The election and Grenfell have changed the mood. First it was Corbyn’s plan to renationalise water, then his relative success at the election, then another monster fine for Thames for failed leakage targets, the scandal of Australian investment bank Macquarie’s exploitation, and then Grenfell where profit lead deregulation was and will be fully exposed for years to come. This week has seen not a shot across the bows, but two broadsides aimed directly at Thames Water from the Ofwat CEO Cathryn Ross and Ofwat’s Chairman Jonson Cox’s (see articles below). Ross’s comments at a recent lecture capture the changing mood:
Ofwat CEO Cathryn Ross– “At some point we may have a government that wants to revisit the whole question of private provision of public utilities. We got rather closer to that in the last election than many thought we would. But even absent that, this shift in the public debate has given some regulators – us included – pause for thought.”
The reality is that when the Daily Mail start trashing your reputation you have a serious problem– see the first article.
By Alex Brummer for the Daily Mail 08, 28 June 2017
Ofwat has finally awoken from a long stupor and recognised a scandal at Britain’s biggest supplier of water and sewerage services. Writing in the sheltered environment of Utility Weekly, the water regulator’s chairman Jonson Cox says Thames Water must speedily change the way ‘it operates and behaves’ and provide more clarity on its outsize payments to investors, most of which are foreign institutions that do not pay UK taxes. The belated intervention comes amid rising public hostility about the way Thames, with more than 15m customers, has abused a privileged position.
Ofwat’s chairman Jonson Cox says Thames Water must speedily change the way ‘it operates and behaves’ and provide more clarity on its outsize payments to investors. Privatised by the Thatcher government in 1989, the company was allowed by successive governments to fall into the hands of different overseas firms. First it was bought by the giant German power utility RWE, and then by Australian investment bank Macquarie – known as The Vampire Kangaroo – for £8billion.
It has now fallen into the hands of a group of overseas investors – including the Abu Dhabi Investment Authority, the China Investment Corporation, and the Kuwait Investment Authority.
As the ownership of Thames Water has become ever more remote from those who pay for its services through their water bills, so the contempt Thames shows for customers has become increasingly plain.
Last week it emerged the company faces a fine of £8.5million from Ofwat for an ‘unacceptable failure’ to control leakages. Earlier this year it was fined a record £20.3million for a grotesque example of corporate vandalism in which it allowed nearly 308,000 gallons of raw sewage – the equivalent of 1,700 Olympic-sized swimming pools – to pour into the upper reaches of the Thames at six sites in Oxfordshire and Buckinghamshire.
In December, hundreds of people were evacuated after pipes burst and caused floods in three London boroughs.
Meanwhile, the company awarded its overseas investors a dividend of £100million, adding to the staggering £1.6billion of cash dividends that it has sent overseas in the past decade.
Unfortunately, the behaviour of Thames Water – along with other privatised utility firms – lends credence to Labour leader Jeremy Corbyn’s demands that public service providers should be renationalised.
Yet that would be a huge mistake, not least because it would cost taxpayers an estimated £300billion, which we don’t have. The privatisation of Britain’s water companies – one of the last acts in Margaret Thatcher’s drive for a popular capitalism – was the right thing to do.
The noble aim was to impose private-sector discipline on out-of-date and under-funded industries.
And as ordinary citizens bought a stake, and the ten big regional water companies and corporate investors ploughed in their money, large swathes of the country saw the renewal of pipes and treatment plants, and investment in cleaner water.
Only a few of the water firms remain quoted on the London Stock Exchange, pay their taxes and dividends in the UK, or are forced to listen to shareholders at annual general meetings.
The rest have fallen into the hands of overseas owners who pay little if any UK tax and have borrowed to the hilt to maximise returns. In the Tory manifesto there was a pledge to examine overseas takeovers, to assess whether they are in the national interest. The US, Canada and Australia already have such regulations.
Overseas owners of water firms feel they can treat customers with contempt because Ofwat is toothless. The few millions in fines paid by Thames Water are a drop in the ocean when compared to the billions it has paid in dividends. Under Macquarie’s ownership, Thames became a cash cow and a serial offender for water leaks and pollution as it failed to invest enough to fully replace the company’s antiquated Victorian infrastructure. Meanwhile, enormous effort went into setting up a Byzantine ownership structure involving no fewer than seven intermediary companies, including one called Thames Water Utilities Cayman Finance, in an attempt to maximise tax avoidance.
During its ownership, it paid no corporation tax and accumulated debts of £10.6billion while running up a pension fund deficit of an estimated £260million.
The Government needs to get real about policing utilities. We need regulators who will flex their muscles and impose heavy fines.
Moreover, next time a major utility comes on the market, there must be a thorough investigation of whether its sale is in Britain’s economic interest.
Weak and inattentive government has robbed the nation of control over critical public services. Robust changes are required if faith in free market capitalism is to be preserved.
Keynote lecture Cathryn Ross, Chief Executive at Ofwat
In a keynote lecture on the future of independent economic regulation, has said that in competitive markets the regulator “may need to stay more involved than we might once have thought.”
Speaking at the London School of Economics, Centre for Analysis of Risk and Regulation last week, Ross said that while competition in the UK delivered via privatisation was originally intended to empower customers, “we now know a bit more about how utility markets work.”
While there are some products that really get customers excited and engaged – consumer goods for example – there are many others that are less exciting and public utilities tend to fall into the latter group. This was especially the case where the complexity of products and tariffs – possibly coupled with some bad experiences – just causes people to switch off.
