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 is currently running at £3.4 billion per year. Companies' operatinmg profits are £2.6 billion in 2005-06 up 17% compared with 2004-05. In Scotland investment is also growing although lagging several years behind England and Wales. The Scottish Executive have now agreed the Quality & Standards III (Q&S III) programme which will l be the third post-devolution investment programme for the water industry in Scotland . It follows major investment of £1.8 billion for the previous period.Over the period 2006-10 total investment is estimated at £2.15 billion.

The UK is at the forefront of the water industry worldwide. With privatised water companies in England, a mutual in Wales, a nationalised industry in Scotland and a government department in Northern Ireland - there is no better proving ground for different ideas about utility provision than Britain's water industry.

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, a Chief Executive (takes up post on 9 October 2006), two executive and four 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 closely with:

• the Secretary of State for Environment, Food and Rural Affairs and the Welsh Assembly Government;
• the Consumer Council for Water (CCWater), which is an independent organisation that represents customers' interests and deals with your complaints;
  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; and
  
• Natural England and the Countryside Council for Wales, on environmental issues.

Ofwat do this by:

• Setting limits on what companies can charge you;
• ensuring companies are able to carry out their responsibilities under the Water Industry Act 1991 as updated by section 39 of the Water Act 2003;
• protecting the standard of service you receive;
• encouraging companies to be more efficient;
• meeting the principles of sustainable development; and
• helping to encourage competition where appropriate.

The approach in Scotland is different. There is only one water company - Scottish Water - still state owned. Performance is regulated via the Scottish Executive and the Water Commissioner.

The water and waste water quality standards that the water companies must meet are regulated by the Environment Agency. 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.

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.

Three events have combined to act as a catalyst for structural change in the water industry.

• The first was the Competition Act and the successful introduction of competition into the gas and electricity markets.

• The second event was the tough AMP3 settlement. This has reduced the income of the water companies, made investors nervous about future prospects and focussed 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 third event is the continuing globalisation and corporate restructuring.

The result of the above developments is that the water companies are undergoing 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. However the wheel is starting to turn full circle with the return of Northumbrian Water to the equity markets after 7 years ownership by Suez. This is combined with the realization that a massive capital programme with tight deadlines has to be delivered and the starting gun has already gone.

Take overs in the industry continue with the recent sale of Thames Water by RWE to Macquarie led Kemble Water a good example.

These changes are creating major opportunities for suppliers to the water industry. The winners will be those companies that carefully segment their approach, focus on the needs of their customers and offer real value for money.