Project summaries

The Future Of Anglian Water

This paper aims to stimulate an informed public debate about the major changes taking place at Anglian Water (AWS), the company responsible for providing water and sewerage services across much of eastern England. These changes, which were announced by its parent company, AWG plc, have two parts:

A financial restructuring of AWS, switching its capital from equity (shares) to debt (bonds). The company expects this to reduce AWS’s cost of finance, some of which will feed through into lower customer bills, although not before 2007. It has not said by how much bills will come down – we guess it could be up to £20 a year per household. The restructuring, which cost £128 million (equivalent to £75 a household), is now completed.
The outsourcing to contractors of most of the work currently done by AWS, with the AWS employees currently doing that work being transferred into the contractors’ employment. Although wrapped up in a single package, outsourcing is not an inevitable condition of the financial restructuring. As of mid November 2002, no announcement has been made about who the first contracts have been awarded to.

Although outsourcing is commonplace, AWS’s plan is radical because it is a piecemeal outsourcing of the core water and sewerage operations to a multiplicity of companies. By contrast, in Wales (with which AWS is often compared), the great bulk of operations were contracted out to a single water company.

AWS’s outsourcing plan represents a new and untested way of running water operations in Britain. It is therefore alarming to find the public documents showing:

a confusion about the objectives of the outsourcing plan and what gains, if any, it will bring to customers;
no serious recognition of how the proposed structure for water services in the Anglian region resembles the fragmented structure of the railway in the Railtrack period; and
an over-estimation of the similarities between Welsh Water and AWS.

Following a public consultation earlier this year, the government regulator for the water industry (Ofwat) reported widespread concern that AWS’s plan could result in it losing control over its business, including from other water companies. To try to avoid this happening, Ofwat imposed a number of conditions on AWS through its licence.

Ofwat needs to make sure these conditions have real force. In particular, it has to insist that the first contracts for outsourcing are not signed until it has approved the procurement plan which AWS must present it with by 31 December. As well as details, that plan needs to address fundamental questions about the outsourcing, including:

the objectives of outsourcing and the gains that it (as distinct from financial restructuring) will bring customers;
why AWS has chosen to pursue a strategy that no other water company has adopted;
how AWS will avoid the systematic problems with contractors that Railtrack faced; and
how far management resources are being diverted from the day-to-day business of running water into the task of preparing for outsourcing.

It should also explain how far the sharp decline in 2001/02 in its ‘overall performance assessment’ ranking was to do with outsourcing or the preparations for it.

In truth, Ofwat, should have obtained answers to these questions months ago. AWS’s proposal is an adventure into uncharted territory for the water industry. With its primary duty under the 1991 Act to ensure that the functions of a water and sewerage company are properly carried out, Ofwat should be able to reassure the public that what AWS is proposing is sensible and justified.

The public documents we have seen, though, do not point to such a comforting assessment. Rather, the way in which water services are to be run in the Anglian region is to be completely transformed in return for benefits that seem uncertain, arguable and modest in their scale. This makes it time for politicians to get involved, to seek from Ofwat and the company a properly reasoned case as to why what is proposed should go ahead.

Finally, is it time for a proper review of the regulatory process, and the respective role of the regulators and government in particular? Whilst their deliberations may be thought largely technical, and thus public visibility and accountability is low, the regulators are actually working in highly political areas where the economic principles are much less clear, and much less pervasive, than most people think.

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