Re-nationalise the water industry? No thanks.

On 1st July 1974 I moved to West Yorkshire to take up a new job with the recently created Yorkshire Water Authority as Pollution Prevention Officer on the River Aire. The Water Authorities had been created just three months earlier. That was the beginning of an interesting and challenging career, which continues to this day. The recent discussion, by the Labour Party, of taking the industry back into public hands bothers me, hence this (rather long, but it’s a complex tale) blog.

First a bit of history

The water industry was highly fragmented in the period up to and after the Second World War. The industry had largely developed in response to a growing population and increasing demand for water driven by the industrial revolution and accompanying economic growth. Each area organised its own water and sewerage services, often by an individual Act of Parliament or Royal Charter. This left different areas of the country with varying levels of water and sewerage services.

In 1945 there were more than 1,000 bodies involved in the supply of water and around 1,400 bodies responsible for sewerage and sewage disposal. Most of these were local authorities, but there were also several statutory private water companies. Planning for water resources was a highly localised activity, with little co-ordination at either a regional or national level.

Post-war legislation aimed primarily to consolidate water authorities so that they could benefit from economies of scale, and to provide funds for investment in rural areas.

The Water Resources Act 1963 led to further changes, which were in response to a severe drought in 1959 and flooding events in 1960. The Act recognised the importance of a co-ordinated approach to water resource planning and introduced an administration system for the right to remove water (‘abstraction permits’). This was intended to make sure that existing and future water resources were adequately conserved.

Restructuring of the water industry (1965-1989)

Although there was a general consolidation of water and sewerage services after the Second World War, and greater investment in the form of grants from central government, water supply and sewerage services were still provided on a local basis.

Responsibility in any one area lay with one of a number of different types of organisation.

Water supply:

  • individual local authorities (for example Wrexham Rural District Council)
  • joint organisations covering the areas of two or more local authorities (for example Doncaster and District Joint Water Board)
  • statutory private water companies which were set up by Act of Parliament (for example Cholderton and District Water Company)

Sewerage services:

  • individual local authorities
  • joint organisations covering the areas of two or more local authorities
  • In the late 1960s and early 1970s ongoing problems with water resource planning and future demands forecasts prompted further restructuring of the industry.

By now there had been chronic under-investment in maintenance of existing and construction of new assets to meet the demands of a growing population. Many rivers were grossly polluted, the River Aire was effectively dead below Keighley down past Bradford through Leeds and Castleford and down to the Humber. Water quality was a secondary consideration by engineers whose operating philosophy was once expressed to me (by one of those engineers!) as “If it’s wet it will do”.

Establishing regional water authorities

The Water Act 1973 established 10 new regional water authorities. These authorities were responsible for managing water resources and supplying water and sewerage services on a fully integrated basis. These authorities took over control of the services that local authorities had previously (not!) been supplying.

The area that each water authority covered was broadly based on river catchment areas. Existing statutory private water companies were unaffected by the changes.

The Water Act 1973 required the regional water authorities to operate on a cost recovery basis. Capital to meet the necessary investment was raised by borrowing from central government and from revenue for the services provided.

Central government set financial constraints and performance aims for each authority.

Trying to meet investment needs

Although the restructuring had some improvements, it was difficult for water authorities to invest significantly in their assets. Additionally, the structure of the authorities meant that they were responsible for both discharging treated water into the environment and also monitoring discharges into the environment – both their own, and that of others. At the same time during this period increased environmental demands were made on the water industry, both with the public in favour of higher standards, and from more stringent European legislation.

In response, in the Water Act 1983 the government:

  • made some constitutional changes
  • reduced (frankly, almost eliminated) the role of local government in decision making
  • gave the authorities scope to access the private capital markets.

These changes did not result in a significant decrease in the number of pollution incidents but there was little desire to provide any additional public finance to meet the demand for capital investment. With the privatisation of other public services already underway, the decision was taken to privatise the water authorities. This was enacted by the Water Act of 1989, which:

  • separated the functions of providing water and sewerage services, and monitoring discharge into the water system
  • allowed the privatised water authorities to borrow money to invest in water and sewerage services

Privatisation (1989 onwards)

The ten publicly owned water and sewerage authorities were privatised in 1989 (after initial plans for privatisation were put on hold in 1986).

Privatisation was achieved by transferring the water supply and sewerage assets, and the relevant staff, of the ten existing regional water authorities into limited companies (the water and sewerage companies). This was accompanied by:

the raising of capital by floating parent companies on the London Stock Exchange

  • a one-off injection of public capital
  • the write off of significant government debt
  • the provision of capital tax allowances.

Over the years most of the companies have been bought out by private investment funds and taken off the stock exchange. At the time of writing only three (Pennon  aka South West Water, Severn Trent and United Utilities   aka North West Water) are quoted companies.

