Government’s consultation response to the Cave Review published

We’ve been waiting to share our views on the Cave Review final report until the Government gave its official response to the various recommendations. Last week this happened. A range of documents are now available at the Cave Review team’s pages, including the main response to the Review’s recommendations, which weighs in at a hefty 121 pages and is out for public consultation until 18 December.

Predictably the majority of the consultation response addresses competition. We’ve cautioned against seeing competition as a ‘magic bullet’ for the water sector for many years now. The sector has been trying to ‘facilitate’ or ‘promote’ competition (or just find new and sophisticated ways to avoid it, depending on who you talk to!) for well over a decade now. Ultimately whether water sector competition that benefits both customers and the planet will ever emerge from this stimulating but to date fruitless academic and policy debate sadly still remains to be seen.

For the time being the most interesting aspect to us is what’s being called ‘ways to increase innovative capacity’. In fact a fairly brief impact assessment on innovative capacity has been published amongst these latest set of documents.

It’s interesting to note that heavy criticism of Ofwat‘s supposed achievements, which was both implicit and explicit throughout the original Cave Review report, has been quite softened in this assessment. The original report made it clear that ‘the current system of economic regulation’ produced incremental innovation ‘rather than the kind step-change innovation the industry needs to meet the future challenges of climate change and demographic change’. It also recommended an ‘innovation duty’ to underlie Ofwat’s activities, to correct its inherent short-termism in the face of longer term issues like climate change.

In the impact assessment (and the other latest documents) though we are continually reminded that Ofwat works to ‘statutory social and environmental guidance’ that is mindful of the longer term, and that Ofwat has taken the initiative to work with the Technology Strategy Board (TSB) to develop a new Water Innovation Platform for the sector. Even overlooking the fact that the idea for a water platform was mooted in the work Roger and I did for UKWIR back in 2006 (and got a decidedly lukewarm reception from Ofwat as I recall…), does anyone really buy the fact that these activities amount to the same thing as a fundamentally reworked understanding in Ofwat that innovation is an engine of economic and environmental performance growth, and is a motor for lasting performance improvements for the water sector? Besides, on the the water innovation platform topic, it’s quite evident that it’s no closer to becoming a reality than it was a year ago. You can see it’s still in the earliest of stages from a range of recent stakeholder presentations about it (in London on 18 June and Leeds on 15 May… I was invited but saw little point in attending, meeting up with the usual suspects, and getting another polite but ultimately non-committal response to our standard innovation message).

As scholars and practitioners of technological innovation in the water sector we have identified and published about a variety of problems in the models and assumptions underlying Ofwat’s economic regulation. Ofwat’s current approaches simply do not, and some would say cannot accommodate increased innovation intensity or the emergence of more wide-scale, radical innovations. Privately many people have agreed with us about this over the years. The Cave Review and others have highlighted these issues publicly. So why is change still not on the horizon?

So… is there even a glimmer of hope throughout these latest documents and in the innovation impact assessment? Well, it seems the best proposition is to create a national R&D body funded to the tune of £20 million per year (half from customers’ bills; half from shareholders) to initially run for 10 years. Immediately though there are problems here; in common with many cost-benefit analyses of R&D, this £20 million cost (or a £162 million present value over the full decade) has been given no associated monetary benefit. With the UK still in the midst of a recession, with public spending cuts due and other domestic cost rises on the horizon, will this intangible ‘leap of faith’ to throw some money into water sector R&D fly? I have my doubts. (There’s also a very real concern about displacement to worry about, i.e. existing R&D activity could be relabelled to look like the new £20 million, rather than new funds being generated.)

Overall the Cave Review process rumbles on and now with a ‘no monetary benefit’ impact assessment the innovation message seriously runs the risk of being lost beneath lots of exciting technical talk between economists about the trade offs of various complicated, but more tangible costs and benefits associated with the array of competition options that are being considered.

The real issue here of course remains whether the policy and regulatory framework can actually reach a consensus that the traditional assumptions, mindsets and technologies of the sector are not fit for purpose to meet the challenges of the 21st century and beyond. At various events and evidence sessions over the past few years we thought it might have. And yet our 2006 finding of ‘misalignment’ in the views and strategies of the sector is mentioned again and again throughout these latest documents.

For the record, and being as clear as we can, this is what needs to be addressed: If the water industry does not change its visions, strategies and culture; if it keeps installing and operating the same outmoded, unsustainable, energy- and chemical-hungry techniques and processes it has habitually used to date; and if it continues to take such a hands-off approach to balancing water supply and demand issues, then it will remain inefficient and stagnant in financial and environmental terms, and it will continue to be a disempowering, uninspiring and uninviting partner to those inventors and innovators who against all odds continue to try to develop and implement new ideas and systems that could improve the water sector for the benefit of both current and future generations.

Update (16/11/2016): Featured image added from this source.

Duncan Thomas

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