Water companies defend their legitimacy

Water companies have been forced to defend their legitimacy, so what do they say? Katey Pigden reports.

Nagging doubts about the legitimacy of private utilities delivering public services have reached feverish levels. And water companies, which had largely managed to avoid the damaging effects of the trust deficit which has gnawed at the energy sector in recent years, now find themselves at the centre of the ferment.

Defending their existence and purpose, the companies of course argue that privatisation has delivered huge benefits to customers and society. Water UK insists that productivity in the sector has seen a 64 per cent improvement since 1994, having grown annually by an average of 2.1 per cent, and company leaders point to measurable improvements in water quality, infrastructure efficiency and environmental care since privatisation.

But such defences are being drowned out by Labour calls for renationalisation and wider attacks on the complex financial arrangements many water companies have established, which critics claim lack transparency and justify a public sense of mistrust in the institutions providing their essential services.

Labour insists that its plan for renationalising water – by creating nine new public bodies to run the water and sewerage system in England – would reduce average household bills by up to £100 per year at the same time as restoring trust.

Battle lines

With the Opposition currently riding high in the polls, the scope for this promise to become a reality is very real, and a poll conducted by thinktank the Legatum Institute and Populus following this year’s snap General Election suggests the party may be right. The survey found that 83 per cent of respondents back the renationalisation of water.

And as the battle lines against privatised water seemingly mass, the regulator has not rallied to the sector’s side. Instead, Ofwat has struck an overtly combative stance, squarely siding with interests and concerns of the consumers it is bound to protect, and firing some scorching criticism at companies for failures in transparency, efficiency and – ultimately – legitimacy.

The regulator’s chairman Jonson Cox has led the charge. At Utility Week Congress in October he argued that failures made by big water firms had “tarred” the whole sector, and insisted companies must avoid just talking about how good they have been in the past. “Customers don’t give a damn about that,” he said. “That’s what they expect.” Instead, he suggested companies should think carefully about the impression they project to the public due to their “highly complex, offshore capital structures”.

Attacks like this have not gone unheeded by the water sector. And instead of remaining staunchly defensive, some have made moves to adapt to the clearly changing expectations of the world around them. Yorkshire Water and Thames Water, for instance, have both announced their intentions to close their financial arrangements in the Cayman Islands with Yorkshire promising further action to reduce borrowing and enhance its financial simplicity. Meanwhile, Thames timed the announcement of its intention to close its Cayman Islands set up to go hand in hand with the revelation that ex-SSE CEO Ian Marchant will become its new chairman in 2018. The utilities veteran has been charged with leading a wide-ranging review of the company’s corporate structure.

But are such actions too little too late? As water companies scramble to polish their tarnished legitimacy in the eyes of politicians, the regulator and the public, Utility Week asks some of the sector’s most prominent leaders to explain exactly why privatisation is good for customers:

Chris Loughlin, chief executive, Pennon Group

“We’re proud of what South West Water has achieved and the facts speak for themselves. At the end of the 1980s the government of the day recognised that it could not fund the investment required to meet the new environmental standards. The answer was the privatisation of regional water companies, who were then able to raise money from shareholders and banks to spend on redressing decades of neglect and underinvestment in the networks. The result has been a transformation in service standards. In the South West alone, we have invested £7 billion in new and improved infrastructure, innovative new technologies and better ways of working. This includes a much-needed clean-up of the region’s coastal waters without which, our local ecosystem and economy would undoubtedly have suffered. Today, the visitor economy of Cornwall alone is worth £2.8 billion and supports 55,000 jobs.

“Since privatisation, customer satisfaction with South West Water has steadily risen to record levels, drinking water quality is excellent and leakage has reduced by 40 per cent. The average bill is less than it was 10 years ago and will rise below inflation to the end of the decade while we spend a further £1 billion on delivering a business plan shaped by customers. And it doesn’t stop there, we estimate a further £6-9 billion of investment is needed by 2050.

“Would this have been delivered if the water industry had remained in government hands? How would we have fared competing directly with other vital services such as health and education whilst we also struggle with rising national debt?

