Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Water regulator Ofwat employed several consultancies at the same time they were advising water and sewerage companies, raising conflict of interest concerns.

Five advisory groups, including PwC and Deloitte, were contracted by the regulator for England and Wales over the past six years while also providing regulatory or management advice to water companies, according to research from government contracting experts Tussell.

Ofwat remains locked in negotiations with water companies over the price increases they can charge customers for the next five years. It is also waiting to hear whether a government commission will recommend replacing the regulator altogether, following criticisms it has been too light touch on the businesses it oversees.

Last year, Ofwat hired PA Consulting to assist with the Price Review 2024 on a “need only” basis in a contract shared with Grant Thornton and worth £1.2mn, according to publicly available tender documents. At the same time, PA was providing consulting services to Thames Water, which is pressing Ofwat for leniency on fines and higher increases in customer bills.

Baringa, another consultancy, was hired to provide business support and management consultancy by Ofwat this year in contracts worth £112,560, tender documents compiled by Tussell show, while at the same time providing regulatory advice to Thames.

Ofwat also paid PwC more than £1mn in 2020 and 2021 to help it on the regulatory settlement over the next five years. At the same time, PwC provided advice to Southern Water on its price negotiations with Ofwat.

In 2018 and 2019, Ofwat hired Baringa, KPMG, Deloitte, PA Consulting and PwC to help with the last price negotiations. At the same time, PA Consulting and Deloitte advised Anglian Water over “business and management consultancy services”, including reporting and governance.

In total, Ofwat, which regulates 16 water companies in England and Wales, paid £25.9mn to consultancies — including EY, KPMG, Deloitte, PA Consulting, Baringa, Grant Thornton and PwC — between 2016 and 2024, Tussell figures seen by the Financial Times show. Some of the payments were for audit services, rather than consultancy advice.

Tim Farron, Liberal Democrats environment spokesman, said the disclosures demonstrate that “Ofwat was a broken regulator and should be immediately replaced”. 

He added: “How can Ofwat hold these polluting firms to account properly when it is hiring the very same people who are working for the water companies?”

Ofwat said there were “rigorous conflict procedures in place which require consideration of any mandates which might be viewed as giving rise to any actual or potential conflict of interest before work begins”.

It stressed these ensure “that there can be no prejudice or impediment to our regulatory decision-making”.

On the Price Review 2024 contract, Ofwat said it required “flexible access to high-quality resources across a range of technical skillsets.”

The regulator faces a delicate balancing act between cracking down on water companies’ failings amid significant public anger, while providing enough funding for them to deliver the billions of pounds of new infrastructure that is needed and keeping bills at a sustainable level for customers.

Several companies are also struggling under a collective £73bn debt burden, and the regulator needs to try to prevent water companies from going bust. 

Ofwat has been accused by environmental campaigners of running a light touch regime that has failed to crack down on dividends and senior pay at the expense of investment in infrastructure such as sewage treatment plants and the pipe network. 

Ministers have ordered a commission into the regulation of the water industry that will look at scrapping Ofwat entirely, after admitting that the “whole water sector has failed”.

PwC said it adheres to “all regulatory, professional, ethical and independence standards. We have in place ongoing procedures with Ofwat to ensure there is transparency with our clients and that we address any potential or perceived conflict of interest.”

Thames Water said it was the responsibility of consultancies to guard against conflicts of interest. “We expect that Thames Water’s information is kept confidential at all times,” it added.

PA Consulting said it “applies rigorous procedures to ensure client confidentiality is maintained and any potential conflicts of interest are effectively addressed”.

Baringa said it implemented “a range of robust measures, including maintaining strictly separate project teams, to ensure that we are adhering to the highest professional standards”.

Southern Water, Severn Trent, Anglian Water, Yorkshire Water, KPMG, Deloitte, Grant Thornton and EY declined to comment.