Water has become a political weapon, but yet more regulation is not the answer to attracting the investment we need, says Lord Dominic Johnson
Water Water Everywhere!
It was very clear from the last election that water has been weaponised. Everyone seems to be deeply unhappy – the consumers, the politicians, the regulators, the investors, the companies themselves, even the fish.
Blame for dirty rivers is laid squarely at the door of greedy CEOs and every political party has engaged in an arms race on who can be toughest with the industry.
We have to remember that water companies are highly regulated utilities performing probably the most essential function of any organisation in the world today – providing us with clean water and disposing of our sewage in a fashion that does not harm our environment.
How can something that we have been doing since Roman times be so difficult in a modern economy – what have we done to create a scenario where some companies have clearly been behaving contrary to the needs of society, failing to fix leaking infrastructure or stop pollution even as generous dividends have been paid and debts have increased? Investors are now shy of investing despite guaranteed revenues, and the media speculates on a daily basis regarding the basic survivability of the industry.
A regulated monopoly
Since the product (water) hasn’t changed for millions of years and since technology hasn’t changed much either around treatment and distribution – the only possible explanation for the issues facing the industry must be regulatory. In a regulated monopoly environment where a false market is created by the state – the simple explanation is that either the regulatory structures are incorrect or the people and bodies tasked with carrying out those duties are not doing their jobs properly.
I think it is a mixture of both. We have allowed nearly all of our utility regulators to focus too much on the immediate cost to the consumer and not enough on the long term financial viability of the industry itself and in particular the need to invest for the future.
Ofwat itself is under a statutory duty to “secure that water companies can (in particular through securing reasonable returns on their capital) finance the proper carrying out of their statutory functions”. Evidence is mounting that Ofwat is breaching this duty in a serious way. Investors are concluding the water regulator cares more about levying the maximum number of fines than putting the sector on a financially sustainable footing.
The new water pricing structure process runs to (I am told) 20,000 pages of information. How can this be allowed to happen? Which person thought this was OK? What a waste. It points to the rise of the bureaucratic state where process is more important than outcome – we want clean water and rivers and pipes that don’t leak.
The new water pricing structure process runs to 20,000 pages of information
We need to be brutally honest now about how we are running these vital services and also far more optimistic about what we could do if we did things better – rather than just sought comfort in fines and edicts.
Paper-shuffling and box-ticking
At the core of this reappraisal has to be a focus on investment. How do we garner the investment we need into these companies in order to provide the services to our consumers at the best prices possible into the future? How do we make these companies attractive to investors both domestic and international? And how do we create a climate where innovation and high expectations are part and parcel of the overall regulatory process?
The issue is especially relevant in light of Monday’s International Investment Summit, which was a chance to showcase the UK as a stable and profitable investment universe. The Prime Minister urged the UK’s regulators to focus on supporting the economy and ensure they are not obstructing growth. This is very welcome and must now be followed through.
As a minister in the last government, time and again I found our plans to stimulate economic growth were frustrated by paper-shuffling and box-ticking emanating from the country’s biggest regulators. That’s why we introduced a ‘growth mandate’ into the objectives of the main utility regulators, so that they have to take into account the growth of their sector and the economy at large when making their decisions. If the Prime Minister can make progress on this agenda, it will be to everyone’s benefit.
I am firmly of the view that we need significant regulatory overhaul if we are to avoid the productivity death spiral we seem to now accept as inevitable. It is certainly possible to have great utilities, proper infrastructure and reasonable pricing, along with happy fish – but only if the body politic and regulators themselves are much tougher, not just on underperformance of their underlying firms, but actually on themselves. Instead of obsessing about prices today they should focus on the longer term prosperity of the country and they should be clearly directed by the government to take account of the growth mandate if we want better overall outcomes and a strong investment climate.
Lord Dominic Johnson of Lainston CBE was minister of state in the department for business and trade