Dead in the water

The water industry’s public service ethos is under threat. And that, argues Barrie Clarke of Undercurrent, may not be good news for people or businesses

What makes a water company legitimate in the eyes of customers and stakeholders? Such a question may not have worried you much during the summer (or ever). Yet it is firmly on the policy agenda. If the Government gets the wrong answers and uses them to drive deep change in the wrong direction, trust could be lost forever. Now is the time – at this month’s party conferences, and ahead of a Water White Paper at the end of the year – to stand up for a truly legitimate water industry.

Water companies in England and Wales operate under licences, also known as Instruments of Appointment, made by (or for) government in the Water Industry Act 1991. They are thus ‘statutory’ undertakers with responsibilities over and above general business law. But this is no answer to a question about ‘licence to operate’ in the sense we mean it. To get closer, we need to see why the matter has come to the fore recently. For that, we have to thank those charged with thinking about such things, Ofwat and its chief executive, Regina Finn.

It is no exaggeration to say that Ms Finn has had a transformative influence on Ofwat and the industry. Naturally, there are contrasting opinions of the value of that influence. But no one should doubt the risk of complacency in a privatised industry now mature and widely thought successful. Whether in her focus on business-as-usual, not just price reviews, her willingness to share unfinished thinking, or her honesty about the burden of regulation, Ms Finn has been a breath of fresh air. And so with “legitimacy”, a question mark over the industry that in the past year seems seldom to have been far from her thoughts or lips. In raising the matter of trust, Ms Finn is again opening a vital debate. For it truly IS the question the crowds are asking now – about all businesses, but especially those that provide an essential service with a monopoly franchise.

With this context, let us return to the question of what creates legitimacy for water companies in 2011. First, we can include factors relevant to all public businesses: performance and governance. Above all society demands reliability in everything from security of supply to billing and pollution control (and prompt action if things go wrong). A high level of transparency and accountability is also non-negotiable for the modern water company.

Second, two more specific demands: value for money and the expectation that the company help keep charges affordable. Third, community involvement. The fact that we all rely on a shared network means that no service is more local than water and sewerage, no providers more dependent than water companies on the goodwill of communities.

Supporting and taking part in community life is vital for legitimacy. Add all these together and what have you got? Only one strategy is sure to win trust in a modern universal business like water supply and sewerage: a public service ethos powered by private sector efficiency. It is an inspiring ideal but we know it works: of all the 1980s privatisations “the water industry is arguably the most successful” (1). Sadly, however (and ironically given my comments above) the ideal could soon be dead.

Ofwat sees, rightly, that legitimacy requires more customer engagement and a tougher challenge to company plans (2), but is driving companies down a road that can only reduce trust and dilute legitimacy. It is the road to market competition and although it is paved with good intentions it is sure to be disappointed.

I have no space, or need, to revisit the pros and cons of extending customer choice by breaking up companies. A public service ethos cannot, by definition, survive in a traditional free market. The reason is the dirty little secret of all consumer markets that is not really a secret at all: they are built on adversarial relationships – and I am not talking about relationships between retailers, or between buyers and suppliers. The ones I mean are between retailers and customers. For all the high-sounding principle and patter, we know that even the most responsible and trusted of retailers play on our weaknesses and hopes and vanities. In fact, when you think about it, through the rule of caveat emptor, this secret is close to what we actually mean by “business” in traditional markets and has led to the creation of a separate consumer protection industry.

To be clear, I am not attacking competitive retail markets; having worked in the food business, no one is more convinced of the benefits of supermarkets to civilisation – just ask my children, who still remember being hauled off to view the latest ‘flagship’ Tesco or Sainsbury’s. But I do see the water service as quite different from fast-moving consumer goods.

And I do worry about those weaknesses and hopes and vanities. Will civilisation really gain if people and businesses have to constantly watch their backs over something as basic and social as public water supply? Reflect on the state of today’s retail energy market, and you too may wonder if a truly legitimate water industry can survive the primrose path to market so earnestly promoted by Ofwat.

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