Water management in England and Wales since privatisation: a complex and centralised framework of regulation

“Water management” in England and Wales⁵ describes today (and particularly since the late 1990s) a highly complex as well as centralized system. It “relies entirely on the privatization of assets, integrated river basin management and centralized but shared industry regulation” (Boscheck 2002: 145) involving different types of key stakeholders.

These are the Department for the Environment, Food, and Rural Affairs (DEFRA) for England and the National Assembly for Wales; private water and sewerage companies; a consumer council (CC Water); and different ‘quango-style’ regulators, namely the Office of Water Services (Ofwat), the Drinking Water Inspectorate (DWI) and the Environmental Agency (EA). These institutions and organizations, in an ongoing “regulatory game”, manage water-related issues at the national level (Bakker 2003a: 108).

DEFRA plays a central role in setting standards, drafting legislation, and formulating water policy. Moreover, it appoints the personnel of Ofwat, DWI, and the EA, and has itself a regulation role, although it is less clearly defined than the one of the three regulators dealing with economic, product quality and environmental issues (ibid: 69). The Office of Water Services (Ofwat), the economic regulator, has the primary duty to assure that companies have adequate funding to carry out their core duties; as part of this duty, it sets limits on water prices (‘price caps’) charged to consumers.⁶ Ofwat has the final decision on prices, although the Price Review process carried out every five years involves all other stakeholders. The facilitation of competition within the market and the protection of consumer interests are secondary duties for Ofwat (ibid). The Drinking Water Inspectorate monitors the quality of drinking water, and the Environmental Agency is responsible for water resources, pollution control, fisheries and flood defense. The Consumer Council for Water is a national body representing the position of service users: “Our job is to make sure that the consumers’ collective voice is heard in national water debate and that consumers remain at the heart of the water industry. We will also take up consumers’

complaints if they have tried and failed to resolve issues with their water companies”

(www.ccwater.gov.uk; 5.10.2009).

Finally, the following national and international private Water and Sewerage Companies and Water Only Companies⁷ are part of the national regulatory process around water-related issues.

The present system of water management sketched out briefly is the result of a development that has been characterized by significant changes over the last 35 years. The

5 Northern Ireland and Scotland adopted different systems, infra.

6 The Price Review process for the 2010-2014 period is currently underway and should be finalised by December.

7 Water and Sewerage Companies are the result of the 1989 privatisation by asset-sale of the previous Regional Water Authorities, whilst the Water Only Companies are private companies that have existed since the nineteenth century and have never been in municipal ownership (de la Motte 2005: 10).

municipal system created in the second half of the 19^th century was nationalized in 1974, privatized in 1989 and has been constantly re-regulated since the mid-late 1990s.

Until 1973, water and sewerage works were delivered by a great number of local organizations: 157 water undertakings, 29 River Authorities and 1393 Sanitary Authorities (Hassan 1998: 127). The 1973 Water Act represented the culmination of previous attempts to establish an integrated management of water resources in England and Wales. It replaced the previous system through the creation of 10 Regional Water Authorities, based on river basins (ibid). The result of this huge reform, through which “municipalities lost most of their responsibilities for the water sector” (de la Motte 2005: 24) was a “semi-nationalized” industry. In the beginning of the new system, private water companies, regional land committees and local authorities still played an active role, because the reduction from 1600 to 10 bodies did not proceed overnight. Between 1973 and 1989, however, “the municipal tradition in the water industry was gradually eroded” (Hassan 1998: 155). The 1983 Water Act, for instance, abolished the requirement for local authority members to be nominated to the boards of the Regional Water Authorities (RWA).

Gradually, moreover, the government introduced new performance standards and aimed to reduce costs and to increase efficiency. Its main goal was “to transform the industry from a public service to a business organization ripe for privatization” (ibid: 156).

Company ownership, May 2004

Company % Parent Group Country

Water and Sewerage Companies (10)

Anglian Water 100 Anglian Water UK

Northumbrian Water 25 Suez-Lyonnaise France 75 Northumbrian Services UK

North West Water 100 United Utilities UK

Severn Trent Water 100 Severn Trent UK

Southern Water 80.1 Royal Bank of Scotland UK (Scotland)

19.9 Veolia France

South West Water 100 Pennon Group UK

Thames Water 100 RWE Germany

Welsh Water 100 Glas Cymru* UK (Wales)