Regulating the privatised companies

To protect the interests of customers and the environment, at privatisation there was further restructuring of the industry. This entailed separating the roles of regulation and the provision of water and sewerage services.

Three separate, independent bodies were established to regulate the activities of the water and sewerage companies. These were:

  • the National Rivers Authority (from 1996 this became the Environment Agency) – which took over the remaining functions, assets and staff of the water authorities as the environmental regulator
  • the Drinking Water Inspectorate – as the regulator of drinking water quality
  • the Director General of Water Services supported by the Office of Water Services (Ofwat) – as the economic regulator

These bodies now also regulate the statutory private water companies (the water only companies).

There is no doubt in my mind that there were two primary reasons for privatising the industry. The first was the reluctance of governments of all persuasions to fund the ever growing demands of regulation.  The second was a philosophical/political one to reduce the size of the state. These came together in a perfect storm under a Tory government led by Margaret Thatcher.

The second of these reasons is a matter of personal philosophy and whilst I personally feel that industries upon which the welfare of the nation depends, such as water and the NHS, should be in public hands others will disagree. It’s a matter of politics.

I do have to observe that the companies have become much more efficient than the public sector organisations with whom I work and much more agile on their feet and able to innovate and use new technologies. The public sector is generally much slower to make decisions and fearful of truly empowering staff because of fears of ‘upsetting the voters’ ‘setting precedents’ and ‘lack of control’. I genuinely believe that one massively beneficial side-effect (or was it an unspoken intent, who knows?) of the changes has been efficiency.

Before privatisation in 1989 – Britain was known as the “dirty man” of Europe, low environmental standards and poor drought resilience eg resulting in standpipes being used in 1976 drought As a regulator, in the early years Ofwat drove investment and greater efficiency through the five-year price reviews. And it worked. Customers and citizens  now enjoy better services and a cleaner environment. Compared to the early 1990s, customers today are:

  • about eight times less likely to suffer sewer flooding
  • and five times less likely to experience unplanned water supply interruptions.
  • A 99% reduction (338,000) in customers at risk of low water pressure, since 1990
  • Leakage is lower – it has fallen by 40% from a peak in 1995
  • Asset health is in a much better state – most companies reporting stable asset serviceability measures.
  • Water and environmental quality has improved – more than 100 Blue Flag beaches and fish in the Thames again
  • Capital expenditure has doubled since privatisation

It is simply not true that, as one commentator has claimed, the water industry has failed customers.

Financing Challenges

Ever more stringent standards required ever more financial and operational efficiencies and despite the investment of over £130billion and massive reductions in staffing (when I started Yorkshire Water had ca 10,000 employees, when I left in 2000 it has ca 4000) more needs to be done to meet society’s aspirations for clean rivers and safe reliable drinking water. The standards are not just bureaucratic wish-lists, they are almost all driven by sound science, the democratic decisions of the EU and incorporated into UK law. Us practical experts occasionally question the relevance of some but by and large they have driven the improvement of our rivers from open sewers in 1974 to a state where salmon are occasionally caught below Leeds on the River Aire (and are shortly to be returned to the spawning grounds, see DNAire) and our drinking water to a quality such that nobody need have any concerns about drinking it.

Further investment is necessary to meet the standards and the current negotiation with Ofwat about prices and investment for 2020-2025. Money does not come free. Whether it is provided from the capital markets or by government there is a cost – in the first case payment of interest to the lender and in the second by government borrowing on bonds. Both routes have to be paid for, and who would pay for them if not the population who use these services? Whether water and sewerage services are paid for publicy or privately is simply a matter of either rises in taxes or increased bills.

There are those who claim that “we did not have to pay for it when the local authorities ran it”. Well that is patently untrue. It was paid for out of your rate bill, which was highly subsidised by central government. The cost was hidden.

Let us just reflect on what else happened when the industry was last in public hands – investment was almost non-existent. The fact that the Victorians, who built nearly all of the infrastructure in place at privatisation, substantially overdesigned most of what they built could be said to have ‘saved’ us from an even worse fate that rivers that were open sewers and water contaminated with cryptosporidium, giardia and all sorts of other life threatening nasties.

Quality and regulatory issues

How often have I heard something along the lines of “Those water companies can do what they like, they get away with murder”. As someone who used to have strategic responsibility for ensuring that Yorkshire Water met its regulatory commitments for drinking water quality, sewage discharges to the environment and health and safety, let me tell you that there might have been times when we wished the regulator did not exist – but only in the same way as I occasionally wish the 70mph speed limit does not exist.

