Welsh Water: The Community Company
By Dick Barry
In 1989 the water and sewerage systems in England and Wales were transferred wholly into the private sector. The Thatcher government had wanted to privatise the industry in 1984 but abandoned its plans after strong public opposition. Water privatisation was to be part of a broader strategy to roll back the state through the privatisation of public assets, which also included telecommunications, gas and electricity. The 1989 privatisation involved ten unitary regional water authorities which had been created in 1974. It should be noted at this point that there were over 20 small water-only companies established by statute that had been in private ownership for many years.
The ten regional water and sewage companies were: Anglian, Northumbria, North West, Severn Trent, South West, Thames, Welsh, Wessex, and Yorkshire. All of these companies, with the exception of Welsh Water which is now a not-for-profit company, are substantially owned by institutional investors, many of them foreign based. However only a few remain as PLCs as most have been bought by private equity consortia. In Northern Ireland and Scotland, water remains publicly owned. In the latter, consumers pay roughly half for water use than those in England. Something for Scottish voters to contemplate in the forthcoming referendum.
Welsh Water, owned by Glas Cymru, was privatised by stockmarket flotation along with the other nine regional companies. In the early 1990s it diversified into other sectors, including electricity. After acquiring the local electricity company SWALEC (South Wales Electricity Company) in 1996 it renamed itself Hyder, becoming an electricity and water multi-utility. Following a number of set backs, including the Labour Government’s windfall tax on utility profits and the 1999 Ofwat price review, it got into financial difficulties and was taken over by Western Power Distribution, a US owned electricity company. Like other foreign companies operating in the UK’s utility market it looked to make a quick profit and subsequently sold its holding in Welsh Water to Glas Cymru in May 2001. The acquisition was financed by a £1.9 billion (the debt inherited from Hyder) bond issue
Welsh Water is the sixth largest of the ten regulated water and sewerage companies in England and Wales. It provides water and sewerage services to over three million people living and working in Wales as well as some adjoining parts of England, specifically in the areas of Herefordshire and Deeside. Dee Valley Water, a small privatised water only company, supplies part of north-east Wales and part of north-west England. While Severn Trent Water, a privatised regional company, supplies mid-Wales and benefits from its water resources. It has a 99-year contract with Welsh Water to supply non-drinkable water. The contract ends in 2073.
In total Welsh Water has over 1.3 million household customers and more than 100,000 business customers. Customers are helped in a number of ways but there are special ‘assistance schemes’ that focus on the very needy. These are, people on benefits, those with a health condition requiring the use of extra water, and households with three or more children under the age of 19 in full time education living at home. Customers tariffs are reviewed on a regular basis and in cases where circumstances warrant it, customers will be switched to a reduced Social Tariff.
The company’s website says that Glas Cymru is unique in the UK utility industry in that it is:
- a private company with no shareholders,
- financed in the capital markets, with no government support,
- not allowed to diversify into other activities or geographies, and
- all financial surpluses are used for the benefit of its customers.
The website also tells us that “Glas Cymru is a ‘company limited by guarantee’; it has no shareholders and so its corporate governance functions are the responsibility of its Board, which has a majority of independent non-executive directors, and its members, around 70 individuals appointed following a process undertaken by an independent membership panel. Members are not representatives of outside stakeholder groups but rather are unpaid individuals whose duty is to promote the good running of the company, in the best interests of its customers. The business operates as a fully commercial undertaking, complying with the Combined Code.”
The website goes on to say that “Successes of the group to date include”:
- some £3 billion invested to improve drinking water quality, environmental protection and customer service – at no cost to the taxpayer,
- financial gearing reduced from 93% to 65%, reflected in improved credit ratings (A/A3/A) which are the strongest in the UK water sector,
- £150 million returned to customers in the form of ‘customer dividends’ and some £10 million of support for disadvantaged groups via social tariffs and an assistance fund,
- lower average customer bills in real terms than in 2000, in part due to the best record in the sector in cost reduction and improved efficiency.
It is, by a long way, the most accessible, comprehensive, and easy to follow website of all ten regional water and sewerage companies.
Welsh Water’s business model based on bond financed capital investment and retained financial surpluses (profits) enable the company to reduce its asset financing cost, which it says is its biggest cost. The company claims that “financing efficiency savings to date have largely been use to build up reserves to insulate Welsh Water and its customers from any unexpected costs and also to improve credit quality so that Welsh Water’s cost finance can be kept as low as possible in the years ahead.” Over the period 2010 to 2015, the company is investing £1.3 billion in its water and sewage network.
Welsh Water is unique in another sense. The strategic direction of the company is the responsibility of ten Directors, three of whom have Executive positions and seven Non-Executive positions, including the Chairman. The Board is assisted by four Committees: Audit, Quality and Environment, Nominations (whose Chairman Bob Ayling, is also Chairman of the Board of Directors), and Remunerations. This structure is not confined to Welsh Water. Uniquely, however, the Company has 57 independent Members, who have the key role of ensuring that “the business remains focused on its primary purpose of providing high quality water and sewerage services to the communities served by Welsh Water.”
