Pamela Taylor, Chief Executive, Water UK City Conference, London, 21 January 2004
I would like to give you an overview of the industry’s national strategy for the medium-term. It is simply: to build a stable future on the back of present success. This means continuing to deliver the economic, environmental and service benefits everyone now takes for granted.
It’s not something the industry can tackle on its own. Many other groups will have an influence. But what we can and will do is commit to a progressive strategy that creates the right conditions for success.
It has four parts. We’ll be working to:
• maintain access to the capital markets
• promote sustainable operations
• build stakeholder support, and
• improve the regulatory process.
We’ve done a lot of good work in all of them. In fact if there were an infrastructure business league, I think the water sector would be top for consistent delivery. But of course it’s what happens next that really matters.
I’m going to talk about the four areas one by one. But the real secret has been in getting them working together. So let’s look first at access to the capital markets.
Capital market access
The point of exposing essential services to the markets is that it guards against complacency, just as it does with any other sort of service. The whole sector (that is not just the water companies, but suppliers, regulators and the relevant bits of government) understands the need to go on raising large investment funds at competitive prices. This is a real challenge.
Our response is to work to increase confidence among the people who matter by being consistent and innovative.
The companies can point to a consistent track record. They have consistently made efficiency gains and out-performed. The returns may not always have been spectacular, but they have been steady. The industry has also been open to innovation. Whether in financial structure, in ownership or in business model, different companies have taken different routes towards common requirements.
We shouldn’t underestimate the value of this journey. We’re creating a record of investment and operating success that is transforming our reputation.
Why does this matter? Because one of our main selling points – I mean regular, reliable cash flows – depends on customers being happy. I know we are regulated monopolies. I know everyone needs water. But in the end our business is no different from others. We all need contented customers to maintain a stable income.
Can the good news go on? I think so, but we have to face some tough issues. For example:
• there’s no end in sight to high investment needs
• a declining financial profile has put credit ratings under pressure
• we’ll always be politically sensitive and vulnerable to political risk
• the regulation system may fail to keep up with the industry’s needs.
One thing is in our favour. The public is beginning to understand more about what we do. And they value it more. I accept this isn’t a magic wand, but I submit that it is essential for dealing with these issues.
As for the key influencers, let’s start close to home with the regulators. Our relationships are improving. I don’t mean that anyone is going soft, but there is growing evidence of a common purpose. This is positive and something I’ll come back to in a moment.
Then there’s the government. We’ll be able to tell a bit more about its understanding when the guidance on environmental and social requirements comes out. But Ministers and officials are willing to talk… and listen.
What about politicians outside government? Last month the Environment Food and Rural Affairs select committee of MPs reported its enquiry into water pricing. This was an interesting test of understanding about the industry - particularly its continuing need for investment funds. MPs’ views matter and I have to say that, on this occasion, they passed the test.
They are natural worriers. One of the things they’re worrying about at the moment is price rises making life difficult for poor constituents – especially just before an election. But to their credit they’re not calling for lower bills. They know this could put all the improvements into reverse. No, they’re asking the government to see if the way we manage the benefit system could do more to help. (We understand that ministers are prepared to consider ideas in this area.)
The EFRA committee is also aware of investment realities. They ask Ofwat to recognise the concerns of companies. They say it’s important to keep the costs of finance as low as possible, but also, crucially, it’s important to ensure that the cost of capital isn’t so low that it threatens credit ratings or even the solvency of companies.
I’ll talk about investors themselves in a minute. But the signs are that the other people who matter are taking on board the importance of continuing access to investment capital.
I’ll now move on to operating policies. The overall aim is stability. What is the industry’s strategy for achieving it?
In a word, sustainability.
This still gets confused with heavyweight environmentalism. What I mean by sustainability is:
• integrating economic, environmental and social activity
• innovation in using resources efficiently
• listening to stakeholders, and
• most important, looking to the long-term.
For businesses with a high exposure to the natural environment, sustainability is the right strategy for taking out risk while still moving forward. And I believe that it goes with the grain of the financial world… and politics… and regulation.
As for politicians, even they are keen to try to curb their short-term instincts where long-term business is concerned. The government committed itself to sustainability and a strong water industry in its vision paper, Directing the Flow. This is reassuring, and so is the fact that the new Water Act gives Ofwat a duty to pursue sustainability.
So, there’s a strong case for expecting the industry to go on delivering the solutions. I don’t need to go through their track record again. As long as they can pursue their long-term strategy, the companies can expect to go on operating successfully.
