Water UK

Water UK City Conference 2011

09/02/11

We have with us today not only leaders of the industry, but regulators, Government representatives, analysts, investors and City institutions. And of course, Secretary of State, we are delighted that you have joined us. So these hours together are an ideal opportunity for us to discuss and review the major financial, economic, environmental and regulatory challenges that the industry is facing at the beginning of 2011 - taking into account the interests of all our stakeholders, including, of course, our customers.

And because of the nature of our industry we are ALL customers!

I think it is fair to say, that in the years since those fledgling days after privatisation, the water industry has made giant strides forward – and overall, the story to date can truly be described as one of "Success".

But while the industry has achieved a great deal, we must also acknowledge that we are still in the first part of a long – and challenging – journey, as we begin the second decade of the 21st Century.

The water industry has already demonstrated that through vision, partnership and commitment, it is more than capable of meeting large and substantial challenges.

And in the future, we face more equally large and substantial challenges – if we are to achieve our three primary, long-term objectives which are:-

 •  Sustainable water supplies – that’s keeping quality water available to customers
 •  Sustainable waste services - taking the dirty water away - and returning it, cleaned and treated, to support the environment
 •  And value – making sure that our services are good value for money - and that customers can pay their bills without undue hardship.

Securing these objectives will require both continuity and change.

We face the need to maintain and renew water infrastructure – which means that we will continue to need new investment.

And change will be needed - because the challenges of the future will differ significantly from those in the past - but I believe that we can face – and tackle them - with both confidence and a well-justified sense of optimism.

 •  Scientists predict that climate change is likely to bring huge pressures on water and catchment management – with everything from storms and floods to droughts.

 •  The population is growing and customers expect rising standards – both in term of service and in our care for the environment. And that means new ideas and new approaches in many areas.

 •  And then, because our services are essential to life itself – we must make sure that our charges are affordable to all.

 •  And all of this of course, drives us inexorably to the heart of our future – that’s investment.

Before I touch further on these issues, let me, reflect for a moment on why I believe that the industry can be both confident and optimistic.

In the face of considerable national scepticism – and not a little active opposition – the water industry in the last 21 years has achieved an enormous rise in the quality and efficiency of both water and waste services.

To do that, we have needed, and have secured, some 90 billion pounds of investment since privatisation – and at no cost to the public purse. And for that – we must say a big "Thank You" to all who have trusted their investment to us.

And with the help of that investment - and through the tireless efforts of the water companies – we have also taken major steps, both to serve our customers better and better – and to help customers understand how the industry is working, in order to improve our service even more.

But, as is ever the case, water is a sector of ongoing change. After the Price Review in 2009, some might have hoped that 2011 would be a relatively quiet year. However, it is already proving to be anything but quiet!

The demands made on the industry are increasing – and changing – and the industry is already changing to respond to these new demands. In the past we have been primarily focused on creating and improving efficiency! Now - our customers and our investors are becoming more concerned about sustainability - and environmental issues.

At this conference today, we will, of course, hear a great deal about investment! Indeed, the success of the industry, present and future, has investment at its heart.

Our responsibility – as an industry – helped by the statutory and regulatory framework, is to source that investment in a way which delivers the best possible results both for our customers and for stakeholders in the industry.

We have no desire - and we see no desire elsewhere - to source future investment funds through taxation. And this means that there will be significant scope - and a great need - for further private investment for many years to come.

Realistically, there are only three potential sources of future funding for water:

 •  Equity
 •  Debt
 •  or increasing customer bills

Since water must be affordable, there are real limits to the extent to which we can increase charges to our customers as a means of obtaining investment – and that leaves equity and debt as being the key sources of our future funding!

So far, we have been able to attract the necessary investment at a broadly acceptable cost.

But we recognise that investors today have a wider range of investment opportunities than ever before and that many of those opportunities are serious alternatives to investment in our industry.

And that means that the sector is going to have to work harder and harder to attract the necessary funds from investors!

In a moment, I want to share some thoughts on what we need to do to obtain these funds - but first, let me mention two things that are fundamental, both to our industry and to its partnership with the providers of capital.

First, all of us working in the industry share the commitment and enthusiasm for providing the most fundamentally important service – and I'm sure that this commitment is shared by all of us involved in the sector.

Participation in the water industry, whether as an investor or in some other way, is far more than just providing customers with quality water supplies and sewerage services.

 •  Our services are critical for public health and our quality of life!

 •  They are vital for the country’s biodiversity - and the security of our natural environment!

 •  They underpin virtually all other forms of infrastructure investment!

 •  And because water is essential for life, access to water must be universal and affordable to all.

