Labour’s key housebuilding target will not be met if water companies are blocked from significantly increasing bills, the leader of an industry group has said.

The government has promised to build 1.5m homes during this parliament as a central pillar to its plans to end the housing crisis.

David Henderson, the chief executive of Water UK, told BBC Radio 4’s Today programme that water companies would not be able to facilitate this without getting the green light from the regulator to substantially raise bills. He also said without sharp rises to household bills, companies would continue to spill sewage into the sea.

“Unless we get that full investment amount we are not going to be able to secure economic growth, we are not going to be able to build the 1.5m homes that we desperately need and we are not going to be able to end the sewage flowing into our seas,” he warned.

Water companies have to aid the construction of homes in water-stressed areas by building infrastructure such as sewage pipes and reservoirs.

Water companies in England and Wales, and other stakeholders in the industry, had until Wednesday to submit responses to the regulator Ofwat’s plans for investment and bills.

The companies asked Ofwat for permission to spend £104.5bn over the next investment cycle, which would cause the average household water bill to climb by £144 over five years.

However, the plans were provisionally reined in by the regulator in its “draft determination” last month, when it set out a budget of £88bn for the sector and called for the average bill increase over the period to be capped at £94 – or £19 a year. Ofwat will study the companies’ submissions and make a final decision in December.

Water companies in England and Wales paid £2.5bn in dividends and added £8.2bn to their net debt in the two financial years since 2021, research by the Financial Times found this year.

The companies paid out £78bn in dividends in the 32 years between privatisation in 1991 to March 2023, which is almost half the £190bn spent on infrastructure in that period, during which they added £64bn in net debt.

Despite this, Henderson said that questioning whether this dividend money could have been spent on infrastructure instead was “neither here nor there”.

He said “all of it [£2.5bn dividends paid out recently] could have been used for investment. But if you want investors to put their money into the UK you need to see a return. We are not allowing our system and economy to grow as it should because of a lack of water. Arguing about dividends is not going to solve the problems we have for the future.”

Investors are threatening to pull out of water companies unless bills are allowed to rise more sharply.

Henderson said: “Investors are telling us they have choices, and if we want them to put their money into the UK, into the water system so it can be expanded and upgraded, then they need to see a modest return. And the return being proposed by Ofwat is simply not enough to allow the improvements to occur.”

In March, investors in Britain’s biggest water company – Thames Water – said the regulator had made the debt-laden company uninvestable as it struggled to secure its future.

Henderson also argued that privatisation was not to blame for the industry’s poor pollution record as the Seine in Paris was polluted during the Olympic Games and France’s system remained state-run.

“People are right to be angry but it is not confined to this country – we saw in Paris, in a state-owned system, that the triathlon had to be postponed because of pollution in their river,” he said.

The Liberal Democrats environment spokesperson, Tim Farron, said: “It’s an absolute outrage that British families face sky-high bills that continue to rise, while water firm CEOs pocket millions of pounds in bonuses, and all the while filthy sewage continues to destroy our seas and rivers.

“It’s clear to see that the current regulator Ofwat is not fit for purpose, and it’s high time they were replaced.”

A spokesperson for Ofwat said: “We have received responses from many organisations, including water companies, customers, environmental and consumer organisations, and investors. Inevitably, these reflect a diverse range of views on the proposals we have made.

“We will consider all of these responses carefully over the next three months and set out our final decisions on 19 December.”