“We must never be complacent. There is always more to do. We must tackle the challenges of population growth and climate change, we must support the growth of our great region and we must continue to invest in the infrastructure of the future.”

Liv Garfield, chief executive, Severn Trent

“Since privatisation, we’ve seen £150 billion invested by the industry to produce a 70 per cent improvement in bathing water complying with standards, serious pollution incidents have fallen by 86 per cent, leakage has reduced by 35 per cent and water quality meets rigorous standards 99.96 per cent of the time.

“Yes, this has come at a cost, and the average bill has risen by 40 per cent since 1989, but most of that came before 1995 with a rise of only 9 per cent in real terms since 1995, equating to around £30 on an annual bill.

“However, since assertive action by Ofwat, between 2009-10 and 2014-15, the price of the average household bill in England and Wales fell by 2.6 per cent and Ofwat also determined that average bills should fall by 5 per cent in real terms between 2014-15 and 2019-20.

“That means that, today, the cost of water and sewerage for an average household is just £1.08 a day. By comparison an average household spends £3 a day on gas and electricity.

“Yes, this industry has faults and we need to work with government, Ofwat and the Environment Agency to address them but we also need to ask if this industry delivering good standards for consumers at an affordable price? And, in the main, yes, we are.

“I’d just ask everyone to consider whether the costly nationalisation of an industry that has delivered improvements and is reducing costs to consumers the right thing to do right now.”

Steve Mogford, chief executive, United Utilities

“It won’t surprise anyone that we do not think Labour’s re-nationalisation plans for the water sector would benefit customers or deliver them better value, quality or service.

“Interestingly, since the calls for nationalisation, there has been little criticism in terms of water quality, customer service, environmental improvements or value for money. In these areas there have been vast improvements since privatisation. No longer are we described as the ‘Dirty Man’ of Europe. Drinking water quality is now at 99.96 per cent, the condition of rivers and bathing waters has improved dramatically and customer satisfaction with water and sewerage services is over 90 per cent. This has only been made possible by the huge investment in infrastructure across the sector: some £130 billion since privatisation and none of it paid for from the public purse. In real terms, bills are similar to where they were 20 years ago and are falling.

“Where there has been criticism, it relates to certain behaviours, governance and transparency. Where companies are falling short in these areas they must step up their efforts of their own accord or otherwise expect to receive regulatory sanctions. Some companies are already recognising this and that is a positive move for the perception of our industry. Regulation is evolving and must ensure water companies are even more incentivised to deliver continuing improvements and value for customers while at the same time penalising those that fail in this regard.

“Nationalisation is not the answer and would come at a huge cost to the tax payer when there are so many other pressing calls for investment.”

Liz Barber, group director of finance, regulation and market, Yorkshire Water

“The bar for legitimacy in the water sector is probably higher than anywhere else, but it would appear in a changing world, the sector is not meeting that bar or keeping up. Fundamentally, if you stand back and look at what’s happening you have private franchises providing two essential services, which the public has no choice about.

“It’s a complex mix of voluntary public and private sector and the water industry needs to be good and seen to be good at all of them for legitimacy. There is a public sector feel with some aspects of the sector, especially around big topics such as vulnerable customers and social cohesion.

“Then the private sector element should be known as truly customer centric. But the rhetoric around offshore finances often means the industry is not being celebrated for it. Ofwat’s push around customers and service is absolutely the right thing to do. At Yorkshire Water, we have been doing an enormous amount of work to be mindful of how water impacts customers’ lives.

“Many customers have an aspect of vulnerability and we want to make sure we provide a more thoughtful service for all our customers. To do this, we need to be accessible as a company.

“Some of the arguments in the debate about nationalisation may be hard to hear but it’s important the sector does hear them. The industry needs to be fair and transparent with how we report performance, but it doesn’t just mean financial performance. We also need to focus on customers, supply interruptions and other measures to make it is a meaningful and comparable performance. We should emulate a competitive market.

“We need to do some soul searching as an industry and ask ourselves if we are being really transparent. I think the legitimacy challenge has come at the right time for the sector as we’re currently not doing a good enough job of explaining what we do. The whole sector needs to rise to the challenge.”