On 1 April it will be 40 years since regional water authorities were formed, bringing together activities previously carried out by central and local government. The vision was to provide catchment-based management of all aspects of water from source to sea, so enabling a holistic approach that would balance competing interests and allow the most cost-effective way of resolving problems within a catchment.
This model was considered to be ground-breaking, but it failed to deliver because of lack of investment. Government could never find the cash needed to improve quality and service against the competing demands of education, social services, transport, etc.
The growing pressure of new EU directives, together with a government wedded to private sector solutions, finally led to a decision that the water authorities should be privatised, minus their regulatory functions.
Privatisation in 1989, although very unpopular at the time, has proved to be very successful at delivering investment – more than £110 billion of investment, facilitated by a stable regulatory regime and resulting in major improvements in quality and service and bills on average £100 per annum less than they would have been in the public sector.
The initial thinking was that there needed to be around ten years of sustained investment to raise standards, after which there would be a lower level of steady investment to improve infrastructure.
In practice, the requirements for higher quality standards and better service, coupled with the mammoth task of fixing existing infrastructure, has meant continuing demands for high levels of investment. Overlay this with the impact of changing weather patterns and we have the prospect of high levels of infrastructure investment for the foreseeable future.
Clearly something has to change – we cannot simply build our way out of these problems. Customers are already feeling the strain of increasing bills and as a result, questions are raised about the legitimacy of the industry. We need to find a different way of meeting these challenges, one that continues to attract investment where it is required but also one that rewards a wider range of solutions.
Returning to a catchment-based approach to managing quantity and quality, in partnership with other stakeholders, has to be a key part of the way forward. The big challenges can no longer be solved without joined-up thinking. Water companies cannot protect their customers from flooding if sewerage systems are overwhelmed by overtopping rivers; environmental betterment cannot be achieved solely by investing in sewage treatment works or storm overflows.
The unprecedented rainfall across many parts of the UK over the recent weeks and the extensive flooding highlights the importance of managing total catchments. No amount of dredging or pumping will provide a complete solution. We need to control flows in the higher reaches of catchments, to promote practices that hold back water rather than accelerating its passage down the catchment.
The new model for the industry must be as a services business that only creates assets when essential to deliver services. It must be one that offers a range of solutions, including collaborative catchment management and incentives to change behaviours so that we achieve the most cost-effective solutions.
We are already seeing a slow, but encouraging, emergence of these changes across a number of areas; financial incentives to farmers to protect water quality for a fraction of the cost of building new treatment assets; incentives for customers to use water wisely so reducing the need to develop new resources; reducing surface water run-off from urban areas by incentivising sustainable drainage options – all welcome developments that will provide more sustainable and cost-effective solutions.
These approaches are less certain than the traditional ones of building more assets and so need to carry an appropriate level of return, but even with a higher level of return, the overall impact will be lower bills for customers. This new model will only succeed if companies are incentivised to develop the higher risk solutions because these will deliver appropriate levels of profit for the risk involved.
So what might the future look like? A customer-focused retail business driving standards that customers want and are willing to pay for. A wholesale business that does not automatically assume the solution is to build new assets, that explores the options of doing things differently through trading or other delivery mechanisms before it considers asset solutions.
Although this model will deliver more cost-effective solutions, the lower levels of certainty will provide a challenge for regulators as the range of solutions becomes more diverse and businesses change the way they operate. Regulators will have to concentrate more on overall outcomes and customer satisfaction rather than detailed measurement of individual components.
It is also important to note that many of these services do not need to be delivered by water companies, so the opportunity for new entrants is enhanced.
The Water Bill gives a strong sense of direction and the new approach from Ofwat encourages companies to set out plans to transform the water business from one that focuses on largely earning a return from building assets to a new dynamic model that focuses on delivering service through imaginative solutions. It is now up to the industry to respond.