One of Britain’s biggest water companies is at the centre of an escalating investigation into alleged bribery, The Times has learnt. Welsh Water, chaired by Lord Burns, the former Treasury mandarin, has been visited by Ofwat, the industry regulator, who interviewed several employees.

James Strachan, a former chairman of the Audit Commission, an independent body whose mission statement is “protecting the public purse”, is a non-executive director.

It is understood that Ofwat’s visit came amid an internal inquiry led by senior management that had been going on for some months.

Welsh Water, owned by Glas Cymru, confirmed last night that there was an internal investigation regarding “allegations of irregular practices” at the company, which employs about 3,000 people and earned operating profits of £82 million last year.

The group provides water and sewage services to three million homes in Wales and is the sixth largest water company in England and Wales. It extols the virtues of its status as a mutual company where customers share in the profits of the company.

A spokesman for Ofwat said: “We understand that Welsh Water has received allegations of irregular practices within a sub-contractor. Welsh Water is undertaking an investigation into these allegations and is keeping Ofwat fully informed.”

The focus of the Welsh Water investigation is understood to be a series of improper supply deals struck with an unnamed subcontractor. Included in the inquiry are allegations that contracts were offered in exchange for gifts.

The source said senior managers at Welsh Water had become aware of the problems several months ago and had been conducting their own investigation when Ofwat became involved this week.

Welsh Water has no shareholders and reinvests all of its profits for the benefit of its customers.

In a half-year profits statement issued on Wednesday, which made no mention of any internal investigation, Lord Burns said: “The strong financial position that we have built up since 2001 means that we can afford to push ahead with our largest-ever capital investment programme, with over £360 million of projects expected to be delivered this year.”

The Welsh Water investigation will stoke memories of other investigations into misconduct within Britain’s water industry.

Severn Trent, the UK’s second-largest water company, became immersed in a corruption scandal over misleading the industry regulator and manipulating figures supplied to the regulator to fatten its profits.

In 2008 the company was fined £35.8 million by Ofwat for these offences and for poor customer service. The company was also fined £2 million at the Old Bailey for misreporting leakage information in a case brought by the Serious Fraud Office last year.

The latest inquiry into improper conduct at one of Britain’s largest water companies comes two weeks before Ofwat is likely to deliver its final verdict on price controls that will last for five years.

On November 26 Ofwat is expected to impose tough new price controls that will force water companies to clamp down on unnecessary spending.

The regulator is set to publish a final ruling this month that will dictate the amount the companies can spend on upgrades to the water and sewerage network from 2010 to 2015 and how much they are allowed to charge Britain’s 26 million households.

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