Reform or be renationalised, Helm warns water sector

“No amount of lobbying and buck-passing will get the industry and its regulators off the hook,” economist Sir Dieter Helm has warned in an essay calling for radical reform of the water sector.

The failure to act will ultimately lead to renationalisation which would not, he pointed out, solve fundamental issues of supply, sewerage systems and river pollution.

Helm acknowledged faults on all sides but said adding “yet more sticky plasters will not only add to the mindboggling complexity of the regulatory regime, but probably result in repeated crises.”

The University of Oxford professor accepted there are “elements of truth” in arguments by water companies that they had not been permitted sufficient capital expenditure by Ofwat; that farming and other polluters impact the natural environment; and that property developers’ right to connect has caused costly end-of-pipe solutions to tackle pollution. But these “will not wash”, he said, as firms should have been better at monitoring their treatment works.

“The companies and Ofwat have turned a blind eye, for fear of the affordability consequences to customer bills,” he wrote.

Helm proposed a systematic approach to land-use that incorporates planning across agriculture, housing, commercial buildings, roads and transport.

He also recommended separating drinking water from grey water supplies to boost resilience against shortages while saving on treatment costs. Incentivising storage of grey water at reservoirs as well as domestically for home and garden use could make the supply system more robust. Capturing surface water for reuse would reduce the amount entering the combined sewerage systems, thus alleviate pressures on that network that lead to pollution.

Another change Helm proposed is greater control over how waste, fats and non-flushables are disposed of. This would move mindsets away from the current “open sewer approach to waste disposal”.

At river catchment level, Helm proposed agricultural incentives that promote environmental benefits over damaging practices. Property developments should be net nutrient-neutral and the transport sector should pay for the pollution it causes – including surface water run-off.

This vision, Helm said “is not utopian: it is within our grasp, provided we take a holistic approach.”

A catchment perspective utilising digital technologies, together with competition for open contracts to boost efficiencies – as has been demonstrated in renewables and capacity contracts in the electricity sector – could see national water quality objectives delivered, he argued.

His vision goes beyond current catchment management plans, which Helm argued lack true integration between water companies, farmers and flood defence in river catchments. Aligning planning considerations could identify how pollution can be avoided.

As well as integration, the model requires a shift away from licence conditions dictating companies’ activities, and towards more stakeholder input including bidding on contracts to achieve the best for net biodiversity, meeting net zero and enhancing nature.

The obvious barrier to an overhaul would be cost. However, Helm argued for coordinating work with other utilities’ schedules to minimise digging and disruption to replace pipes at the same time as cables being laid or fibre optic networks being rolled out. This, he suggested, could enable a switch towards a dual system of drinking and greywater. He advocated for incentivising greywater capture and storage at domestic level.

Greater emphasis on the part householders play would include metering and a social tariff that allocated a “block of cheap water” to homes, with prices increasing progressively beyond that amount.

“There is no need to stand idly by and wait until a new infrastructure is in place. Social tariffs, metering and special incentives can help to make it gradually happen.”

By separating the system, Helm suggested companies will save on treatment costs and pressure on existing pipes would reduce as more homes use stored greywater.

“Continuing with the status quo will require a lot more clean drinking water infrastructure and supplies, and with lots of additional costs, some of which could be avoided.”

Costs to add new supplies could be avoided as well as abstraction reduced. Capital works such as new reservoirs may not be required and leakage would not be as critical as less water would flow through pipes.

Helm described the state of company finances since privatisation as resulting in a sector that is not fit for purpose and called on the regulator to correct flaws from the past 30 years. He proposed pro-forma balance sheets on the basis of actual capex not paid out of current bills, and the actual cost of debt. Problems resulting from improper maintenance of assets such as sewers should be paid for by companies, not customers – an area that Helm attributed to “a serious regulatory and company failure.”

He called Ofwat out for “large-scale regulatory failure” compounded by failures of the Environment Agency to enforce environmental standards and regulation, and by company directors in failing to deliver the full requirements of the licences.

“The bottom line is that the licences have not been properly enforced. Against this backdrop, the fact that some companies have paid large executive salaries and bonuses understandably excites public criticisms,” Helm said.

“Whether, had the licences been properly enforced and had Ofwat prevented the abuse of balance sheets and indexed the cost of debt from the start, the current situation would have been satisfactory is open to doubt. But at least it would be much better than it actually is.”

However, short-termism beyond five-year periods remains a crucial challenge that Helm said his model overcomes.

Helm concluded that the continuation of status quo “with a few nods in the environmental direction” was the most likely outcome as it has worked in the past, but this would not solve growing problems.

The cost of not reforming systems would be stretched water supplies, declines in river quality, environmental damage and rising bills “to deal with the repeated crises” that further outrage the public that in turn stokes demands for renationalisation.