IDPM Archived Publications
Public Policy and Management Working Papers
Please note: this working paper is part of a series that has been discontinued and archived.
Regulating the Water Industry: Swimming Against the Tide, or Going Through the Motions?
Richard Schofield and Jean Shaoul
Abstract
Within five years of the privatisation of the water and sewerage industry in 1989, the public water supply system to West Yorkshire failed. Supplies were only maintained by means of a mass road tankering operation. There was widespread public concern not only in Yorkshire but elsewhere about the public water supply. This concern was heightened by the cold spell over the Christmas period when many consumers had no tap water as a result of damage to their pipework and Northumbrian Water's mains.
An independent inquiry identified the actions and inactions which had led to the failure from an engineering and managerial perspective (Uff 1996). But the report did not examine some of the wider public issues and concerns raised by the failure of the public water supply system. In particular - how could such a failure have arisen when there was a regulatory system designed to protect the public from a potentially rapacious monopoly?
The Government had, after all, appointed an economic regulator to ensure that the companies were able to finance the supply of their statutory duties, by setting prices to cover the cost of maintenance and enhancement of the infrastructure and additional quality standards set by the quality regulators; and also ensure that customers' standards of service were protected. The emphasis was 23 September, 2004 that if the companies had the money, they would spend it on maintaining and enhancing the water and sewerage businesses.
This paper assesses whether the crucial assumption underpinning the operation of the regulatory system : that providing privately owned corporations with the financial resources will result in the satisfactory delivery of essential services is indeed a valid one. We examine empirically the companies' financial resources; their expenditure on additional plant and equipment and their investment in the basic infrastructure; the non-financial information provided by the companies about their performance; the targets, levels of service and other indicators of performance and the actions taken by the regulator. The paper examines the regulatory framework as set out by the Government; the way it actually operated and how this changed over time; and what additional (if any) forms of protection the consumer has or requires. We present data about the ten individual water and sewerage companies to identify systemic problems rather than individual company failings.
Our findings showed that while the regulator has indeed ensured that the companies have had, via rising prices, the finances to run their water and sewerage services, the companies have underspent on their budgeted investment programme, underspent on their budgeted infrastructure renewal programme and most importantly made insufficient allocation for renewals. Expenditure of the underground network is low and declining. The implications are twofold. Firstly that some areas have not been and may not in the future be adequately resourced in the event of low rainfall. Any such shortage would be the result of inadequate maintenance of the infrastructure, not an unexpected and sudden increase in demand. Secondly that some areas are likely to face problems with their sewerage services as the sewers crack, leak and collapse. Both of these have major public health implications.
The failure of the public water supply within five years of privatisation was not simply an aberration, due to some rogue company or freak weather conditions, but was systemic. It is unfortunately, on the basis of this evidence, likely to be only the first significant failure to deliver water and sewerage services. Our analysis showed that it is impossible to regulate a privately owned water industry so as to satisfy all the claims or even ensure service standards. All the ambiguities and contradictions in the regulatory process stem from this; the regulator is both swimming against the tide and going through the motions.
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