Crumbling Britain: Water

The water industry was the Cinderella of the privatisations. Telecoms received strong competitive challenges in two tranches, on and after privatisation, producing a large number of new providers and suppliers. Electricity and gas had much of their monopoly broken, and they were in strong competition with each other. Even railways were made to compete through franchise awards to run the trains, and through different leasing and owning companies. Water alone saw the main regional monopolies survive intact, with the predictable consequences – the two worst characteristics of the nationalised industry, shortage and higher prices, partially survived the change of regime. Regulation and shareholder pressure did something to improve both areas, but not enough.

The first step the government should take stimulate new investment is to break the monopoly. If the industry is as advertised a natural monopoly removing the legal monopoly will make no difference. If, as seems obvious, it is not a natural monopoly, new entrants will come in to challenge the current returns and high prices of the incumbents, and offer a lower cost model of water supply and dirty water removal. New entrants will seek to tap into borehole water in the many parts of the country where the water table is rising. They might offer to desalinate sea water, or to use river water where there is sufficient to allow further extraction.

Water is no more a natural monopoly than oil or gas production. Each of those businesses needs pipes and tankers to get the product from where it is fouond naturally to the market. They need to refine or purify their raw material;. Water suppliers need to pipe or transport water form where they can collect it or abstract it, to the customers, cleaning on route to the necessary standard.

A competitive water industry might not wish to supply all water to a uniformly high standard for drinking, but may supply cheaper water for gardens or loo flushing. It might propose collecting more water at or close to the user’s own home for lower grade uses. It might supply water to industry without the drinking water additives some water companies put in on a take it or leave basis. A competitive industry is unlikely to tell people to use less water in hot summer periods, or cut people from certain uses altogether. In summary a competitive industry would be more obliging and more flexible in meeting customer requirements.

The government should also make it clear permits will be forthcoming to put in extra reservoir capacity where needed. There is a need for several more reservoirs in southern and eastern England. It is important work starts on these soon. Even if the government is sufficiently gutless to want to keep the monopolies, it could insist through the regulator that the companies aim to meet demand rather than artificially restricting it. This should be enough to trigger the investment schemes needed. Water is not a scarce resource, and it is the ultimate renewable. You cannot destroy it, it merely returns through the water cycle. As this is the case we should sotp all this nonsense about husbanding the resource and using less, and concentrate on finding ways to route around another 1% of the copious rainfall our country experiences to customers through the pipe, borehole and river system.

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10 Comments

  1. Kevin Lohse
    Posted August 2, 2008 at 11:32 am | Permalink

    John. some questions.
    1. One of the main reasons for water shortage is the large loss of water through the mains distribution system. A cynic would suspect the the main reason for privatisation was the refusal of the Government to take on the costs of renewing the Victorian supply and disposal systems. Some firms are clearly not moving fast enough on supply system renewal. Is this because fines for failing to progress are cheaper than carrying out the work required? What are your thoughts on this?
    2. I agree that nationally there is sufficient fresh water for us all in the UK, though alarmist GW enthusiasts would disagree.
    Unfortunately, most of the places where abundant water is are in places where people aren't. No government has ever advocated a national water grid. Do you have an opinion on this concept?
    3. people are increasingly looking at commercially produced "grey water" systems which recycle used water for garden or sewage flushing. Water companies steadfastly refuse to even consider lowering used water disposal charges for households who invest in this technology. There is also the possibility that if enough households use grey water systems, there would not be enough running water to move the sewage, resulting in increase in blockages. Do you have any thoughts on this?
    Regards, Kevin Lohse.

    Reply: The market is renewing and will renew where this makes sense. The technology for in situ repair is improving. There is plenty of water available in most places if people are allowed to abstract it and use it – water tables in many places have been rising.
    Sometimes it makes sense to repair more pipes, sometimes to tap more boreholes – that's a matter of cost. There is a tradition of water management in river basin areas, with limited movement across borders -e.g. Mid Wales to Birmingham. It is probably easier to put a few more reservoirs in where water is needed e.g. south of Abingdon than to pipe and pump long distances. Relax – there's plenty of water – even in drier summers!
    We need more permits and more competition – then it would work fine.

  2. richard
    Posted August 2, 2008 at 4:35 pm | Permalink

    I've often been staggered by the idea that monopoly providers of water are able to post substantial profits while their efficiency drops below the level of the previously nationalised industry providers.

    The breakup of the water companies leads to ridiculous situations (like Severn Trent spending billions on pipe regeneration when there is more than adequate supply while Southern Water companies face inadequate supply) and I'm sure a bit of competition couldn't hurt the market…

  3. Cliff
    Posted August 2, 2008 at 5:27 pm | Permalink

    I personally believe water was one industry that we made a mistake in privatising. It is something that is essential to life and in my view, should not be subject to commercialism.

    I am advised that the government has gone back on it's word (nothing new there then) and agreed to allow water companies to compell ALL homes to fit water meters wether they want them or not.
    My prediction, once the companies have everyone on meters, then they shall start to inflate the prices in much the same way as the other utilities, forcing many into water poverty.

    The beauty of a non metered water supply, such as the one I have, is that it is a fixed predictable expense and being on a fixed income, it is an important factor for me.

    If poor people feel they cannot afford to use water, they may try not to and this, combined with the new rubbish collection policies, may lead to an increase in disease and infestations.
    Poorer people may choose not to flush their toilet or wash so often or wash their kitchen floors in an attempt to save money this could lead to a rise in diseases such as stomach upsets and urine infections.

