that not-for-profit entities would have to raise capital through debt, whereas for-profit entities would have access to much less risky and burdensome equity investment. This overlooks the ability of not-for-profit entities to structure debt instruments so that they behave much like equity.”

The commission identified barriers to investment into not-for-profit enterprises in the form of high risk and low return, said SEUK’s Emily Darko, but delivering additional equity finance “can’t sensibly come at a cost to quality of provision for the public”, she argued. 

She continued: “Shareholder and dividend prioritisation sits particularly at odds with quality public services delivery when finance and budgets are constrained and investment costs are high.”

Shareholder and dividend prioritisation sits particularly at odds with quality public services delivery when finance and budgets are constrained 

Darko and Kirkpatrick’s criticism of the report was echoed by campaigners. In a statement James Wallace, CEO of environmental charity River Action, said: “This was a once-in-a-generation opportunity to reset a broken and corrupted system. Instead, the commission blinked. After three decades of privatisation, there is no evidence it can work.”

A LinkedIn post by campaign group Surfers Against Sewage described the recommendations as “putting lipstick on a pig”. It said: “Prime Minister, you must abandon the dangerous fantasy that the current privatised water industry can be patched up  –  it can’t. Abolishing Ofwat and replacing it with a shinier regulator won’t stop sewage dumping or profiteering if the finance and ownership structures stay the same.”

In a statement Gary Carter, national officer at the GMB union, said: “Water privatisation has been a disastrous failure. Our rivers and waterways have been fouled, while bills rocket and fat cat bosses get rich. Meanwhile, the water infrastructure crumbles through lack of investment.”

The government will introduce a Water Reform Bill next year to put “many” of the report’s recommendations into law, said Emma Hardy, government minister for water and flooding. 

Additional reporting by Laura Joffre.

Header image via Freepik.