Fining water companies only diverts investment from improving assets, but there is an alternative that could serve everyone better, says Tim Farley, of Sanivar UK.
Across the UK, water company assets are in a critical condition and service failures on both potable and waste networks are on the increase, the result of years of under-investment and rising demand on ageing infrastructure.
Accountability isn’t up for debate, but are monetary penalties really the most effective way to drive responsible stewardship and a culture of proactive asset management?
Water company spending is controlled by Regulatory Determinations from OFWAT that limit the amount that individual companies can charge, and consequently spend, on asset maintenance.
Irrespective of who ultimately pays the fines, this is money that is taken out of the sector at a time when investment in infrastructure is critical.
To put this into context, a £10m fine could potentially fund 2km of pipeline refurbishment, which would go some way to mitigating against future failure and fines.
The current cycle of failure, fines and funding consequences only perpetuates the challenges that the water companies are facing.
At least one operator in the South West has already paused its rising-main refurbishment programme, in the knowledge that it faces significant financial penalties for asset failures, a move which will inevitably result in further failures… and fines.
The consequences of financial penalties extend beyond disruption to essential programmes of work.
The funding structure of the sector, rightly or wrongly, is dependent on institutional investment, and the water industry has always been viewed as a safe investment with stable returns for corporate investors.
The imposition of large fines makes that investment less stable, as evidenced perhaps by Thames Water’s failure to attract crucial investment just days after receiving a record fine of £122.7m.
This financial uncertainty threatens investor confidence across the sector, and may result in more Government intervention, either regionally or nationally – placing huge demands on the public purse.
If nationalisation is indeed the answer, then it should be properly planned and financed rather than occurring as a reaction to a crisis. However ideologically attractive, it would come at a huge cost and carry with it the liability of failing assets.
Recent developments have only intensified the debate. The Government has announced plans to make it “quicker and easier” to fine water companies up to £20,000 for certain breaches, allowing the Environment Agency to impose penalties without the full criminal-proof burden of ‘beyond reasonable doubt’.
The move, which could raise between £50m and £67m each year, aims to encourage better behaviour, but risks further draining already limited sector resources
So, if fines are not the answer, how should companies be held to account?
One solution could be to ‘suspend’ fines for a defined time period, during which the water company would be charged with committing investment (perhaps to 50% of the value of the fine) to address asset failures.
For example, if a company was given a suspended fine of £40m for an incident, they would have the option of committing an extra £20m of external investment to deliver a defined programme, beyond their AMP determination, to address critical needs.
Although radical, this approach would at least ensure that financial penalties were used to reinvest in infrastructure rather than be lost in a bureaucratic ‘black hole’.
The dissolution of OFWAT provides the sector with a unique opportunity for transformation at a time when its very survival is dependent on adopting new approaches.
Instead of focusing on why technologies can’t be used and creating regulatory barriers to innovation, governance needs to embrace change and adopt safe working practices that are proven and adopted as business as usual in other territories. Regulators should champion innovation rather than constrain it.
OFWAT has served its purpose, and good progress has been made in business planning and water quality. Its successor must focus on operational needs, innovation and supporting water companies in delivering outcomes rather than policing and penalising failures.
Fines may grab headlines, but investment fixes pipes.