Every routine discharge to the environment must have formal consent from the Environment Agency, who have a duty to impose conditions appropriate to protecting and improving the environment. It is changes in these conditions which drive further investment, so every 5 years there is a delicate and challenging negotiation between the companies (who have to implement the results of the negotiation), EA (who want more improvement faster) and Ofwat (who regulate the finances). There is always more to be done than can be afforded and so Defra also have a role in agreeing what it is appropriate for the EA to ask for in the current economic and regulatory environment. Having spent the last 2 years of my time with YWS leading such negotiations, I know just how challenging it can be – we started out with ‘demands’ from the EA/DWI that would have cost £2.5billion over 5 years and ended up with a programme valued at £1.4billion and even that was only possible by increasing bills a little.

Water companies around the country are regularly prosecuted by both the Environment Agency and the Drinking Water Inspectorate. Thames Water has the ‘privilege’ of holding the record for the largest environmental fine, a staggering £20.3million for repeated pollution of the Thames. Whilst it is right that the full weight of the law is brought to bear when serious incidents occur, the tragedy is that fines such as the £20.3million go straight to the chancellor and do not get spent on improving the environment. Recent provisions for civil penalties called Enforcement Undertakings offer the possibility that instead of a prosecution and equivalent penalty be paid to an environmental charity who must then spend the money improving the environment.

Accountability

Yes, a private company is lacking a democratic deficit and that is one reason that Ofwat, the statutory regulator, is keen on encouraging the companies to fill that gap. For the current price negotiation a series of ‘Customer Challenge Groups’ has been created with the express intent of challenging the companies’ plans.

An excellent paper https://www.ofwat.gov.uk/wp-content/uploads/2017/08/Putting-customers-at-the-centre-of-a-regulated-monopoly-sector-DB-20-July-2017.pdf is available which traces the history of customer involvement in the industry.

The industry has long understood that only by satisfying customers will its reputation improve (and it did indeed have a poor reputation in the early years). Of course not all customers are satisfiable

Wasteful water companies!

The first wind turbine I ever saw was erected to power a remote pump delivering water to Bradford.

Water companies have long use anaerobic digestion to recycle sewage sludge and produce methane in the process.

Sewage sludge has been returned to the land as a fertiliser for hundreds of years. Following treatment, sewage sludge is either landfilled, incinerated, applied on agricultural land or, in some cases, retailed or given away for free to the general public.

One company has committed to planting 1million trees as part of its contribution to tackling global warming.

One company has committed to energy neutrality, generating all the power it uses and potentially exporting the excess to the grid.

It is claimed that Paris has leakage rates of ca. 10%, compared to 25-30% in the UK. A useful summary of the re-nationalisation of Paris water is available at http://research.ncl.ac.uk/media/sites/researchwebsites/gobacit/Anne%20Le%20Strat.pdf . This actually claims 5%, a figure which is hard to accept for us industry stalwarts. Leakage in the UK is too high for many and the public perception is one that needs changing. Part of the problem is the value of water. At ca £1 per tonne the economics of leakage control are a challenge!

Wasteful?

Overall…

Both history and experience has suggested that the environment is better protected and our taps better supplied when water is in the private sector. That challenges my own predilections for public ownership of such a vital asset, but experience in other fields shows how inadequate are public sector processes, how hard it is to get financing in the pubic sector and  how out of control pubic sector tendering and construction processes become.

At the time of privatisation, I held principled objections to the process. I still do, yet as a pragmatist I have to admit that we are much better off than we would have been had water remained in the public sector. Do I support renationalisation? No.

One response to “Re-nationalise the water industry? No thanks.

  1. Hi Geoff.
    Excellent review of how and why we are where we are. I could add lots more regarding the attitude the old Local Authorities and Water Authorities had to customer service in the “good old days”. Suffice to say it was best summed up by a senior person who once told me consumers (they were not even regarded as customers) should be grateful for what they get. This in the days when the chance of getting a phone call answered were somewhere between slim and none!
    My main addition to your article would relate to value for money. Chris Jones used to make a presenation where he described what happens when you turn on a tap…… billions of £ worth of assets kick into gear and fresh wholesome water is delivered 24 hours a day. Conversely when you flush the toilet, several more billions of £ of assets kick into gear to remove the waste, transport it far away, treat it to make it acceptable for returning to the environment and dispose of it in safe manner. All again 24 hours a day. In fact as we know, most customers get hung up on water charges whereas in reality over 50% of bills are related to sewerage and sewage disposal. In terms of value for money, I find these services remarkable. Certainly in my household they are very much the small bills I receive when compared to Council Tax, Energy, Broadband, Satellite TV, Insurances, Telephone Services.
    You rightly highlight the danger of a return to public ownership which would turn the services back into a political football subject to the whims of politicians whose sole focus is retaining power rather than long term planning for this vital service.
    On a personal note, I never had a problem with privatisation. All services should be measured by outputs not inputs and with the correct approach to regulation there is no reason why these services should not be run by those who can do so in the most efficient manner for the benefit of all customers.

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