The UK Water Industry - A brief overview
The UK is a key geographical area in which to operate, not only because
of its historical influence world-wide in water treatment but because
it is currently in the middle of a prolonged growth phase. Capital investment
in England and Wales since privatisation 20 years ago is over £90 billion. Last year (20009-10) capital investment was up 11% at 4 billion. Over the whole of the current regulatory period, 2010-2015, £22 billion will be invested.
Companies' operating profits are £3.5 billion in 2009-10 (latest year data available) up 7%. In Scotland investment is also growing at £2.5 billion over the 2010-2015 period.
The UK is at the forefront of the water industry worldwide. With privatised
water companies in England, a mutual not for profit company in Wales, a nationalised industry in Scotland and a Government owned company (GoCo) in Northern Ireland - there
is no better proving ground for different ideas about utility provision
than Britain's water industry.
The water industry faces a number of challenges:
a changing climate
- population growth
- rising demand for water
- an uncertain economic future
The supply of water and waste water in England and Wales was privatised
in 1989. Ten companies were formed that supply both water and waste
water. In addition there are 13 water only companies. The water and
waste water companies are responsible for the abstraction, treatment
and supply of water and the collection, treatment and return of the
waste water to the aquatic environment.
The industry is highly regulated. The Water Services Regulation Authority
(Ofwat) is the economic regulator of the water and sewerage industry
in England and Wales. Ofwat's role is to seek value for consumers. Before
1 April 2006 their functions rested with the Director General of Water
Services. The framework for the changeover was outlined in the Water
Act 2003. It provides a similar structure to other economic regulators.
Ofwat is responsible for making sure that the water industry in England
and Wales provides customers with a good quality and efficient service
at a fair price. The Ofwat Board includes the Chairman (Philip Fletcher), a Chief Executive (Regina Finn), two executive and five non-executive
directors. The Board is responsible for deciding how Ofwat carry's out
their functions and effectively meet their statutory requirements. There
is a majority of non-executive members.
Ofwat makes its decisions independently of the Government, but works
- the Secretary of State for Environment, Food and Rural Affairs (DEFRA)and
the Welsh Assembly Government;
- the Consumer Council for Water (CC Water), which is an independent
organisation that represents customers' interests and deals with your
the Drinking Water Inspectorate, which sets standards for the quality
of drinking water;
the Environment Agency, which regulates and enforces water abstraction
consents and quality standards in inland, estuarial and coastal waters;
Natural England and the Countryside Council for Wales, on environmental
Ofwat do this by:
Setting limits on what companies can charge their customers;
ensuring companies are able to carry out their responsibilities under
the Water Industry Act 1991 as updated by section 39 of the Water Act
protecting the standard of service customers receive;
encouraging companies to be more efficient;
setting the water companies challenging efficiency targets;
Monitoring the water companies performance band taking action, including enforcement, to protect consumers' interests;
making sure companies deliver the best for consumers and the environment in the long term (sustainability and carbon reduction);
helping to encourage competition where it benefits consumers.
The approach in Scotland is different. There is only one water company
- Scottish Water - still state owned. Performance is regulated via the
Water Industry Commission for Scotland (WICS).
The water and waste water quality standards that the water companies must meet are
regulated by the Environment Agency in England and Wales. This regulatory body was formed in April 1996 as
a "one stop shop" for environmental regulation. The functions of the National Rivers
Authority, Her Majesty's Inspectorate of Pollution and the waste regulation
responsibilities of the local authorities were all incorporated into this new body. As well as
a duty to protect and improve the quality of rivers, estuaries and coastal waters, it is
responsible for managing water resources and protecting people and property from
flooding. In Scotland this duty is undertaken by the Scottish Environmental Protection Agency and in Northern Ireland by the Northern Ireland Environment Agency.
Investment activity is driven by EU legislation such as the Urban
Waste Water Directive and Bathing Water Directive. Water charges
have more than doubled since 1989 and this combined with considerable
adverse publicity over issues like water shortages means that the industry
is under constant pressure to improve.
A number of events have combined to act as a catalyst for structural change in the water industry such as:
- The Competition Act and the successful introduction of competition into the gas and electricity markets.
The tough regulatory environment and cost comparison process implemented by Ofwat. This has reduced the
income of the water companies, made investors nervous about future prospects
and focused attention on the cost of capital. This has encouraged sophisticated
financial management schemes to securitise the debts to emerged such
as that at AWG plc.
The continuing globalisation and corporate restructuring through this current decade.
The result of the above developments is that the water companies have undergone
considerable structural change. The formation of asset operators has
emerged as evidenced by the Glas takeover of Welsh Water. New players
have entered the market such as YTL - owners of Wessex Water.
Infrastructure investment banks have entered the scene as evidenced by Thames Water being owned by the Macquarie led Kemble Water
With the pressures of climate change and rising water demand, capital investment will continue at around £4 billion per year and the water sector is comparatively sheltered from the current economic turmoil. The winners will be
those companies that carefully segment their approach, focus on the needs of their
customers and offer real value for money.