A resilient water sector

How can the water sector turn a burning
platform for change into a beacon of hope?

Originally delivered as a speech by Rachel Fletcher, Chief Executive of Ofwat at the Twenty65 Conference on 26 March 2019

We need to talk about resilience.

The word ‘resilience’ certainly sums up the challenges facing the water and wastewater sector in England and Wales.

In Ofwat we define it quite broadly as:

And through our 2019 price review, it is one of the core aims we have set for the sector in the 2020 to 2025 period and beyond.

We need to talk about resilience because in recent years – such as the service disruption to many customers in Spring 2018 following the Beast from the East –have shown the sector isn’t as resilient to shocks as it should be and there is likely to be many more to come.

Escaping the ‘jaws of death’

Th e Chief Executive of the Environment Agency, Sir James Bevan, recently highlighted the threats to resilience emerging from climate change and population growth.

He has shone a spotlight on the “jaws of death” – the narrowing of the margin between water demand and supply.

He has talked about us needing to take serious steps to reduce water consumption and a radical rethink on how our homes and businesses are plumbed to the mains in the first place.

Without these measures, and steps to explore new reservoirs and water transfers for example, the country faces an unacceptable risk of water shortages in future years.

The cost of having to tanker water and what we should do to avoid this risk has been documented in a timely report by the National Infrastructure Commission.

I wholeheartedly support the alarm being sounded on water resources.

But my message is to point out that the challenges to the water sector’s resilience are in fact much wider than this.

I believe together these challenges create a burning platform and signal the need for big and holistic changes.

This is not a tale of gloom
and doom.

It is a tale of hope.

Because many in the water sector have woken up to the need for change, and are already taking steps to deliver it.

My view is that 30 years after privatisation, we are on the brink of seeing the sector reinvent itself.

It will require new ambition, commitment and bravery. But if change is secured, the sector can become a beacon for the rest of the economy to follow.

The burning platform

So before we get ahead of ourselves, let’s start by understanding this burning platform.

Climate change and population growth present challenges to water resource resilience. But these factors also present a risk to the resilience of assets and threaten the very ecosystem the water sector depends on.

Let me illustrate:

The Beast from the East and the hot dry summer in 2018 showed that rapid changes in temperature and in soil moisture can damage water pipes causing service disruption to customers.

And with extreme rainfall and flooding comes the risk of sewer overflow into rivers and onto our beautiful coastline. Not only does this damage the environment. It angers people who understandably expect their local river or beach to be places of relaxation and enjoyment.

I receive more letters complaining about sewer overflow than any other topic. After all, who wants their kids to play in a rockpool full of wet wipes or to see human waste in their local river? And who would expect this in the 5th richest country in the world? With climate change, more weather extremes are predicted. But I don’t see people becoming any more tolerant of the disruption and pollution extreme weather can exacerbate. And nor should they.

And to this let’s add in population growth.

· New housing developments put strain on old sewers and can cause internal sewer flooding – one of the most horrific things that can happen to a water customer.

· As our population grows, abstraction and effluent discharge puts the environment at risk – seen most dramatically in what is happening to many of the ecologically precious chalk streams in the South of England.

· And of course it is in water scarce areas with already threatened ecologies, that our ambition to build 300,000 homes a year is concentrated.

So climate change and population growth pose a very real and present danger to the resilience of water resources, the water company assets, to the reliability of service, to our enjoyment of the natural environment and to the ecosystem itself.

But there is one further challenge to resilience. And that is the threat to the legitimacy of the sector.

Water companies are providers of a service which is absolutely essential for life, and over which most customers have no choice of provider. To be resilient they must be trusted to work in the interests of customers, society and the environment – not just in the interest of their shareholders.

The ambition

Looking at all of this together, it becomes obvious that putting out the fire on this burning platform will require more than some engineering work.

It needs more than tackling leakage, water consumption and building reservoirs and transfers – hard as these things are.

The sector can only really achieve resilience if it also keeps water affordable and protects and even enhances the environment. Like a three legged stool if any one of these elements is missing, it becomes unstable.

If we have resilient water supplies but the cost has made water unaffordable for many, the legitimacy of the sector will be weakened.

If we don’t seize opportunities to protect and enhance the environment, the ecosystem the sector depends on will be ruined. And there’s a link here too to legitimacy of the sector.