Technical expertise is vital of course. But sustainability also demands workable systems and practical legislation. These have to be argued for. One area where this is essential is influencing Brussels. You probably know that some 80% of UK environmental legislation is born and brought up in Brussels.
I’m pleased to say that we have recently raised our game in this area. We can often promote common sense solutions and get them on the table for consideration. This may not sound like a big deal. But it means we’re better at protecting customers and investors from disproportionately expensive projects. Which is an advantage when you’re aiming at lower risk.
My third industry commitment is working effectively with stakeholders.
Working with stakeholders
You can only tell if you’re getting through to someone if they listen to and act on your point of view. You can do this by logic, eloquence or charm, and naturally the water industry uses all these. The groups we really need on side are customers, investors, regulators, and the government. I’m confident we’re making progress, but it’s a job that never ends.
Customers need convincing that the bill they’re forced to pay is value for money. It can be an uphill task if prices are rising and the extra value isn’t very visible. Well, despite this, the latest research shows that most people think the service is good. And when we asked them if they’d be willing to pay a bit more for an even better service, a majority said they probably would.
We’d be stupid to take this kind of acceptance for granted. There’s still plenty of opposition to higher prices. But if we keep our communication strategy going, we stand a fair chance of keeping many if not all our customers on side.
In the end delivery is the key. That’s just as true for investors as customers. How do we see the future of the industry’s relationships with the financial community?
In operational terms we’ve proved we’re the best in the world. The next phase is to create truly sustainable businesses. In the medium term we need answers to the questions about financeability. There are some essential steps like getting the right cost of capital, promoting innovation, and not stifling dynamism. We’re committed to making the case for these even more strongly.
We’ll continue to research investor opinion. We’ll create more opportunities for decision-makers with different interests in the industry to meet each other. And we’ll promote the economic value of environmental businesses.
Now, my fourth commitment is to support the regulators, the government and other stakeholders in reducing regulatory risk.
We’re in the middle of a real debate about the quality of regulation in this country. It’s a high priority that regulation should be as streamlined and relevant as possible. This requires much more than going on about red tape strangling British enterprise. The needs have changed since the big water companies were privatised nearly fifteen years ago.
Then, the public’s opinion of us wasn’t great and a tight economic rein was essential. The state of the environment cried out for an aggressive regime. The quality of tap water was still lower here than in some other developed countries. But now, we have some of the best tap water in the world. Rivers and beaches have been restored. And Ofwat says the biggest efficiencies have been achieved.
It’s time to move on again. But where we do we want to go? Both policy-makers and others are looking for answers.
The Better Regulation Task Force is leading the policy effort. Its five key principles - accountability, transparency and the rest – have been widely adopted. There are lots of other official bodies involved, including the National Audit Office, the House of Lords Constitution Committee, and various House of Commons committees. They all help keep regulation honest. It gives regulators and regulated a chance to express their views.
Then there’s competition. The Water Act 2003 clarified policy and increased the number of eligible customers. We are now involved in discussions with Ofwat about how the new provisions should be implemented.
There’s also a debate going on outside government. Water UK has identified four issues that will hold up the industry’s development if they aren’t tackled. The solutions to all of them depend on more sharing of interests than we’ve seen up to now.
The first is the old mindset based on driving efficiency and low prices by ‘sweating the assets’. In future the aim should be investing for long-term value. The second need is to replace ‘one-size-fits-all’ regulation with common aims but diverse solutions.
Third is the need to stop treating water customers as taxpayers. They shouldn’t be a convenient source of subsidy to other industries. Everyone accepts that the polluter pays principle makes sense – it’s just that it can be painful to implement. But we are getting somewhere. Our case on this has led government to pay more attention to diffuse water pollution, which adds a lot to the cost of water supply.
And fourth, we need more self-regulation and more focus on outcomes than process. Nobody chooses complex and bureaucratic regulation. It just somehow appears. We’ll be working to encourage alternative approaches.
So, in conclusion, the industry has a clear medium-term strategy for promoting policies that will help us build on a very successful track record.
We will make it a high priority to maintain access to the markets on advantageous terms. We will continue to promote sustainable development aggressively - it’s the best way of reducing risk while having a forward-looking approach to business. We will collaborate with stakeholders where it’s appropriate; cooperate with them where it’s possible; we’ll keep a positive conversation going whatever else happens. And we will play an active part in the debate about the future of regulation in the water sector and beyond.