H3O: Raising standards and putting customers first – victories for privatisation

With the water industry under attack from media and politicians the bosses of some of the biggest water companies in England talk to Utility Week's Ruth Williams about the improvements privatisation has brought and how the challenges they now face are the toughest yet.

Until the 1990s Britain was dubbed the Dirty Man of Europe. Arguably we have been called a lot worse in recent years, but this nickname at least is not a recognisable reflection of the country today.

Rivers that were biologically dead in the 1970s and 1980s have seen species return and levels of biodiversity that hadn’t been recorded for decades. Water companies, pushed by the Environment Agency and rivers trusts, have worked to clean up waterways and while there are still vast problems to be addressed, it is impossible to deny that huge progress has been made over the past three decades.

Under public ownership, investment had been neglected or delayed, recalls Chris Loughlin, chief executive at South West Water. “There were decades of underinvestment in the industry by the state and state ownership constantly reprioritised other investment. It’s easy to put things off for a year, but if you put things off for ten years you end up where we were. We were classified as the Dirty Man of Europe and couldn’t see a way forward as an industry to meet all the European directives EU standards and drinking water standards and it needed a massive injection of capital. Through decades of state ownership that wasn’t forthcoming.”

The problems had come to a head by the mid-1980s amid “questions about the level of cleanliness of drinking water”, according to Colin Skellett chief executive at Wessex Water, who recalls insufficient funding coming from the treasury. “Education and health were always needing more,” he reflects.

There were insufficient resources to meet targets set by Europe so private investment stepped in to not only meet these targets but rise to other challenges that underinvestment had neglected – an estimated £24 billion was needed for the coming 10 years.

“There was always a huge scrabble for money and water always seemed to be very low in the pecking order,” says Peter Simpson at Anglian Water, who joined the company in 1989 after graduating so has seen the transformation from the early days. “Water was always the bottom of the list and the sector also wasn’t as productive at that stage. The government didn’t know how we would meet the standards of the new directives.”

At the time the idea of something fundamental to human existence going into the hands of private companies was widely unpopular, but as a biproduct the move injected new levels of productivity into the sector.

“The fact we were able to meet those standards and become leaders at a European level is because we were privatised and the model has essentially worked,” Simpson says. “The sector has seen more than £150 billion of investment since privatisation – and none has come from the public purse, it’s all privately generated.”

Continuous investment

Investment across the sector has seen leakage reduced by a third as well as improvements for customers who are now five times less likely to suffer supply interruptions; eight times less likely to face sewer flooding and 100 times less likely to experience low pressure. But it all came at a cost.

“The thing with this industry is it needs continuous high levels of investment,” Skellet explains. “That is the whole reason it was privatised – to get private capital in.”

The level of maintenance – and thus investment – required across network assets is near-constant. Thanks to our industrious Victorian forefathers, the country has reservoirs, pipes and other assets dating back to the 19^th century. Thames Water, for example, has 32,000 kilometres of pipework laying beneath one of the most densely populated cities. About a third of these pipes date back to before 1900 and are sat in London clay, which contracts in dry weather and expands in wet weather causing fractures.

Investment in assets is needed both in terms of maintenance and longer-term planning as Ian McAulay, chief executive at Southern Water says, each company is investing in assets for long-term resilience. He says: “We are doing long-lived infrastructure, multi generation infrastructure. Bills simply do not fund all the investment that’s needed.”

Bob Taylor, chief executive at Portsmouth Water explains the ongoing need: “A back log of investment was built up because of lack of funding so when privatisation happened it brought huge need for investment in the sector. But the investment needs in our industry are ongoing and if we are not able to continue making improvements the sector will suffer. There are still a lot of issues to maintain in the sector and investment needs are increasing.”

Technological advances

Another factor that played a less significant role in the 1980s was the use of technology. To address the challenges faced now, companies are investing heavily in technology to address leakage, improve customer service, manage catchment areas and monitor the pipes across their networks.

In the coming five-year period from April 2020, Ofwat has set out that it expects companies to invest an additional £6 million per day to protect the environment, improve service for customers but also to cut bills.

After the rush of investment in the 1990s services improved all round but bills shot up by around 40 per cent in real terms and, naturally, customers felt it.

Tony Smith at Consumer Council for Water recalls the point in the early noughties when the rising bills were coupled with increasing customer complaints. Smith, a former director of competition and consumer affairs at Ofwat, says the price rises coupled with complaints led to a feeling that the regulator should be less company orientated.

“In the 2004 price review customers had very little look in,” Smith says. “Government judged that prices going up and a sense that ‘all was not well with customers’ was a good reason that there needed to be much greater customer orientation.” This led to the formation of CCWater and the introduction of Service Incentive Mechanisms (SIM) scores from Ofwat.

This step change led to customers not only listened to, but made a major focus for the first time, as Skellet remembers. “A highlight really was getting people to talk about customers not some abstract bunch of consumers – the customer service has been transformed.”

Customer service is now a focal point for all companies and something they are accountable for to not only Ofwat, but CCWater. Smith says the change saw complaints drop by about 70 per cent since 2006/07. Although complaints are down and Smith says customers are overall satisfied with the service, there are issues of legitimacy and fairness that must be addressed as underlying discontents. “At the heart of legitimacy is not about politics, it’s about a sense fairness. It’s not a creation of the media or politicians, it’s inherent with customers view of the water industry,” he points out. “That’s where the industry hasn’t been urgent enough in resolving that problem.”

Wildlife benefits

As well as improvements in service, leakage and resilience, wildlife has benefitted from the investment. Despite some high-profile environmental crimes, the overall picture has been positive.

“When you look at rivers, tens of thousands of kilometers of rivers were in awful quality. There’s still a lot to be done for rivers but in the 1970s there were many rivers that were biologically dead and that’s not something we talk about nowadays,” Simpson recalls as one of the undeniable victories for the sector.

At the time of privatisation 40 per cent of raw sewage was emptied on to beaches. Although it’s an improved picture today, with 63 per cent of bathing water sites around the UK classified by the European Environment Agency as having excellent water quality. Twenty-five EU countries rank above the UK showing there is more work to be done despite the improvements.

However, the challenges faced in the past 30 years are nothing compared to what is to come, as we will explore more another day.

The sector must adapt to the changes that come in thicker and faster, but McAulay, for one is confident solutions will be found, because the industry has set a precedent to rise to what is thrown its way.

“If someone put the Urban Wastewater Directive in front of us for the first time now we’d say ‘oh fine, that’s ok’ but back in the day it was different,” McAulay says.

“The last 30 years have been good and got us to a good place but looking ahead the challenges are bigger, bolder and we need to engage technology. We’ve got less water available and more people demanding it. These are big big challenges.”

With an election coming next month that could see a Labour government in Downing Street bringing plans to renationalise utilities with it the future of these companies is uncertain. The challenges of the past 30 years have largely been met by the water sector. Despite its many failings, it has achieved these significant things.

Simpson rebuts the claim that so much could have been achieved by a publicly owned sector. He says “some could argue we could have done those things anyway. But the reason we were privatised was because we weren’t going to do it because the money simply wasn’t available. We were out of ideas but now we’re at a place that the UK is well ahead of many of our peers in Europe.”

But for some, the idea of who owns the pipes is small fry compared to the fears of what might not come out of them. “The real challenge isn’t an ownership debate it’s about climate change and population growth,” Loughlin says.

“As James Bevan warned, we’re going to run out of water, and we need to change our habits now. This is what’s important more than privatisation. This is what we need to focus on. This is real, we need to do something about it and build reserves and resilience and the ownership debate just takes oxygen away from the main issue.”