Water Utility Privatization in England and Wales: An Advocate’s Perspective

1. Water Utility Privatization in England and Wales: An Advocate’s Perspective Elizabeth Brubaker Executive Director, Environment Probe British Columbia Water and Wastewater Association Workshop Water Utilities in British Columbia: Industry Challenges and P3 Experiences October 23, 2003

2. Overview “Privatization works.” – The Economist, 2003 Privatization in England and Wales has: • Increased capital investment • Improved drinking water quality • Improved environmental performance • Improved regulation • Improved customer service

3. Before Privatization Drinking water (1990): percentage of zones breaching limits Faecal coliforms: 12 Lead: 23 Pesticides, iron: 30 Sewage (1988): 34% of beaches breached European standards Ineffective regulation “Potent culture of government concealment” – David Kinnersley, 1994 Permit system designed “to avoid an embarrassing number of failures and an excessive number of prosecutions of public organizations” – Lord Crickhowell, 1989

4. What changed? • European Community directive (1975) Member countries given 10 years to bring bathing waters to uniform standards • Britain anticipated need for £24 billion in capital investment Constrained by “financial harness of Whitehall” • Thatcher government’s ideological support for (and experience with) privatization

5. The Privatization Process • Government wrote off debts and injected cash into water/wastewater authorities • Government transferred water/wastewater authorities’ infrastructure to 10 new “water service companies” (WSCs) • Government sold shares in WSCs in public offering • Government established environmental, health, and economic regulators

6. Capital Investment Average annual capital expenditures Before privatization (1980s): £1.9 billion Since privatization: £3.5 billion “You just couldn’t contemplate that kind of expenditure in the absence of privatization.” – Department of Environment official, 1997

7. Drinking Water Quality “The quality of drinking water in England and Wales is the best it has ever been.” – Chief Inspector Jeni Colbourne, 2003 Percentage of tests breaching standards 1990: 1.0 2002: 0.13 Percentage of water-supply zones breaching faecal col limits 1990: 12 2002: 2.6

8. Drinking Water Quality (continued) Percentage of water-supply zones breaching pesticide limits 1990: 30 2002: 2 Percentage of water-supply zones breaching limits for taste 1994: 1.3 2002: 0.1 Other improvements: Iron, nitrate, lead, aluminum, odour

9. Environmental Performance Percentage of population served by STPs meeting “discharge consents” 1990-91: 90 2001: 99 Tonnes of suspended solids discharged by STPs 1990: 140,000 2002: 70,000 Tonnes of biochemical oxygen demand discharged by STPs 1990: 110,000 2002: 40,000 Not good enough: Water industry caused 150 serious pollution incidents in 2002

10. Fresh Water Quality “Rivers and estuaries in England and Wales are probably cleaner than they have been since before the industrial revolution.” – Environment Agency, 2001 Percentage of rivers and canals with good or fair biological quality 1990: 87-90 2002: 95 28% of rivers (net) improved Percentage of rivers and canals with good or fair chemical quality 1990: 85 2002: 94 42% of rivers (net) improved Percentage of rivers with high concentrations of phosphates 1990: 64 2002: 54

11. Leakage Total industry leakage, in megalitres per day 1989-93: approximately 4,781 (no significant change) 1993-94: 4,888 1994-95: 5,112 1995-96: 4,980 1996-97: 4,528 1997-98: 3,989 1998-99: 3,551 1999-2000: 3,306 2000-01: 3,243 Water companies have reduced leakage by more than 32% since privatization.

12. Sea Water Quality Number of designated coastal beaches in England/Wales 1979: 27 1989: 401 2002: 482 Percentage of beaches complying with European standards for bathing waters 1988: 66 2002: 99

13. Environmental Regulation “Despite having been privatized, the water industry in England has been re-regulated rather than de-regulated.” – Karen Bakker, 2003 Environment Agency demands • Zero tolerance for pollution • Public shaming of polluters • Higher fines for polluters • New 5-year program to improve 4,000 sites

14. Price Increases Prices (nominal) almost doubled between 1989-90 and 1997-98 <10% of households on water meters Few consumers could reduce costs Public outrage over rate increases, profits/dividends, salaries 1999 price review: 12% reduction in prices Percentage increase (real) in average household bill for water and sewage during 14 years after privatization: 21.3

15. Household Disconnections 1987-88: 9,187 1988-89: 9,218 1989-90: 8,426 1990-91: 7,673 1991-92: 21,282 1992-93: 18,636 1993-94: 12,452 1994-95: 10,047 1995-96: 5,826 1996-97: 3,148 1997-98: 1,907 1998-99: 1,129 Water Industry Act (1999) banned disconnection of households and vulnerable water users.

16. Disconnections Not Linked to Disease Peak in disconnections coincided with peak in dysentery and hepatitis A “There is no evidence at this time stage that the two are connected.” – Britain’s Chief Medical Officer, 1992 “A causal link has yet to be established between water disconnections and infectious diseases, such as dysentery and hepatitis A.” – British Medical Association, 1994 “Ofwat has seen little evidence of a link between water disconnections and public health.” – Ofwat, 1999

17. Accountability to Customers “In many ways, better customer care has developed more significantly than any other facet of the water industry.” – Alan Booker, Deputy Director General of Ofwat, 1994 Guaranteed Standards Scheme sets compensation payments for • Missed appointments • Interruptions in water supply • Low water pressure • Flooding from sewers Water companies have paid £7.6 million in compensation and rebates since 1991

18. Customer Service Percentage of properties at risk of low pressure 1990-91: 1.85 2002-03: 0.06 Percentage of properties subject to unplanned interruptions of 12+ hours 1990-91: 0.42 2002-03: 0.05 Percentage of properties at risk of flooding from sewers once in 10 years 1990-91: 0.13 2002-03: 0.04 Percentage of billing contacts not responded to within 5 working days 1990-91: 31.18 2002-03: 0.53

19. Comparing England, Scotland, Ireland English utilities • Score better on drinking water quality tests • Comply more often with sewage discharge regulations • Lose less water to leakage • Provide these superior services at lower costs to both households and commercial customers “State ownership is costly and inefficient.... Private water firms beat the public sector on all counts.” – The Economist, 2003

20. Water Companies’ Financial Challenges • 1997 Windfall Tax: £1.65 billion • 1999 Economic Review: 12% reduction in prices • Decline in profitability, dividends, share prices • “How does the record look 14 years on? In terms of quality, service delivery and efficiency, the answer is excellent; in terms of stockmarket performance, less so.” – The Economist, 2003 • “The speculators and the global conglomerates want out of the industry.” – New York Times, 2003

21. Assessments of Privatization “The privatized regime is in many respects better for consumers than its nationalized predecessor.” – Karen Bakker, 2001 “By almost any measure, the water industry in England and Wales has achieved a great deal since privatization in 1989. However, this has not been without costs and a significant amount of conflict and political controversy.” – David Wheeler, 2001 “There have been spectacular successes.” – Director General Ian Byatt, 2000