Productivity in water sector increases since privatisation

Productivity in the water sector has seen a 64 per cent improvement between 1994 and 2017, according to a report commissioned by Water UK published today (29 November).

Water UK has engaged the services of Frontier Economics, working with Professor David Saal of the centre for productivity and performance at Loughborough University, to “assess what has happened” to water sector productivity since privatisation.

The study found water and sewerage company productivity in England grew annually by an average of 2.1 per cent, “based on relatively cautious” assumptions on the improvements in the quality of service provided.

While annual productivity was shown to fluctuate from year to year, and the annual growth rate to have declined, the report suggested “estimated cumulative productivity” depicted an upward trend “over almost the whole period.”

To undertake the work, Frontier Economics estimated the Total Factor Productivity (TFP) growth achieved by the industry between 1992/93 and 2016/17.

Cumulative TFP growth over the analysis period increased by 64 per cent on a “quality adjusted” basis and 27 per cent on the “most conservative” basis without quality adjustment.

The report said productivity growth was high during the immediate post-privatisation period, followed by a period of intermediate growth in the first five years of the 2000s, with a significant drop in growth since 2007 following the Global Financial Crisis (GFC).

Michael Roberts, chief executive of Water UK, said: “Productivity growth obviously matters to our national economy. Without it, we will neither restore real terms growth in people’s incomes nor afford vital public services in future. And it matters in the water sector, since it determines both the level of bills people pay and the quality of services they receive.”

Roberts said the figures published in the report about productivity in the water sector “reflect improvement” both in the productivity with which companies operate and the quality of what they deliver.

He said: “Put crudely, it is not just about providing the same water and sewerage services as in 1994, by using fewer employees and smarter kit. That is certainly part of the story, but it is also that the quality of the services provided is itself better.

“On the one hand, companies over the years have delivered increasingly world-class water quality, cleaner beaches and higher levels of customer satisfaction, made possible in large measure by £150 billion of investment.

“And on the other hand, as Ofwat would probably put it, these things have been achieved by private sector companies within a framework of robust, independent regulation which has ensured that bills are £120 lower than they would have been if the combination of privatisation and tough independent regulation hadn’t happened.”

But he warned the “obvious sting in the tail” is the scale of the “productivity challenge” ahead for the water sector, if it is to continue “delivering better, more resilient services while keeping bills affordable.”

“There needs to be a turnaround in the rate of productivity growth of the last decade identified in the report,” he said.

The report suggests the water sector has compared well to other sectors including electricity and gas, construction, transport and post and telecommunications.

It said: “Our analysis of productivity growth in comparator sectors suggests that the water and sewerage businesses have outperformed materially those comparators in the decades after privatisation and leading up to the GFC in 2008.

“Since then, the UK’s productivity growth and the productivity growth of comparator sectors has been negative. The water sector has not been immune to this trend, with productivity growth materially slower than in the post privatisation period, but the water and sewerage businesses have nonetheless delivered modest positive productivity growth.”

Frontier Economics’ work is based on an update of previous work published by Saal & Parker in 2001.