    Even living in Wokingham where we still have weekly bin collection, I have seen a rise in the number of flies about since our neighbours, the People's Republic Of Bracknell Forest, have introduced their fortnightly bin collection policy.

    With the amount of water that we have in this country, it is crazy we have water shortages, the government needs to ensure the water needs of the population in the South East can be met before they blindly carry on with their ridiculous house building targets.

    I suspect our party's Glorious Leader supports water meters as it is being sold as part of the Green Religion's Gospel.

  4. Richard Nabavi
    Posted August 2, 2008 at 7:32 pm | Permalink

    One of the most remarkable failings of the present system is that the water companies have a monopoly, but do not have a universal service obligation. I live in East Sussex, and some houses in our road do not have mains water – despite the fact that they not far from the nearest town. If they want mains water, they have to pay for the infrastructure to be installed.

  5. david
    Posted August 2, 2008 at 8:38 pm | Permalink

    The gas industry was taken into public ownership in 1948, taken out in 1986, in the nearly 40 years it was in public hands, name me one year it put up gas prices by 35%.?

    In 1980 the then Minister of Energy,(David Howell) under instructions from the cabinet, made British Gas raise gas prices by 9% above the rate of inflation for four years. The money raised, (The Gas Levy) was taken by the treasury.

    [[Comment removed – Editor]]

  6. mikestallard
    Posted August 2, 2008 at 9:48 pm | Permalink

    I worked very briefly for the Anglian Water Board in the 1990s. It seemed to me to be a remarkably efficient unit where people would actually treat each other with respect and go out of their way to provide help to each other and the general public.
    That said, the Victorian water pipes of Harrogate had to be seen to be believed. 3" pipes had a small trickle running through the lime deposits. It looked as bad as something out of a fat man's vein system. But, by sending down scrapers, we did a lot of clearance. We worked off Victorian maps.
    Now that there are blue plastic pipes, perhaps something could be done with them to promote privatisation? Otherwise, I really cannot see how privatisation will work: there is only one set of Victorian pipes, you see.

  7. Chuck Unsworth
    Posted August 2, 2008 at 9:50 pm | Permalink

    Some time ago I discussed water and geopolitics with some eminent authorities who had been retained by the Aga Khan's Foundation to examine, inter alia, water supply in Africa and the Middle East. They were convinced it was likely that there would be widescale warfare in those areas arising from the increasing need for, and consumption of, water.

    We should remember that water is a commodity.

  8. William B.
    Posted August 3, 2008 at 2:03 am | Permalink

    Water, gas and electricity are different from other things we need because it is impractical to have a series of different physical routes of supply to the home. Food can arrive in my car or be delivered by the store, and there are five major chains available for me to choose from as well as many other smaller chains and even more individual shops. But is it not practical for there to be half a dozen water, gas or electricity supply lines coming in to my house.

    But that physical difference between the way water and food arrive in my tiny part of Highbury does not rule out a place for market forces in the supply of the wet stuff. Different companies will have different ideas of how to increase supply, how to treat water, how to replace decrepit pipework (an important task which was almost ignored when the old Water Boards ran the show), how to maximise re-use and so on. When the National Lottery franchise was last up for grabs it was awarded to a profit-making enterprise rather than a not-for-profit organisation because the evidence was that the amount going to good causes would be greater, even after a profit was taken, than it would have been had the not-for-profit bid been successful. There is no reason to believe that a profitable supplier of water will be more expensive to the customer or will provide a worse service.

    The key is the contractual and regulatory mechanisms. Through these a minimum standard of performance and a maximum price can be set. They must be enforced rigorously and they must contain some flexible elements to reflect the fact that circumstances can change in unpredictable ways during the time a franchise operates. But if they eliminate profit what motive is there for improving efficiency?

    A number of the comments made above suggest that things are worse now than before privatisation. I do not believe that to be so. Not only do the water companies have a strong incentive to be efficient (something that was never the case with the old Water Boards) but the supply of water now stands as an industry by itself, it is not just another part of government's income and expenditure account. The current economic situation is exactly the time when water charges could be increased to provide the government with more income because, under a nationalised scheme, water charges are just another tax going into the same pot as fuel duty, income tax and everything else. As things are today, any increase in water charges must get past the regulator and will only do so if there is good reason.

    The ideas you raise, Mr Redwood, seem to me to have one thing in common, they increase the number of stages in the water cycle at which competition bites. It is a nonsense that a single company should always control the whole cycle over a large region where there are distinct, stand-alone, elements to the cycle. A water treatment plant has nothing in common with the pipes in my road carrying water into our houses. An efficient whole can only result from efficient parts, I endorse heartily your call to allow competition at every stage of the cycle.

    Incidentally, I must pick a small bone with Mr Stallard. I believe it is fat men's arteries that get clogged not their veins (it certainly is the case of this fat man).

    • mikestallard
      Posted August 3, 2008 at 8:30 pm | Permalink

      An instant apology!

  9. Kevin Lohse
    Posted August 9, 2008 at 9:37 am | Permalink

    Dear Mr Redwood. On 1 aug, I posed some questions re. water supply and asked for your opinion on these matters. Do you wish to engage in debate, or have you moved on?

    Reply: Yes I do wish to discuss – I was away and someone else kindly posted things for me that I had already written and also posted incoming replies. I will look it up.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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