Money down the drain?

It’s been a busy few weeks since my last post about national water policy conference, Future Water 2013. Mere hours later, the Water Bill was introduced to Parliament, making it even more annoying than I’d previously noted that no one was willing to talk about it properly at the actual conference the day before! Never mind. There was at least a flurry of media coverage on 27 June when it came out. The Government presented it as a positive step forward to make the water industry ‘fit for the 21st century’, and Water UK and Ofwat echoed this message. WICS did welcome the Bill but criticised its lack of a way for water companies that turn out to be inefficient to exit the proposed competitive market for non-domestic customers.


The Bill is also significant it that it provides a legal basis for the parallel announcement that a joint Government-ABI agreement has now been reached on the otherwise shortly due to expire ‘statement of principles‘ about flood insurance for at-risk householders. The official Defra press release for the agreement read as follows: ‘Hundreds of thousands of households in flood-prone areas will be guaranteed affordable flood insurance after the government and insurance industry agreed a deal’. The deal creates ‘a new industry-backed levy’ with all ‘UK household insurers’ required ‘to pay into this pool, creating a fund that can be used to pay claims for people in high-risk homes.’ Alongside the new deal, Defra’s ongoing capital investments in flood defences will apparently continue.

Seemingly based largely on its facilitation of an imminent, competitive non-domestic water retail market, the Defra press release arrives at a figure of an overall £2 billion net benefit to the economy by 2030 from the Bill. Interestingly a few weeks later and an Ofwat press release was also claiming a further £2 billion benefit to the economy from water matters, this time accruing from revisions to its own regulatory approach that have now been finalised. (The press release footnotes say this independently generated figure breaks down as ‘an estimated benefit of around £1billion from looking more closely at companies’ retail services – such as billing and customer call centres – to drive better customer service and lower costs’ and ‘also an estimated benefit of up to £1billion from encouraging more efficient water trading’. The press release says ‘Ofwat expects to see substantial efficiencies being delivered in the next five year review’ but does not put a time bracket around the  £2 billion figure.)

With these seemingly positive developments and with billions in ‘benefit’ being bandied about, it was surprising to see also a very critical report come out of Westminster-based independent liberal think tank CentreForum, called, ‘Money Down The Drain‘, with a foreword by no less of a UK water authority figure than former Ofwat DG himself, Sir Ian Byatt.


Water21 wrote a clear press release about the report, pitching it as ‘lambast[ing] water companies for “reckless profiteering”‘ and painting a picture of the UK water industry as ‘consistently placing short-term profit maximization above the interests of consumers and taxpayers’ by engaging in tax avoidance, excessive debt, and – in some cases – refusing to re-invest customers’ money after incurring lower than forecast capital costs because of the recession. The report also calls for ‘disclosure requirements on non-stock market listed water companies, and require public disclosure of all intermediate holding companies and ultimate controlling companies’ to tackle the rather opaque corporate structures that are now common amongst the England and Wales water utilities.

I haven’t yet been able to find any response to this report (there is another good summary news piece about it here though). Last month however we can recall that new Ofwat Chairman Jonson Cox took a similar stance in the press to this report, when he highlighted ‘water utilities … taking out annual dividends of up to 24pc of their regulatory equity’, using ‘shareholder loans to avoid UK taxation’, and accessing debt costs of ‘no more than 1.25pc’ compared to Ofwat’s allowance of ‘a real cost of debt of 3.6pc’ at the 2009 settlement. Cox also stressed that all this has come against the background of ‘hard-pressed customers’ having faced ‘annual bills rise by 13.5pc since 2010-11, while their incomes have fallen’ – and because of customers being on the receiving end of ‘an industry where more than 90pc of the assets are a “natural monopoly”‘.

The force of Cox’s moral high ground has however since been rather muted by press scrutiny of the company he formerly led, Anglian Water, particularly on ‘whether Anglian “abused its dominant position and infringed the Competition Act 1998” in relation to a contract it secured in 2008’, and via the revelation that Anglian paid only ‘a net total of £1.6m in corporation tax on its profits between 2004 and 2010’, during this time ‘a tax credit from the exchequer, while its share price soared and huge dividends were paid out’, and that Cox himself of course got a payout of £9.5m in salary, pensions and bonuses’ when he resigned from Anglian in January 2010.

Overall, all this recent coverage makes for a rather mixed, paradoxical message for your average water customer, I must say. Without a doubt though, the Money Down The Drain report’s main message – that ‘anyone who looks at today’s water industry would find it difficult to come to the conclusion that it is being managed responsibly’ – is very hard to argue against. Its criticisms that aspects of the industry are likewise ‘unsustainable’ and demonstrate ‘very little public accountability’ also ring true. Where we have typically criticised the sector for under-investment in long-term research and innovation, the report has emphasised that post-privatisation (post-2005 in particular) very high profits for water companies … funded out of consumer bills, have not been spent on improving customer service or for investing in infrastructure’. The report convincingly argues these profits ‘have been transferred straight to shareholders who have seen extraordinary returns on their investment’. Surely this was not intended by the original privatisation? And certainly it’s not what the current policy and regulatory climate has in mind, I expect, from what I’ve heard in recent years.

Given the apparent lack of responses to Money Down The Drain it seems hard to tell how much of a difference it will make. My feeling is that we’ll hear more of the ‘£2 billion benefit’ statements in the coming months as the Water Bill progresses through Parliament, and less about the negative side of things.

Duncan Thomas

One comment

  1. Please view my web site for an alternative view of the reasons for flooding. I am just a retired person with a bit of common sense. Please get this site to Ann Macintosh as a lot is in her area.

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