However, while there was evidence to suggest that customers overall are better off as a result of competition, unsurprisingly those who don’t engage don’t get as good a deal as those who do, she said.
According to the Ofwat chief, there is “no doubt that the difference in the experience between those who engage and get the best deal, and those who don’t, is increasingly seen as unacceptable.”
Ross suggested to attendees that where there was competition in utility markets “maybe regulators should expect a little less from customers, and be more prepared to stay involved.” Regulators needed to pay close attention to the need to build customer trust in competitive markets and build their confidence to engage.
They also needed to keep an eye on whether markets are delivering for customers – not just on average but across different groups of customer. “And if they aren’t we will need – quite possibly working with government – to figure out whether that needs intervention,” she added.
Commenting on independent economic regulation in general, Ross said:
“The good news – at least if you are a regulator – is that I think independent economic regulation has a very bright future…. In short I see big opportunities for independent economic regulation to help build trust and confidence in public utilities.”
On the regulatory role in respect of companies, Ross commented:
“I think economic regulators need to be much more demanding of companies, in terms of expectations – not only on service and the customer experience more broadly but also on things like corporate governance and transparency– but demanding in a different way.”
Regulators needed to be clearer at the macro level about the immense responsibilities that companies and investors in the public service sector have, especially where they have the privilege of monopoly. However, they should be much less willing to step in at the micro-level and tell them exactly what to do and how to do it. Ross explained:
“Because I have seen in water that micro-level intervention across a sector – while it might have been appropriate in the early years following privatisation – over time just infantilises the sector. Rather than provoking and challenging and holding to account, the regulator ends up providing a safety net for companies and that isn’t what we should be doing at all.”
The Ofwat Chief Executive also commented on the re-privatisation of utility companies which was raised as an issue at the recent General Election, saying:
“At some point we may have a government that wants to revisit the whole question of private provision of public utilities. We got rather closer to that in the last election than many thought we would. But even absent that, this shift in the public debate has given some regulators – us included – pause for thought.”
Click here to read the lecture in full
Utility Week: ‘Holding Thames Water to account – Ofwat chairman Jonson Cox 23/06/2017
Holding companies to account is a much-used expression these days. At Ofwat, it is not a casual phrase or one we use lightly. It drives what we do every day to ensure that water companies deliver more for less for their customers and society. Recent commentators have pointed to service failings in London and the scale of rewards available to companies generally. I understand these concerns. Getting the best for customers means, at the very least, requiring companies to meet all their obligations.
Our approach uses incentives – rewards and penalties. We’re bold in stimulating all companies to go above and beyond, creating new frontiers for service or efficiency. We then require less effective companies to match the standards of the best. Our actions are currently bringing down bills for customers and delivering a high level of investment in water infrastructure.
During my five years here, we have also shown that we do not shy away from taking tough further action with companies, and Thames Water specifically, when necessary. We refused an unjustified request for a price increase of £30 per customer in the depths of the recession. We took action against Thames Water in 2014 for misreporting, and secured a package worth £86 million for its customers. Following our intervention this year after a spate of serious bursts, Thames will invest almost £100 million more to improve its trunk mains assets.
To cap all this, Thames has just announced that it failed its leakage target for 2016-17 by a huge margin. We have already launched an investigation using our regulatory powers, on top of the significant automatic penalty that Thames Water has incurred by failing to deliver the performance that customers have paid for.
Given all this, we see an urgent need for Thames Water to make a step change in the way it operates and behaves. The company has new members of the management team and new investors.
The previous ultimate controller, Macquarie, has sold out to Canadian Borealis and Middle-Eastern Wren House, whom we welcome to the sector. Responsible investors can benefit from helping us drive performance up and prices down.
We are asking the company, with new investors’ support, to adopt the following steps:
- Far-reaching improvement in its communication with all the company’s customers: using the right channels at the right time. Thames Water serves a diverse and vibrant community, which operates around the clock. It should be leading the way in customer communications.
- An annual audited statement from the Board, to sit in front of financial statements, focusing on how the company has set its aspirations and performed for all those it serves. This will illuminate how well Thames Water is delivering for everybody who depends on its services.
- Transparency and clarity about the financial returns to the company’s investors each year. This requires a clear comparison in the annual report between the financial flows under the complex highly-leveraged structure the company has chosen and what those returns would be under the more conservative structure we use for assessing all companies.
- A prompt review of the Board composition to ensure a standard of independence, that the Board can hold the company to delivery of its promises to customers and that the Board can win and maintain public trust.
- Demonstrate that management rewards give appropriate weight to performance for customers as well as financial performance, and explaining transparently how the performance standards have been set and assessed each year.
I call on the company to adopt these five commitments quickly, and discuss with us how it will meet them. We may ask the same of others in the industry too, as we evolve our ground-breaking approach to reforming Board leadership in public service providers.
The leakage results show that Thames’ performance continues to need serious scrutiny. Our investigation will be thorough, its outcome transparent, and if appropriate, it could bring sanctions beyond the penalties which flow automatically from our performance regime. Meanwhile, Thames’ adoption of the steps above would help demonstrate the company’s intent to turn a corner. We would encourage critics of the company to move forward with us.
It’s a privilege for a company to hold a monopoly franchise, in perpetuity. Ofwat will always take action where necessary to protect customers and step in when necessary. We challenge companies to do the very best for the communities they serve and to provide clarity and transparency so that customers have the information they need and the service they expect.
Author: Jonson Cox, chairman, Water Services Regulation Authority (Ofwat),