H3O: Three decades of water privatisation

This month marks 30 years since shares in the water and sewerage companies of England & Wales were first floated.

Three decades on, the argument as to whether the industry should be returned to public ownership has reached fever pitch. The election on 12 December is a potentially seismic moment, but the threat of nationalisation does not just hang on a Labour win. If a coalition of convenience has to be brought together, could steps towards renationalising certain key industries (or parts of them) be one compromise a potential partner to Labour would swallow? Certainly it’s difficult to see what principal objection the Scottish National Party would have.

This is why a dose of reality is needed and the case for privatisation put forward as an essential component in the changes the utilities sector needs to make over the coming decades.

This week, Utility Week kicks off a series of features delving into the past 30 years of privatisation in the water sector. Our H₃0 campaign does not shy away from the difficulties that have arisen over that time but rather than seeking to apportion blame we are looking for the key lessons to learn as we look towards the next three decades.

As South West Water chief executive Chris Loughlin tells us: “The industry is often criticised for not investing enough, but if you put your shareholder hat on, they love nothing more than us spending money and getting a return on it. People are delighted to invest in the future and to have a regulatory regime and a joined-up approach to investing in the future.”

This is where the argument should lie, in creating an environment that will unleash the innovation needed to cut water consumption, upgrade aging infrastructure and blaze a trail for industry in general by being one of the first to hit is internal net-zero target.

Beginning today, we speak to leading figures in the water industry and expert commentators about the learnings from the past three decades and the future challenges.

To open the coverage it is perhaps worth considering the environment which led to privatisation being considered in the first place.

Privatisation was the future once

Detailing the debates and concerns that led to water privatisation in England & Wales would (and has) required the scope of an entire book to cover.

If we begin a whistle-stop tour in the late 1960s and early 1970s, the government was faced with the task of reforming a water industry that had been designed for a different era. Chief among the concerns were coping with increasing demand and finding solutions to widespread pollution problems.

A series of working groups, in collaboration with the industry, identified the need to considerable investment and a co-ordinated approach to water supply, sewerage and the management of water resources. They also pointed to the need to move control of investment from local authorities to central government.

The resulting Water Act 1973, created 10 supply areas, based broadly on natural watercourses managed by the water authorities. Prior to this, there had been more than 1,500 organisations responsible in some way for water and sewerage provision.

While government retained ultimate responsibility for the full range of the functions of the industry, this period also saw the creation of the National Water Council, comprised of the 10 chairmen of the water authorities and the same number of independent members appointed by government. The council was an independent statutory body, tasked with drawing together issues of common interest and acting as a link between government and the water authorities.

The 1973 act did not have a significant impact on how the privately-owned statutory water companies operated. Although the statutory water companies would act as agents for the water authorities in the areas they supplied water, they continued to be financed privately. At this point they supplied approximately 20 per cent of the total drinking water supply in England and Wales.

Post the changes prompted by the 1973 Act, the main issue for the water industry was the heavy burden of inherited and continuing capital investment. This lack of investment was apparent in 1982, for example, when government permitted the water industry to spend around half of the total capital investment incurred in 1974.

Water Act 1983

Controlling pollution incidents also remained an issue and this was a key driver in Water Act 1983. The assumption of this act was that water customers were best served by an efficiently run water utility providing prescribed service standards at least cost. It introduced further changes to the organisational structure of the water authorities, reduced the role of local government, and, by allowing companies to operate in a more commercial manner, paved the way for privatisation.

While government continued to exercise control over borrowing, this latest act did make express provision for the water authorities to borrow directly from the private capital markets.

Despite these changes, pollution remained out of control, and led to prosecution proceedings by the in the mid-1980s by the European Community over non-compliance with EC directives. This is seen as was a major factor in the government’s move towards privatisation.

The path to privatisation

Privatisation was first formally suggested by the government on 1986, and followed the ethos of the Conservative administration, which had already privatised British Telecom two years earlier and British Gas that year.

It became a commitment in the 1987 Conservative manifesto, and when Margaret Thatcher’s party was re-elected the groundwork for the Water Act 1989 was laid.

In November 1989, the 10 water companies of England & Wales, which at the time employed almost 50,000, were successfully floated, with heavy oversubscription for their shares.

These companies also became owners of their local water and sewerage networks, including roughly 230,000m of water and sewerage mains, 6,500 treatment works and 8,300 sewerage pumping stations.

Privatisation applied only to England & Wales with Scotland and Northern Ireland remaining resolutely in public ownership – as they do to this day. Welsh Water officially became a not-for-profit organisation in 2001. These respective ownership structures will be explored later in the week.

As provided by the 1989 act, the Office of Water Services (Ofwat) was established. It has many designated responsibilities relating to the industry, but the role with which it has been most closely associated is the regulatory price regime. The evolution of regulation in the sector will be the subject of a separate article in the H₃O series.

Over the past three decades the industry has seen much-needed investment flow in, first through the public offerings and then as many of the companies were taken private. However, the debate over the balance of commitment to shareholders and to the longterm resilience of the industry has been ever present, culminating in Labour’s increasing vocal calls to renationalise. These proposals and the sector’s response will form the final day of H₃O coverage.

These plans, and the public reaction to them, cannot be taken lightly. If Labour wins the next election it is entirely possible this will be the last significant anniversary of water privatisation. If nothing else, it is a stark reminder that the industry must get much better at communicating the benefits privatisation has brought. Hopefully, H₃O can play a part in that process.