Two-thirds of England’s biggest water companies employ key executives who had previously worked at the watchdog tasked with regulating them, the Observer can reveal.
Cathryn Ross, the new interim joint chief executive of Thames Water and a former head of watchdog Ofwat, is one of several ex-employees working for water companies in senior roles such as strategy, regulation and infrastructure.
An analysis by the Observer has found 27 former Ofwat directors, managers and consultants working in the industry they helped to regulate, with about half in senior posts.
The findings have raised fresh concerns over a revolving door between the regulator and the industry.
“There is a merry-go-round between the core regulators and the regulated utilities,” said Sir Dieter Helm, a former government adviser and professor of economic policy at Oxford University.
“Regulators are not paid very well, and if there is the potential of future jobs in the firms they regulate, it creates potential conflicts of interest.”
Tim Farron, the Liberal Democrats’ environment spokesperson, said there should be more robust rules and vetting procedures for former regulators moving to the private sector.
Calls for a crackdown on the revolving door come amid concerns that Thames Water is at risk of collapse from about £14bn of debts. There is public anger that water companies were allowed to pay out billions of pounds to shareholders by borrowing vast sums against their previously publicly owned assets.
Six of the nine water and sewerage companies in England have hired directors of corporate strategy or heads of regulation who previously worked at Ofwat, including former director of strategy Andrew Beaver, now at Northumbrian Water, and former director of strategy and planning Iain McGuffog, now at South West Water.
When she headed Ofwat, Ross defended the regulation of the industry after a Financial Times article criticised Thames Water and said that “water privatisation looks little more than an organised rip-off”.
In addition to Ross at Thames Water, Jonathan Read, director of regulatory policy and investigations, and Giles Stevens, director of regulatory strategy and innovation, also worked as directors at the regulator.
The Observer has established that another executive from the regulator was recruited by Thames Water as recently as March this year as a “regulatory engagement lead”. The advertisement for the “mid-senior level” role stated that “you’ll be leading relationships with the core regulation stakeholders” and securing “regulatory buy-in” through policy development.
At Severn Trent, there are at least nine employees who were previously at Ofwat. They include Shane Anderson, director of strategy and regulation, and Jonathan Ashley, head of economic regulation. Both have previously worked as directors at the regulator that oversees water and sewerage firms in England and Wales.
None of the former Ofwat employees has acted improperly or broken any rules around appointments of former civil servants. The regulator says it can impose restrictions on civil servants leaving for the private sector, which can include the type of work they can do, and these are shared with the new employer.
Helm said that Ofwat should have regulated the balance sheets of the water companies more closely. He said: “There was a failure to stop the companies essentially mortgaging the assets and then paying out the proceeds in dividends. It was a huge regulatory mistake and we are now seeing the consequences.”
A report published last week by Richard Murphy, professor of accounting practice at Sheffield University, has calculated that the nine water and sewerage companies in England and Wales benefited from a 35% profit margin before financing costs between 2002 to 2022, paying out £24.8bn of profits in dividends.
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Murphy said: “Ofwat allowed water companies to take on an extraordinary amount of debt, which was always going to explode. They were apparently unable to appraise the scale of risks inside the industry.
“It’s exceptional that over 20 years, every single penny of profit that has been earned after tax has been taken out by way of dividends. The mindset was they were managing a cash cow and would keep getting dividends for ever.”
The water companies have been criticised by campaigners for failing to adequately invest in infrastructure to reduce leaks and prevent sewage spills in rivers and along the coastline.
An Ofwat spokesperson said: “We have reported routinely on Thames Water’s financial situation and have been clear that their performance isn’t good enough. They need to fix it, but this isn’t a situation where the business is about to fall over.
“Ofwat recruits people on the basis of their skills and experience, which can help us to hold companies to account. All employees are subject to civil service rules on independence, propriety and probity as part of our code of conduct. They are reminded of this, both when first appointed and when leaving the organisation.”
Water UK, which represents the industry, said criticism of high dividends was out of date, with average returns of 3.8% for shareholders last year.
A spokesperson said debt finance was typically cheaper than equity and helped to keep costs low for customers.
Water companies say that all their employees comply with relevant appointment rules when they have previously worked in the public sector.
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