Ending the cycle of absurdity

The review of Ofwat identifies the absurdity of the five-year cycle, says Sam Ibbott of the Environmental Industries Commission, but is anything really likely to change?

It has been an interesting and unpredictable few weeks. We have seen the formerly untouchable Rupert Murdoch ‘in the dock’, the nation’s top two policemen stepping down, and, with bookmakers offering odds of 16/1, maybe even the scalp of a prime minister by the time this goes to print. It may seem dull to most, and when governing is done well, people rarely notice, but when governing is done badly, suddenly people’s ears prick up. Nowhere is this truer than when it comes to the nation’s water supply – the most fundamental resource in all our lives.

As a consumer, it is a process to which we give little thought. You turn on the tap, clean water comes out – we do it on autopilot. But what about the time the tap is turned on and dirty water comes out, or sometimes no water at all? Or when the bill arrives, and it is suddenly tens of pounds more expensive?

Media barons, police chiefs and prime ministers come and go, but our debt to water is unyielding.

But why do our water bills rise, and what keeps our water safe to drink?

The answer, at least in part, is the water industry’s supply chain – the vast network of businesses that rely on the relatively small number of water suppliers for their livelihoods, and which, in turn, consumers (often unknowingly) rely on for their water supply.

Water and sewerage companies spend billions of pounds each year within this supply chain, and where and when they choose they spend this money has huge ramifications. Water prices, as readers of WWT will of course be aware, are determined by the industry’s regulator, Ofwat, on a five-yearly basis Asset Management Period, or AMP cycle.

The supply chain has repeatedly witnessed water companies bunching up the bulk of their spending into the middle three years of the cycle, meaning a noticeable, and damaging, two year lull during the last year of one AMP-cycle and the first year of the next. Its effects are very real, and this inefficient approach has seen:

  • Employment instability as staff remain unwilling to dedicate themselves to a sector in which their job is at risk every few years
  • A subsequent difficulty in retaining skills within the sector
  • The unintended promotion of a short-termist approach to investment planning, which encourages ‘quick-fix’ solutions
  • Difficulty for investors trying to take a long-term view of the industry’s prospects
  • Additional unnecessary costs to administering the industry
  • Ultimately, higher costs to the end user

The arrival of the Coalition Government last May came with the promise of a radical rethink about the water industry and the publication of a Water White Paper (due later this year). In the lead up to the White Paper, Defra agreed to undertake a review of the relationship between Ofwat and the industry, and, as part of this process, the Environmental Industries Commission (EIC) robustly raised the issue of ‘boom and bust’ and the damaging effect it has on jobs, water prices, and skills. The results of Defra’s review have now been published and it unequivocally recognises the problems resulting from the current five-yearly framework, concluding that it is ‘bizarre’ that such a long-term, stable industry, with a relatively consistent supply and demand, should have such a cyclical pattern of investment.

Crucially, the report makes clear that “no-one has suggested to us [the review team] that there is any intrinsic reason for the flow of business to the supply chain to be cyclical at all”. This is an important observation, and chimes perfectly with the words of Environment Minister Richard Benyon MP, who told EIC in a recent meeting that the ‘boom and bust’ spending pattern is ‘absurd’.

Clearly this is a very positive step, and we are delighted that the issue has received recognition up to the highest levels of government. But formal recognition of the issue is not new – what the industry needs now is an indication of what actions will be taken beyond the rhetoric.

The review is, regrettably, less forthcoming in its recommended remedies. It is sceptical of a number of possible solutions put forward by the EIC and others – including for example, lengthening the AMP cycle, or a ‘late-finish’ approach, allowing the delivery of some programmes to overlap into the next AMP.

The EIC would be the first to admit that the solution to the problem is not obvious, but a wide-range of recommendations were made that have not been addressed and this has proved disappointing. This frustration is exacerbated by the fact that what we have before us is a golden opportunity to solve a problem that has blighted the industry for years, if not decades.

The fact that the Coalition has been willing to look at the industry in such detail is greatly encouraging, and the constructive dialogue that has been opened up between themselves, industry, and consumers is to be lauded. But unless as a result of this dialogue we see real, tangible reform, it will have been an opportunity wasted. If it slips through our fingers, it is unlikely that a government of any colour will look at the industry in such detail for at least another decade, if not more.

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