Water companies - public ownership or public interest?

Photo credit: JMundy/Shutterstock

After yet another bruising week for the water industry, future ownership and governance of water and sewerage companies remains high up the agenda. What are the options? What would rebuild trust? What might political parties advocate at a general election, asks Alastair Chisholm

In a scathing House of Commons Environment, Food and Rural Affairs (EFRA) Committee hearing this week, common themes were that the water industry financial engineering that the has so appalled observers and the public and brought the sector into such disrepute occurred largely prior to 2017; that the performance failures which are at least partly down to a corporate culture of profit over investment are only really playing out now, and that the solutions are both expensive and long-term.

The changes to Ofwat’s focus and powers in recent years and the evidence by Thames Water’s co-interim CEO (who had in a prior life been Ofwat’s CEO) served only to shine a light on the regulator’s lack of attention to the implications of investor behaviour at a time when the pressures on water networks and the environment were ramping up and needed watchful management and high levels of corporate responsibility.

References to the zeitgeist, policy, and powers of the regulator at the time, how those have now changed, the conduct of Thames and its since-fabled “turnaround” show how keen both are to draw a line under the sins of the past and be forward-facing. But they can’t. Because the legacy is playing out now. And the answers are neither easy or cheap.

Environment Agency and Ofwat investigations into performance of thousands of sewage treatment plants and declarations by companies of compliance with legal duties on effectiveness of sewer systems are ongoing and yet another potential scandal set to shake the industry. Allied to government’s announcement that it is removing the penalties cap for permit non-compliance, these present ongoing jeopardy for poorly performing water companies.

As if to cast this shameful mess into starker focus, the Environment Agency published its latest environmental performance report for water and sewerage companies, for 2022. An opening “the performance of many of the 9 water and sewerage companies for 2022 is very disappointing” by Chair Alan Lovell set the tone. More pollution events than previously. The best performers “at the top of a very poor league” and a call for “profound, long-term change across the sector”.

Ownership

Ownership of our water companies is central to the debate because it’s been central to the loss of trust in them and a factor in their poor performance. It’s an issue of principle as much as practicality for many.

With water an essential public good, sewage pollution, leakage and other challenges have become so charged in large part because of the association with owners indebting companies and paying excessive dividends rather than reinvesting in the infrastructure to improve creaking assets. Pollution being the societal side-effect of shareholder profit.

As a general election creeps closer, public opinion is still heavily behind water renationalisation. Someone needs to present a palatable pitch on a future combination of ownership model, governance and regulation that feels like that “profound change”. Especially when none of the political parties appear to want to move away from privatised water and move back to public ownership.

And it’s not just public opinion. What’s striking is the proportion of people working in the water sector, once either comfortable with water privatisation or outward advocates, who now express a different view. Privately of course, because there remains a reluctance to express such views publicly whether because of fear on the part of water company employees or an unwillingness to bite the hand that feeds them on the part of those in the supply chain.

“It just doesn’t sit comfortably” is the common expression on privatisation by people motivated to work in the water space for the public good, who feel tarnished by events of the past few years and public reactions to them. Also, from those now retired or otherwise out of water companies, who worked pre- and post-privatisation, saw the initial surge in investment but then the impact of offshore private equity.

Where next?

So what are the options? Bear in mind that one person’s profound change might be another’s set of sticking plasters. There could be quite broad variations on any of these models.

Privatisation with stronger public interest and transparency

Despite sewage pollution being targeted by opposition parties in particular as an election issue, there’s apparently no appetite to move beyond a privatised water industry. But there is appetite to shake things up. Whilst Labour have championed a plan to ‘clean up’ sewage pollution by 2030 in the form of a Bill presented to Parliament in the spring, they’ve yet to reveal their model for future structure and governance of water beyond trailing a shake-up of regulators.

The Lib Dems have instead targeted water companies themselves, proposing a Bill that would put water companies onto a similar footing as US-style public benefit corporations with board-level representation of local environmental groups, requirements for greater transparency.

