It seemed somehow appropriate that environment secretary Michael Gove should be the man to give water company executives some blunt PR advice last week.
The consummate political survivor, who deftly transformed his own image from Boris betrayer to environmental crusader, knows all about reinventing public perception. And he warned delegates at Water UK’s 18th annual City Conference that their time for a serious rebrand had now arrived. “Change,” he announced, “has to come.”
“… Public concern about the way the water industry operates is growing – and I understand why.”
His stark assessment was far more than free marketing advice, more a government edict for water firms to swiftly clean up their act across the piece, but particularly regarding offshore finance, leveraging, dividends and executive pay. Greater transparency, leaks, flooding, drought and the environment were all listed too, with consumers now watching utilities on several fronts more than at any time before.
“Because you make your money from a captive market, you need to show that you’re playing fair. You may be private companies but you have a responsibility to the public who cannot take their custom elsewhere. But instead,” he asked, “what do the public see? An industry slow to stop leaks, slow to repair them, slow to stop pollution and slow to say sorry.”
He continued: “My priority as we gear up for PR19, is to support Ofwat – and the Environment Agency – in ensuring that water companies are now and in the future working as diligently on behalf of consumers and the natural world as they are for their owners.”
Whilst acknowledging some had made strides in tackling the issues, Gove’s comments will have still been difficult makeover advice for many in his subdued audience to hear. Not that they hadn’t been expecting it. An opening salvo, back in January, talked of cracking down on water companies’ “excessive profits”, high gearing and the use by some of “opaque financial structures based in tax havens”.
Yet last week the rhetoric rose to a new level.
Gove not only reaffirmed his new year message far more forcefully, but this time in person, from the podium at the water industry’s own flagship event.
As one sector observer pointed out to Utility Week afterwards, the significance of the high-level cameo appearance was unmistakable. “It’s very unusual for a Secretary of State to attend this – a minister perhaps – but not a cabinet minister. That’s pretty serious.”
Indeed, Gove fully grasped his chance to tell as many chief executives and industry players as he could find in one place that the time for “excuse-mongering”, as he saw it, was now over.
And any hopes of them citing the past positives of privatisation as public relations quick-wins were soon dashed. Although acknowledging private companies had done much work for the public good and brought significant benefits to the environment and consumers, the secretary of state said it was “crucial” progress did not stall.
Capital-intensive
Their capital-intensive work, he accepted, involved heavily decentralised infrastructure and significant sunk costs. And he agreed that when 1980s reform was needed it was to private companies that the government and the country had turned to spend money on decaying pipes, sewers, reservoirs, corroded water mains, interrupted supplies and water quality.
Since privatisation, around £140 billion overall has been invested in infrastructure, leakage levels are down by around a third, and two-thirds of beaches are classed as excellent – up from one-third pre-privatisation.
Yet, he added: “…Whilst accepting undoubted gains, efficiencies and investment since privatisation, the system is not working as well as it should. Far too often there is evidence that water companies, your water companies, have not always been acting sufficiently in the public interest.”
The last decade, he said, had also shown some were not being as transparent as they should. “They’ve shielded themselves from scrutiny, hid behind complex financial structures, avoided paying taxes, rewarded the already well off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist for far too long.
“And when there has been an acknowledgement that change is required… far too often there’s been prevarication and procrastination, ducking and diving and dragging of feet. Change, having been promised in many cases, hasn’t happened or hasn’t happened quickly enough.”
Multi-layered corporate structures of “dizzying complexity” and involving multiple subsidiaries, some based offshore, had only added to the image problems of some, and the sector as a whole, he added, with customers having an absolute right to question their use. “Customers are justified in wondering why water companies have also proved slow to clean up their financial act,” he added.
Generous dividends
Referencing late media tycoon Lord Thomson’s comments that ITV franchises when advertising monopolies “were a licence to print money”, he said of the £18.1 billion paid out to shareholders of the nine large English regional water and sewage companies between 2007 and 2016: “Whatever advantages an ITV franchise holder once had in the 60s and 70s, they would have looked with envy at the commercial position at the owners of water companies.”
Generous dividends can be justified he said, if they’ve been guaranteed by the lean and efficient running of an operation – and have been paid out after appropriate capital investment – but this figure represented 95 per cent of the £18.8 billion profit over the same period.
Turning his attention to corporation tax, he highlighted how some water companies had been able to minimise theirs – “… even as many as those who fail to minimise leaks and pollution” – because “some of their best brains appear to be as intent on financial engineering as they are real engineering”.
The environment secretary’s words seemed to have the desired effect, especially following, as they did, an unequivocal keynote address from Ofwat chair Jonson Cox.
Railing, in particular, against his seemingly least favourite acronym, HLCs (highly-leveraged companies), Cox had called for various moves to help fix an industry facing a “crisis of confidence”, including better corporate governance, appropriate dividend payouts and bills reductions in keeping with cash to investors. The clock really was now ticking he warned for sector change, to come ideally from water companies working with the regulator.
His contribution was never going to be a mere warm-up act. No-one expected it to be – rather regulatory grist to the mill for Gove’s political blast that followed. Whilst temperatures in the frosty capital continued to plummet outside, it felt almost as chilly indoors.
One stage of Gove’s speech had promised to hot things up when he began itemising some executives’ salaries – one of which he said was five-times that of the prime minister’s. ‘You must realise that in the public eye you are very handsomely remunerated,” he said.
“At least, one might hope, companies making such massive profits, paying such big dividends and supporting such generous executive salaries would be big contributors to the Exchequer through their tax bill. Well some are, and others not. Very much, not.”
But the crackle of electricity this had sparked around the room was quickly gone – very much like Gove himself, who didn’t stop for lunch.
Public support
What happens next will be key if the sector is to prove it has listened to both Gove and the regulator. No-one Utility Week spoke to afterwards seemed to have taken the governmental shot across their bows lightly.
Many agreed, just as with privatisation in the 80s, another key moment in the history of their industry had just arrived. And not least with the prospect of renationalisation, as Gove pointed out, gaining “significant public support”.
Raising some of the challenging realities for water companies in achieving consumer buy-in on certain projects, such as inter-generational expenditure, conference chair and chief executive of Southern Water Ian McAulay said gaining absolute support could be difficult – something perhaps for water companies to discuss with the regulator.
He also wondered if there was also a role for government to play in helping the sector, during this new water age, to champion its value to the public in terms of environmental and economic benefits.
During a later panel discussion, Yorkshire Water chief executive Richard Flint called for a proactive takeaway from the conference to help restore consumer confidence. “Meeting and not beating targets is not the place to be, so we shouldn’t be led by regulation we should be led by minimum standards. We should talk openly about seeking to outperform.”
As we move towards a third decade of a privatised sector, it seems companies’ PR messages will need to hold far more water than ever before.