Wessex Water 100 YTL Malaysia

Yorkshire Water 100 Kelda UK

Water only Companies (13) Bournemouth and West Hampshire Water

50 Biwater UK

50 Nuon Netherlands

Bristol Water 100 Bristol Water UK

Cambridge Water 100 Cheung Kong

Infrastructure

Hong Kong Cholderton & District Water 100 Cholderton Water UK

Dee Valley 100 Dee Valley UK

Folkestone and Dover 100 Veolia France

Mid Kent Water 100 Swan Group UK

Portsmouth Water 100 South Downs Capital UK South East Water 100 Macquarie Bank Australia South Staffordshire Water 100 South Staffordshire UK Sutton & East Surrey Water 100 East Surrey Holdings UK

Tendring Hundred 100 Veolia France

Three Valleys 100 Veolia France

Company floated on London Stock Exchange; * Company Limited by Guarantee Source: de la Motte 2005: 11

In 1989, the 10 Regional Water Authorities were indeed floated on the stock market. The case of water falls into the third period of privatization (Cliften et al 2003: 49) carried out by the ‘iron lady’. The first period emerged during the first Thatcher government, “partly by chance” (the success of the policy to create a society of ‘home owners’), partly by the political ideology of the minimal state. The second period was one of a “massive

denationalization of public services”, whereas the third one (starting by 1987) was characterized by an extension to “previously untouchable areas such as health and education” – and water. The “most controversial” privatizations (Railtrack, British Energy) were carried out in the fourth and last period. Thereafter, the privatization policy has been continued by the newly elected Labour government and has entered a more contradictory phase (ibid: 50).⁸

The following table presented by Cook (1998) (who relies on an article by David Parker) provides a summary picture of major privatizations carried out between 1977 and 1997.

8 “Most privatisations under Labour have taken the form of PPPs or PFIs (private finance initiatives, a close relation). The intention is to introduce the reputedly superior project management skills of the private sector into transport, defence, the NHS, education, and other public services. By 2003, 564 PFI deals had been agreed with a capital value of £35 billion” (Parker 2006: 388-9).

Date of first sale

Industry

British Petroleum 1977 Oil

National Enterprise Board Investments 1980 Various

British Aerospace 1981 Aerospace

Cable and Wireless 1981 Telecommunications

Amersham International 1982 Scientific Products

National Freight Corporation 1982 Scientific Products

Britoil 1982 Oil

British Rail Hotels 1983 Hotels

Associated British Ports 1983 Ports

British Leyland (Rover) 1984 Automotives

British Telecom 1984 Telecommunications

Enterprise Oil 1984 Oil

Sealink 1984 Sea Transport

British Shipbuilders and Naval Dockyards 1985 Shipbuilding

National Bus Company 1986 Transport

British Gas 1986 Gas

Rolls-Royce 1987 Aero Engines

British Airports Authority 1987 Airports

British Airways 1987 Airline

Royal Ordnance Factories 1987 Armaments

British Steel 1988 Steel

Water 1989 Water

Electricity Distribution 1990 Electricity

Electricity Generation 1991 Electricity

Trust Ports 1992 Ports

Coal Industry 1995 Coal

Railways 1995-7 Railways

British Energy 1996 Nuclear Electricity

This table clearly shows that the privatization of water was part of an overall, massive privatization strategy, which was rooted in the political ideology of the government. At the same time, however, the privatization of the water industry was undertaken without a clear strategy and was contested not only in public,⁹ but also within the government and civil service (Bakker 2003a: 8). The hesitation was partly due to the regulatory framework that would be required in order to deal with the public health and environmental issues related to water. “To a greater degree than any of the industries privatized before it, water lay at

9 Due to a broad public protest movement against the plans to privatise the water industry by the mid-1980s, the government put the initiative off the agenda in order not to threaten the forthcoming elections (1987).

Once it had won the elections, it pursued the privatisation initiative – this time with success.

the frontier of the market – so much so that new regulatory institutions had to be designed and regulatory bodies created (…) in order to enable the market to function” (Bakker 2003b: 372). Another concern stemmed from the size of the required capital investment, which was due to years and decades of under-investment in the water infrastructure,¹⁰ as well as to new environmental directives of the European Union. The government realized by the late 1980s that an investment programme of roughly £24 billion pounds would be needed to raise the quality of water in the UK to European standards (Hassan 1998: 167) – the quality of drinking water and of the natural environment being also an issue that played an increasing role in public debates. As the government did not accept capital expenditures on this scale being financed through the public sector (ibid), privatization finally appeared as a possible strategy.¹¹

By 1989 (Water Act 1989), the Regional Water Authorities were sold by issuing shares on the stock market. Special discounts were offered to the public to ensure the success of the undertaking. The newly created private water-and-sewerage companies became owners of the entire water system and properties of the Regional Water Authorities. They received 25-year concessions for sanitation and water supply (except for the 25% covered by the still-existing small private enterprises, known as water-only companies) and were protected against competition. “It was the simple creation of private monopolies” (Lobina, Hall 2001: 4).¹² Before privatization, the government wrote off the debts of the water companies, worth over £5 billion pounds. Moreover, it provided companies with a ‘green dowry’ of £1,6 billion pounds (ibid: 5). Finally, the first price regime, launched before the creation of the new economic regulator, was also “extremely generous. As a result, the pre-tax profits of the ten sewerage and water companies rose by 147% between 1990/91 to 1997/98 with sewerage and water prices rising respectively by 42% and 36%” (ibid).

