The high cost of low water bills

It's no secret that the water industry faces major funding challenges. To turn things around former Downing Street advisor Tara Singh calls for an end to the prioritisation of low bills at the expense of much-needed infrastructure investment. Writing for Utility Week, Singh outlines her plan and explains why we must finally confront the high cost of low bills.  

The UK water industry is in crisis, and it’s not just the fault of the debt-laden companies caught dumping sewage. The real culprits are our politicians and the water regulator, Ofwat, who have prioritised short-term consumer interests over long-term investment in our water infrastructure.

As regulated monopolies, water companies operate within the constraints set by those in power. For far too long, these frameworks have emphasised keeping bills low at the expense of necessary investments.

More than a decade ago, politicians were warned about the unsustainable debt structures of some of these companies, but they chose to do nothing. The Conservative government at the time believed that private companies should have autonomy over their capital structures, even though these were public utilities. The high levels of debt appeared to be keeping bills low for consumers, and that took precedence over all else.

This short-sighted approach extended to other areas as well. Sustainable urban drainage solutions, which reduce the risk of urban flash flooding, were delayed for over 14 years due to lobbying from housing developers. Agricultural runoff was also insufficiently controlled due to pressure from the farming lobby. And inadequate attention has been given to climate resilience: the five-year business plan cycle is not conducive to strategic investment; the planning system enabled vocal interest groups to obstruct the development of essential infrastructure, and a focus on low-cost solutions led to sticking plasters over long term solutions. The UK now risks running out of water in just 20 years without urgent new infrastructure.

The consequences of this neglect are becoming increasingly apparent. Thames Water, which serves a quarter of the UK population, will likely need to spend £19.8 billion on new infrastructure through 2030 while already burdened with £16 billion of debt. The water sector as a whole has over £60 billion of liabilities, and if things go wrong, some of these companies could be put into Special Administration – effectively temporary nationalisation. This regulatory approach mirrors the one used for Bulb, an energy retailer which faced similar issues in a parallel sector because, once again neither the regulator nor the government seemed prepared to address the industry’s evident problems as long as customer bills remained low.

To address the water crisis, we therefore need a fundamental reset. The government must develop – and stick to – a robust water strategy that acknowledges the challenges posed by climate change and population growth and allows companies to invest over multiple price reviews to deliver the infrastructure so urgently required. This strategy must also move beyond the current “end of pipe” approach to water pollution and leakage. While water companies should rightly be penalised for any failures, they are responsible for just a third of water pollution. We need a comprehensive plan to tackle sustainable drainage for farms, houses, and highways.

As part of this, planning policy must also be overhauled to enable the swift construction of the infrastructure we so desperately need. The new National Policy Statement (NPS) for water resources infrastructure in England is a promising start. However given that the Secretary of State will be responsible for determining applications – and that these will be judged against value for money considerations – it is essential that short term political expediency doesn’t get in the way.

Finally, and perhaps most controversially, we must also adopt a “least worst” approach to allowable returns to attract the new equity needed to revitalise the sector. As witnessed with Ofgem’s over-complex plans for financial resilience in the energy industry, there is a risk that pressured regulators overcompensate for perceived past failures by swinging from under-regulation to over-regulation almost overnight. So let us be transparent about the public’s current and future needs, the infrastructure required to meet those needs, and the returns necessary to finance it. While higher bills may be unpopular in the short term, they are essential for securing the long-term sustainability of our water supply.

Of course, given the current crisis, the siren call of nationalisation is getting louder, and its hard to defend the status quo given the state the sector is in. But given the track record of politicians in prioritising short-term consumer interests over long-term sustainability, it is unlikely that a nationalised water industry would fare any better. Politicians have repeatedly demonstrated their unwillingness to sign off on private companies raising bills, even when necessary to fund critical infrastructure investments, due to concerns about voter backlash. If held directly responsible for the water industry, as would be the case under nationalisation, it seems even less likely they would prioritise long-term investments over short-term political expediency.

More important than the question of ownership, then, is the need for a fundamental reset in our approach to the water industry – one that prioritises long-term sustainability across all sectors of the water and wastewater economy. Crucially, that requires having the political courage to make difficult decisions and stay the course, even in the face of short-term political pressures. The high cost of low bills is becoming increasingly clear. It’s time for our politicians and regulators to step up to the plate.

Tara Singh is Managing Director of Public Affairs for Hill & Knowlton, which from July is merging with BCW to create Burson. She was previously a No10 Special Adviser with responsibility for energy, climate and water policy.