The fundamental public service nature of our industry has resulted in a true partnership between the sector and its investors. It is a partnership that provides:

 •  investors with stable and predictable returns; and
 •  the industry – and its customers – with the resources needed to provide a universal, high quality service.

And secondly - water is a long-term industry! And its investment profile also has to be long-term so that the industry can deliver on major policy objectives.

For example: the Government's Carbon Reduction Targets start to bite in 2020 – in nine years' time. Now, even though that might be a very long time in politics, it is not very long in water industry terms.

So, our approach within the sector has to be based on our willingness and ability to plan and perform over decades - and it also means that we must put the right incentives – and safeguards - in place now to generate the outstanding results that we all want in the long term.

Now, we shall no doubt be discussing throughout the day how we present an attractive case to investors – and I know that our programme participants will give us much food for thought.

So, let me conclude by suggesting some of the things that we will want to keep in mind as we consider the case for investment.

Firstly, investors tell us that they recognise that the industry must deliver this wide range of sustainable, environmentally-friendly services – and at what the public are willing to consider as "a reasonable cost".

But they also tell us that if they are to fund – and continue to fund – the Industry at a cost that the industry and its customers will find attractive, the practical extent and requirements of our goals and objectives, need to be thoroughly understood, before investment is committed.

That means that together, all stakeholders need to think through our priorities and determine the strategic and practical pace of our move forward – before we ask for money.

Secondly, planning for the sector, by industry, policymakers and other participants, needs to be sufficiently co-operative and integrated to ensure that there is a serious degree of certainty that we can deliver on schedule.

This aspect will be crucial in determining the price we must pay for funding - because the long-term nature of the investment profile that we are now offering, must produce a sustained return to investors for their large up-front commitments.

And thirdly, if we are to make an effective investment case, we have got to be able to demonstrate support from a wide range of stakeholders, which will include policymakers and regulators, our companies – and most importantly – our customers.

And since all stakeholders are also customers, that's a pretty challenging task!

At the moment, there are many different strands of activity going on which will impact the shape of the sector and the investment opportunity in future years!

For example:

 •  White Papers on Water and the Natural Environment are being planned
 •  BIS is undertaking a Review of Regulatory Principles – and the probable need for more cross-sectoral regulation and co-ordination
 •  Infrastructure UK is working to bring about the best conditions for investment in the UK Infrastructure sector as a whole
 •  There is the ongoing Defra Review of Ofwat and CC Water
 •  And there is Ofwat's own Review of its regulatory approach

Now, I find – and I think most of us do – that the complexity of all these activities is pretty difficult to grapple with, let alone sort out and clarify.

There is a lot of activity – but what we now need urgently – and if I may suggest it, Secretary of State, before the White Paper is too far advanced – is a thorough appraisal of the industry, its challenges and the best means to meet these challenges, so that we can make united plans for short and medium-term action, in the context of the broad long-term picture.

I hope that the White Paper, incorporating such an appraisal, will allow the Government, the industry, and investors to see clearly, and understand fully, how the solutions we invest in today, will effectively address the challenges that lie before us tomorrow.

We can then ensure that there is a successful transition from the efficiency-oriented objectives of the past, towards more emphasis on sustainability and environmental benefit in the future.

As we face these new demands, we recognise and understand that there will be areas where change is necessary. We will together need to distinguish and separate meaningful change – which brings about the desired outcomes - from change merely for change's sake.

Of course, this has to be a Government-led process, and our role, both as companies in the sector and at Water UK, is to provide all the support we can, to enable Government to bring together these individual processes, into a cohesive whole.

As an industry, we want to work with Government, to ensure that both our actions and the expectations of investors, are in line with our customers' long-term goals and expectations, and that all policy developments lead to outcomes which move us steadily forward, to achieve those goals.

So, we will look forward to hearing more today about the enablers for future investment. It is essential that the Government, with support from all of us in the industry, begins now to set out the key deliverables for water over the next ten, twenty – and even thirty years, drawing together the different strands.

With a Water White Paper, and perhaps even a future Bill, and the significant acknowledgement by the Government that there is an ongoing need for infrastructure investment – this year of 2011 is likely to prove a critical one for ensuring that these enablers are put firmly in place, so that we can give investors the confidence they need to continue to be a vital part of this industry’s success story.

So I hope that while we recognise the scale of the challenges that lie before us, we can nevertheless join together and tackle them with confidence and – with so many stakeholders demonstrating their commitment, with the positive expectation that the Water Sector will continue to improve and develop, as we have done over the last two decades.

Thank you again for coming to this 11th Water UK Annual City Conference – I hope when you go home this evening it will be with renewed vision, confidence and expectation for the future of this great industry.