Paul Horton wrote for New Civil Engineer on the state of the industry in light of the new political and regulatory settings.
There is a sense of frustration surrounding the Thames Water situation and the state of the England and Wales’ private water sector generally.
Despite the extensive supply chain efforts to bring about change, the resolution hinges on Ofwat’s determination convincing shareholders to invest in improving water sector assets. Although there’s been significant commentary on the matter, the situation is expected to improve with appropriate regulatory and shareholder engagement.
Our Future Water Report Card recently assigned a D score to asset health across the sector, underscoring the industry’s incomplete understanding of asset conditions, hampered by insufficient survey data across all assets. Moreover, the regulatory conflicts between Ofwat and the Environment Agency have contributed significantly to the current problems, resulting in unclear direction and guidance.
Is it right for the government to avoid nationalisation?
The government is reportedly only looking at nationalising Thames Water as a last resort. This is the correct approach because nationalisation is not likely to resolve the core issues or create the necessary changes, it merely shifts the financial burden from water bills to taxation.
The sector was originally privatised due to a prolonged lack of investment. It’s uncertain how much investment would have occurred post-credit crunch and post-COVID in a nationalised industry.
However, the regulatory regime has not adequately protected the environment, with the Environment Agency being consistently overruled by Ofwat and companies being allowed to take on debt and pursue tax avoidance. Political interference has also prevented necessary bill increases, leading to the current investment shortfall.
Notably, Scottish Water and Northern Ireland Water, which have never been privatised, face similar issues, indicating that ownership model changes alone won’t solve the underlying problems.
Potential consequences of asset failure
The immediate concern is the performance of water mains and sewers over the next five years, as these are critical infrastructure components. While the risk of failure at a strategic waterworks like Coppermills is challenging, there is a need for modernisation of the systems.
Despite this, the UK maintains one of the best water qualities globally, with Thames Water reliably providing clean drinking water daily. The sewerage system, however, presents a different set of challenges in terms of condition, the level of surveying and condition based monitoring is far from where it needs to be.
The responsibility for improving water assets primarily lies with the companies themselves, as the asset steward rather than the owner. These assets are public by nature, and water companies are merely transient stewards who will be outlived by the infrastructure. This perspective emphasises the government’s role in ensuring the longevity of water assets, particularly in the face of population growth and climate change. The water sector operates on a compliance-at-minimum-cost model, meaning companies are funded to meet basic compliance.
For substantial improvements, the government must step in, as seen with the Thames Tideway project. Ultimately, significant environmental improvements can only be financed through taxpayer support, either via water bills or taxes. The current regulatory framework often prioritises short-term fixes, whereas managing assets effectively requires 20-30 year planning horizons.
Broader considerations for the private water sector
Future Water’s Report Card has highlighted critical sector challenges and a risk register version is in development.
The water sector excels at achieving minimum compliance at minimum cost to bill payers. Significant improvements in sewage discharge compliance, river water quality, drinking water and leakage have been made but only to the funded levels. Recent climate change impacts and public demands for environmental improvements have outpaced the capabilities of existing infrastructure.
A national conversation is needed about expectations from water companies and willingness to pay. The sector’s response to public concerns about financing, dividends and asset stripping has been poor, eroding trust, which will be difficult to restore under the current structure. A systems thinking approach is crucial for long-term solutions.
Moreover, the failings observed, particularly in Thames Water, are partly due to poor regulation and conflicting objectives between Ofwat and the Environment Agency, which have led to a lack of clear direction.
There is a pressing need to attract more talent to the sector and drive change. The nationalisation versus privatisation debate is a distraction that offers no easy solutions. A national direction, driven by public consultation, is essential to determine what people want from their water services and environment and what they are willing to pay for.
A potential solution could be merging the Environment Agency and Ofwat into a National Water Agency, which would fund and oversee investments needed to implement a National Water Plan, irrespective of the ownership model (private, part-private, or fully nationalised).
The supply chain is a critical component, with companies working hard on projects and innovations. It’s vital to prevent the supply chain from being strained to the point of failure. The prolonged Thames Water issue has not only affected the supply chain but also tarnished the UK’s reputation for water management internationally. This situation has continued for too long due to regulatory and governmental ‘inaction’, highlighting the need for immediate and decisive measures rather than prolonged discussions.
To improve asset performance, a significant investment in innovation, artificial intelligence (AI) and technology is necessary. This mirrors the approach being suggested for the health service and is essential to address the ageing and failing asset scenario. Investing in research, not just innovation, is crucial to developing sustainable, long-term solutions for the water sector.
Now is the time for an honest conversation about the future of the water sector, recognising the need for a systems thinking approach and a long-term vision.