The company emphasises strongly that all Members are independent. They are not appointed to represent any particular group or stakeholder interest. There is, therefore, no direct trade union representation on either the Board of Directors and its four supporting Committees or among the appointed 57 Members. Without wishing to doubt Welsh Water’s claim of genuine independence in these matters, there is what appears to be an odd appointment in the presence of the current President of the National Farmers Union Cymru. This ‘anomaly’ is only partly balanced by the appointment of a retired trade union official.
In the absence of any sign of a return to public ownership of the whole industry, the kind of business model employed by Welsh Water appears to be the ideal alternative to privatisation. However its operating model is far from perfect. Almost all of its operational activities to supply drinking water and to collect, treat and dispose of waste water are contracted out to other private companies some of whom are other UK Water Companies like Thames Water. The success of this model depends on Dwr Cymru putting in place a rigorous system of contract compliance to supervise and monitor the performance of the contractors.
The pro privateers argued that privatisation would reduce costs and improve customer services. But the Welsh Water model, despite its drawbacks, has been highly successful in these and other areas, without having to satisfy shareholder expectations. However, governments were conscious that privatisation was, effectively, a switch from a public to a private monopoly, albeit on a regional basis. So for a decade or more, efforts have been made to introduce competition to the network.
In recent years there have been two consultations on the issue. In July 2007 Ofwat, the industry’s regulator for England and Wales, published the first of a series of consultation papers on the options for promoting the development of competition in the sector. And in September 2009, the then Labour government began a 12 week consultation on an independent review of competition and innovation undertaken by a Professor Martin Cave. Welsh Water responded to both consultations.
The company was broadly sceptical of any alleged benefits from competition in water and sewerage services. Its views on this and other related matters had been set out as long ago as February 2002 in ‘Competition in the Water Industry. Position Paper prepared by Glas Cymru.’ This was Welsh Water’s response to the intentions of the Labour government in 2001 to extend a form of competition to the industry. The consultation paper tells us that “A new licensing regime would enable entrants to compete in ‘production’ and ‘retail’ activities, whilst leaving the existing regional companies, including Welsh Water, as vertically integrated statutory undertakings.”
The paper concluded that “Any Government initiatives which offer tangible net benefits to Welsh Water customers will be welcomed and supported by Glas Cymru. Glas Cymru does not, however, believe that the net benefits from developing competition along the lines set out by the Government in March 2001 have been demonstrated, nor that they can be asserted or assumed on the basis of experience in other sectors. The institutional and regulatory regime within which water companies have operated since 1989, together with various existing forms of competition, have already delivered significant benefits.”
Although sceptical of Government initiatives to introduce further competition to the industry, Welsh Water is not in principle opposed to competition where there are tangible net gains. The consultation paper and other sources say that a key element of the Glas Cymru model is “significantly extending competition to the business of water and sewerage services in Welsh Water’s region through a process of competitive tendering as a result of which over 80% of Welsh Water’s costs are now established through a highly competitive process.” (page 3 of ‘Competition in the Water Industry. Position Paper prepared by Glas Cymru.).
Responsibility for the industry in Wales is a complicated matter. While Welsh Ministers can make particular secondary legislation in relation to the whole of Dwr Cymru or Dee Valley Water’s supply area it cannot necessarily make primary legislation on the same matter. A Research Note published by the National Assembly for Wales sets out its current competence: “The Welsh Government is responsible for setting the strategic policy for water in Wales, within which the following organisations operate:
- Water companies wholly or mainly in Wales – Dwr Cymru and Dee Valley Water;
- The economic market regulator – Ofwat;
- The environment regulator – National Resources Wales;
- The Drinking Water Inspectorate; and
- Local authorities.
Legislative competence for the industry does not therefore lie wholly with the National Assembly for Wales. An attempt was made to rectify this perceived anomaly in January when the Commons debated a new clause to the Water Bill, first introduced in June last year, which has almost completed its passage through Parliament: a significant purpose of the Bill is to allow businesses and other non-household customers to switch supplier if they so wish. New Clause 1 of the Bill moved by Plaid Cymru’s Hywel Williams on 6 January stated: ‘The National Assembly for Wales shall have legislative competence for water up to the geographical boundary with England.’ It was defeated by 282 votes to 6, the ayes being made up with Conservative and Lib Dem Members plus Ian Paisley Jr of the Democratic Unionist Party. Hywel Williams lost the vote but won a victory of sorts highlighting the genuine advantages of Welsh Water’s not-for-profit model for delivering high quality water and sewerage services at a fair price – there have been below-inflation price rises for the past three years – to its domestic and business customers.
The present UK coalition government is intent on breaking up the existing water industry as it believes it is complacent and inefficient. Initially all companies are being required to separate off their retail functions and this will allow other retail companies to bid against the incumbent company for the provision of water and waste services. The government’s intention is to first subject the commercial and business sector to competition leaving the domestic customers to some future as yet unspecified date. Even if the Labour Party win the next general election it is far from clear what the policy position is for the UK’s water industry.