The privatization of the water industry was accompanied by the development of a new regulatory framework, of which the main stakeholders (or their successors) were mentioned above.¹³ Initially, the price cap regulation was supposed to take place once every ten years. Moreover, the system was supposed to require little regulation and to increase efficiency through ‘yardsticks’ competition. Following Bakker, however, a process of “regulatory creep” initiated only several years into privatization (Bakker 2003b,

10 “In 1974 about 60,000 km of sewers out of a total network of 200,000 km. And 67,000 km of water mains originated from before the First World War. After decades of neglect the physical assets inherited by the RWAs [Regional Water Authorities] had fallen into a sorry state“ (Hassan 1998: 147). In the North-East these problems were even stronger. In Manchester during the 1970s, for instance, one sixth of the sewers were over 100 years old, two to three miles even predated 1830 (ibid).

11 Until the year 2000, £36 billion pounds have been spent “to tackle a sizable backlog of capital investments built up under public ownership to improve deteriorated infrastructure and environmental conditions in line with EU commitments” (Boschek 2002: 145). The money has come primarily from increased water charges.

12 In July 2002, the Government consulted on proposals to create new opportunities for competition in water supply to large commercial and industrial users. These proposals were included in the Water Act 2003 and came into force on 1 December 2005 for customers that use 50 megalitres or more of water. Private customers, however, still cannot choose their company.

13 Economic regulators were also created for other privatised sectors, for instance telecommunication (Oftel), electricity (Offer), and gas (Ofgas) (Clifton et.al 2003: 50).

2003b), particularly since the newly elected Labour government that aimed to overcome the worst aspects of the privatized water industry. They were, for instance, the poor management by water companies of the Yorkshire drought of the years 1995-96; the concern over ‘water poverty’ and related negative public health effects because of increased charges and water disconnections; high leakage rates; and last, but not least, the huge profits made by private companies, whilst prizes for water continued to increase.¹⁴ Because of these developments, ‘water’ becomes an issue of public concern during the 1990s. Put differently: the privatization of water has politicized the issue, which under the previous system of public water supply (and limited environmental concerns) was hardly an issue of public debate or concern.¹⁵

The newly elected Labour government organized a water summit in May 1997, bringing together the water companies and regulator. It announced a ten-point plan that included, amongst others, mandatory leakage targets; a statutory duty for water companies to conserve water in carrying out their functions; and an announcement that the government would review the water-charging and metering policies (Bakker 2003a: 135). Later that year, it announced the ‘Windfall Tax’ in order to reduce the excessive profits made in the first post-privatization years. In contrast to the “lax regulation” (Parker 2006: 381) of the first years, and partly in reaction to the changed political climate, Ofwat adopted a tougher approach to the industry. In 1999, it announced significant price reductions for the 1999-2004 Prize Review period. It reduced water charges nationally by 12 per cent, which resulted in a “drop in accumulated pre-tax profits for the companies of at least £50 billion”

(Sjölander Holland 2005: 234). As a reaction to this development towards tougher regulation, some companies considered the possibility to separate “the running from the owning of their infrastructures” (Boscheck 2002: 146) or even to convert into non-for-profit organizations (a customer-owned mutual company). This aspect, however, cannot be dealt with in detail here (see for instance Bakker 2003a, b; Boscheck 2002; Lobina, Hall 2001). Instead, I now turn to the specific question of the role of public participation in the domain of water and sewerage management in England and Wales.

14 The case of water represents an exception with regard to other areas. Whereas „[i]n most of the United Kingdom, public utilities prices and tariffs have fallen since privatization (…) domestic charges [in the water and sewerage industry] rose sharply after privatization, by over 40 percent in real terms for average unmeasured water and sewerage bills (less for measured or metered services). The privatized water companies justified these increases in terms of the need to fund investments to modernize water and sewerage systems after years of under-investment in the state sector and to meet the requirements of EU water quality directives. But the scale of the increases may also reflect a lack of competition in water services since privatization“ (Parker 2006: 382-3).

15 Between 1990/1 and 1993/4, by contrast, the number of complaints received by the water companies’

consumer services increased from 4,613 to 14,302 (Hassan 1998: 193).

2. Public participation in form of a national consumer council and