A government-commissioned review of the UK’s privatised water industry – which recommends the abolition of the existing regulator Ofwat – has been welcomed by a trade body representing major global infrastructure investors.
The Global Infrastructure Investor Association (GIIA) welcomed Sir Jon Cunliffe’s report, for its “clear-eyed diagnosis of the sector’s root problems”, but other experts have pointed out its potential limitations.
UK environment secretary Steve Reed – who commissioned the report in response to public anger about the water industry – announced immediate steps to adopt key recommendations, including replacing Ofwat and committing to a record £104bn (€120bn) investment to rapidly reduce sewage pollution.
The report promises a comprehensive overhaul with 88 recommendations and highlights systemic failures across regulation, infrastructure, company governance and environmental protection.
Most importantly, the government has answered critics of a fragmented and confused regulatory system. As well as the abolition of Ofwat, Reed announced the consolidation of four separate regulatory bodies into a single integrated regulator for England. He also welcomed the report’s proposal for eight new regional water authorities which will be empowered to deliver local priorities and streamline planning, allowing investment in infrastructure such as reservoirs to be more responsive to regional needs.
The GIIA threw its weight behind the review, in particular because it crucially “recognises that maintaining the UK water sector’s investability is essential” and showed that the recent failures in the water industry were not simply down to private ownership.
“The commission has rightly dispelled the myth that ownership model alone determines company performance, as the evidence simply does not support that claim,” GIIA stated. “Investors are ready to play their part in delivering the long-term capital the UK’s water sector urgently needs. This depends on the right policy and regulatory environment being put in place.”
GIIA’s CEO Jon Phillips added that the report “rightly recognises that restoring investor confidence is essential if we’re to unlock the £100bn needed for the UK’s water sector over the next five years.” He hopes the new regulatory arrangements “will provide a joined-up, long-term framework so the sector can get on with delivering the improvements needed for customers and the environment”.
Renationalisation no longer on the cards?
However, several significant recommendations have not been immediately implemented. Water minister Emma Hardy stated full government policy will not be revealed until a white paper is published in October, leaving it unclear which detailed steps, such as mandatory water metering or asset resilience standards, will be taken.
On the issue of Water’s ‘social licence’ there was some reform. Reed’s response accepted recommendations for more robust oversight of company ownership and governance, with increased intervention powers and tighter controls to ensure water companies act in the public interest, and the creation of an Ombudsman for Water and the introduction of a consistent national social tariff for vulnerable or low-income customers.
The report did not consider – and the government explicitly ruled out – renationalisation of the water industry, despite pressure from some politicians and campaigners. And while the report – and some MPs – urged crackdowns on water company tax practices and called for more financial transparency, there is no commitment yet for new legislation or investigations on these issues.
This has left many critics unsatisfied. Professor Nicholas Ind of Kristiania University, who has long studied the UK’s water sector, welcomed the measures the government implemented but observed the route it was taking was “still based on stakeholder theory”.
He said: “It assumes that the sometimes-divergent interests of stakeholders can be managed without investors being given too much precedence – this is particularly important in an industry that is designed to deliver the public good… without the will to consider properly the needs of all stakeholders and to take a sufficiently long-term perspective, stakeholderism doesn’t function.”
A well-implemented, rapid and transparent transition might improve the water industry’s reputation, Ind said. “The more dramatic [alternative] to another attempt at making the industry model work would be renationalisation. For now, the government has not taken that path, but if Cunliffe’s recommendations don’t deliver, that might still be a future option.”
Tim Whittaker, director of the EDHEC Infrastructure & Private Assets Research Institute, which has previously been critical of the UK’s water regulator, said the report had “done a good job at highlighting the shortcomings in the water industry and regulation” and is a “good start”. But, he added: “It isn’t clear if this is going to be the ‘magic bullet’ that will result in the water industry being fixed. There remain a series of key questions that investors will need to be sorted in the coming months.”
The first of these is what comes after Ofwat? Whittaker said: “Will the new regulator just be Ofwat with more responsibilities, or will they take a fresh approach to regulation? For example, will they reconsider the past approaches regarding setting allowed returns?”
Furthermore, investors would need clarity on how the minimum capital requirements would be implemented. He said: “Will they be just another dividend ban like the existing rules? How would this requirement stop the slow demise of another water company as had happened to Thames [Water]?” Above all else, Whittaker said: “How will the new regulator work to ensure the sector is still investable whilst also ensuring the bills are affordable?”
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