The water company of 2030 must learn to live with change

With Brexit and a changing regulatory environment, it’s impossible to predict what the future holds – so water companies must learn to embrace change as a matter of course, says James Clement.

It’s a busy time for re-invention. From car companies and oil refiners wondering about life after 2040, to our nuclear industry scratching its head about Brexit and withdrawal from Euratom in 2019, life is changing fast and in unimagined way.

Less headline-grabbing, but just as significant, is what’s going on with the water industry. The stalwarts of the utility sector are under irresistible pressure to change. By 2030, they could be substantially different to now. But what direction are they heading in – environmental guardian, energy company, wholesaler, retailer? What they turn into will ultimately define the relationship with their customers. Change takes time, and so up and down the country in water company boardrooms bets are being made on what the future holds and what direction to take the company in. In a sector where you may have combined operations that manage wholesale water, wastewater and retail operations, the fundamental question is: “Should water companies just be wholesalers and leave the rest to others?”

For outsiders looking in, this has the makings of a mid-life identity crisis for the water industry. It is very hard to formulate a concrete strategy that deals with uncertainty and there’s a lot of that about right now. Central government is distracted by Brexit, and what direction and leadership it is able to provide for the next couple of years is open to debate. Potential future regulatory changes from Ofwat are similarly uncertain. Some expect AMP7 (2020-25) to deliver retail separation and consequently some water companies are already organised for separation, whereas others are thinking the government will have its hands full and this idea will be pushed into the long grass.

There is no escaping the macro economic environment either. Everyone is having to do more with less because of the limits on economic growth. Money is going to be tighter for both investment within water companies and coming in from customers as Brexit impacts on the wider economy (despite what the politicians may promise us). We also need to have much more resilient assets, the pipes and sites need to cope better and recover faster from more severe weather and more storms. It is Mother Nature’s exquisitely timed echo to the man-made uncertainties we have created for ourselves. There’s a simple message here: circumstances are difficult and will remain so. The core service provision will have to remain but under sharply different economic and social conditions. Not just an economic matter, but also social and environmental. As well as less money, we will also have to use less energy and chemicals and use them better.

It is worth considering what effect this is having on investors in the sector. Last year, Australia’s Sovereign Wealth Fund sold its stake in Southern Water to Hermes, and Macquarie divested its 26 per cent stake in Thames Water to Borealis. More recently, Prudential sold its 10 per cent stake in Yorkshire Water with fellow shareholders Corsair Capital and Deutsche Bank (together 50 per cent owners) rumoured to be following suit.

There is an existential question here. Does it make sense to have so many water companies? In the current climate it makes more sense to rationalise and have something like ten water and wastewater companies operating nationally. Interestingly, the economics of how to value a water company remain in their favour. As companies build new infrastructure it is valued as an asset. The returns will still be there. More people will need more water. More houses will need more connections to the grid and so on.

What will remain true in 2030 and beyond is the extent to which water companies particularly are embedded within the local community. Traditionally UK water suppliers have had a good relationship with their customers, playing an active part in communities, charities and the local environment. It is the source of life after all. In Britain our water companies are viewed as world class, with Veolia and Severn Trent two contenders to be the very best globally. If we are to be (some would argue “remain”) the envy of the world in terms of water management we have some lessons to take on board. By 2030 there will be nowhere to hide in terms of efficiency and effectiveness. Our water companies need to be lean, innovative, open minded and have a customer-back focus, treating water as a precious resource and educating consumers on water preservation.

In a nutshell, water companies need to be change-able, because you just don’t know what’s coming around the corner. Our vision of what the end of AMP8 in 2030 might be now will have changed in five years’ time and again in the five years after that. Strategy, like the water that courses through the network, needs to be fluid. This sort of continuous transformation mindset is difficult to grasp for an industry that buries things in the ground for 100 years, but it can be done.

Utility companies have learned about lean process improvement. They have adopted change practitioners. They now have to adapt these learnings to the core and not just the periphery. The biggest character trait of our water company of 2030 will be its ability to constantly evolve, making change as regular as the seasons.