This kind of approach, allied to beefed-up regulatory capacity, is the form horse. Labour seem to be thinking a similar way and an email by Severn Trent Water boss Liv Garfield to other CEOs was published recently urging them to head-off the spectre of renationalisation by pitching a formal approach to social purpose to the Opposition. Anglian Water changed its articles of association a few years back to be purpose-led, supporting development of a Publicly Available Standard for purpose-driven organisations.

Not for profit – the Welsh Water model

When water privatisation occurred in 1989, Welsh Water was created, after a period of time diversified into energy and renamed Hyder, but then ran into financial difficulties in the late 1990s and was put up for sale. Rather than being bought by other private equity owners it was instead acquired by Glas Cymru – a company limited by guarantee set up for the purpose.

Despite the acquisition being financed through debt, as a not-for-profit organisation Glas Cymru has no shareholders and pays no dividends. It is run solely for the benefit of its customers with wide-ranging stakeholder input into its governance. Like privatised companies it raises its capital for investment on private money markets, however profits are reinvested in Dwr Cymru’s (Welsh Water’s) assets and infrastructure.

Whilst Dwr Cymru very much has its share of storm overflows sewage pollution, mains leakage and other challenges, it is well-regarded and trusted by its customers.

Anecdotally, it’s the ownership model that practitioners in the water sector point to as balancing safe distance from politics and the risks of competing with other areas of government spending incumbent in a nationalised approach, with public interest.

What’s likely to hold things back from a widespread move to such a model is navigating any transition from private equity ownership to not-for-profit. As with renationalisation, there are fears the costs to the taxpayer to so fundamentally change things may be excessive when added to those of infrastructure investment needed to improve performance too.

Public ownership

Water is a critical public good. More than any other utility, water is the one we most immediately rely on for public health and the impacts of the industry are so intrinsically linked with the health of the water environment there is clear public interest here too. So it’s understandable that this is how the public feel water should be owned and managed.

Plenty have pointed to the benefits of renationalisation. Arguments have been made that considerable savings could be made on debt interest payments – which could be reinvested into infrastructure upgrades – under public ownership. Also that privatised water companies are “environmentally insolvent” – simply unable to raise the quantum of private finance necessary to operate and do their bit to recover the water environment.

But the fears around public ownership in England (Scottish Water is already in public ownership) are predicated on a lack of appetite to go through the turmoil of taking them back from private ownership. Also, a fear of where water investment would sit in the pecking order against health, policing, education, decarbonisation and all manner of other demands on the public purse.

With Kier Starmer doubling-down on economic competence and sustainable job-creation rather than “hope and change” and allegedly hitting out at “tree huggers”, if there’s growing doubt over how heavily a Labour government might invest in tackling climate change there’s surely even more regarding water recovery.

And Lord Goldsmith’s recent resignation citing the Prime Minister’s intransigence on climate action suggests perhaps the best outcomes might come from better-regulated private or not-for-profit models than public ownership.

Outcomes – resilience and recovery

However things play out, there are some fundamentals which must be ensured. Water companies must in some way be constituted to formally deliver in the public interest, with this foremost in their considerations on planning and investment. It should also reflect in their company culture.

In the EFRA Committee session, Thames’ Cathryn Ross spoke of a historic culture in the company where “bad news travelled upwards too slowly” and “people were afraid to say how things really were on the ground”. Of the operator self-monitoring approach to pollution reporting, campaigner Ash Smith recently observed “you can imagine how popular an employee would be for raising a pollution incident that might then attract a multi-million pound fine”.

Whilst many water companies will distance themselves from such behaviours, they must become a thing of the past. Trust will need to be earned. That can only come from open-book transparency, significant improvements in performance and clear commitments to be held to account alongside increased regulatory capacity to enable this to happen.

All of this must drive the right outcomes for water customers and the environment – more climate resilient supplies and healthier waters. The right outcomes doesn’t necessarily mean the fastest pace to reach a target however.

There is a world in which an outcomes-based approach – maximising the use of natural processes and wider benefits rather than single-outcome, carbon-hungry concrete – might need a little more time and regulatory flexibility to deliver. That will need more trust; any flexibility earned through improved performance.

The water rollercoaster of change undoubtedly has more twists and turns to ride. Irrespective of ownership, we can end up somewhere better.

Alastair Chisholm is CIWEM’s Director of Policy