Increasingly people expect private businesses to improve the environment – and to certainly not damage it – as illustrated by the school children’s climate change strike a few weeks ago.

Balancing resilience of service, affordability and environmental enhancement needs to become the sector’s ambition.

The encouraging story

Set out like that, the task before us could sound overwhelming. Conferences like Twenty65 are meant to inspire you to go back into the battlefield with renewed focus and energy. So let me tell you an uplifting story.

In the last 9 months a truly revolutionary thing has been happening. The water companies with the Environment Agency, Defra, Welsh government and Ofwat – and with the help of academics - have been working together to create a national and joined up approach to water resource planning.

This movement – to create what we call a National Framework – is looking across the country as a whole to identify opportunities to move water from places with a surplus to where there are deficits. It will identify where trades and transfers might be less costly than local solutions.

This is a break with the current approach where each water company sorts out its own water resource solution.

· It allows us to reduce the risk of water shortages - avoid the jaws of death if you like - without putting unnecessary costs on customers’ bills.

· It is also an opportunity to reconsider our approach to abstraction- potentially reducing or ending abstraction from environmentally sensitive areas.

By factoring in the cost to the environment we can make a more rounded assessment of the balance between demand reduction and building new sources of supply.

And we have set up the first ever joint team across the Environment Agency, Ofwat and Drinking Water Inspectorate, creating a framework for investment in new transfer schemes and other joint infrastructure.

A great example of how, with a bit of ambition and leadership - resilience, cost and environment can be considered together.

The solutions

If we can do it on water resources, the biggest challenge facing the sector, we should feel confident we can tackle all challenges in an affordable and environmentally friendly way.

Building on a platform of leadership and vision, the sector can tap into three interconnected and mutually reinforcing opportunities to address the resilience challenges.

These are:

· Innovation

· Collaboration

· A deeper connection with the customers and communities the water sector serves.

So what do these mean – and what are the implications for Ofwat’s regulation of the sector?

1. Innovation

First, innovation.

The world is awash with new ideas, new technologies, techniques, processes and business models.

These create opportunities for the sector to deliver more resilient services at an affordable price. As we see in the catchment management schemes across the country, by doing and thinking about things differently, companies are able to bring environmental improvements as they go about the task of providing clean water and waste services. “More of the same” – replacing our ageing assets in a like for like fashion and operating them as we’ve done for decades – won’t provide the low cost, environmentally friendly solutions to resilience that we need.

I don’t think this is a controversial statement. And yet the pace at which water companies are innovating remains slow. I hear a lot of frustration in the supply chain – as well as amongst people working in the companies - about the water companies’ reluctance to adopt new approaches and change the way they operate.

I hear that Research & Development , trials and pilots are happening but that solutions are are failing to find their way into the fabric of the business.

Diagnosis suggests that the single biggest thing holding back change is risk aversion. Companies have a tendency to hold onto tried and trusted techniques. The irony is that in doing this, they are failing to manage the biggest risk of all - that they fail to meet society’s expectations of them.

2. Collaboration and partnerships

Second, collaboration and partnerships.

Climate change is a global phenomenon – and many countries are having to adapt much more quickly than the UK. The risks associated with population growth are not unique to any company or sector.

Recent experience suggests that the sector’s legitimacy stands or falls on the performance of the poorest performing company. Responding to these big strategic challenges therefore calls for joint action.

For a long time, water companies have been focused inward on their own business, solving problems their own way. They’ve kept contractors at arm’s length, showing a suspicion of any new idea “not invented here”.

This has impeded sector wide take up of successful new techniques even where these have been shared openly by fellow water companies, or offered up by contractors. The failure to collaborate has led to duplication of research and has made it difficult for any new technology to gain economies of scale.

I am pleased to say there are signs of this changing.

• Some companies are working collaboratively, and others are looking for global learning, to hit the sector’s ambition to reduce leakage by at least 50% by 2050.

• There is evidence of water companies working in partnership with energy companies, money advice and consumer bodies to help people struggling to pay their bills.

• And of course where a company is using catchment management approaches this often involves forming partnerships with local farmers, landowners and community organisations.

This is great to see but we still need much more. Partners bring new skills, new ideas, can unleash new funding sources and can bring innovation and a fresh impetus to the company. Partnerships are key to allowing water companies to add social and environmental value as they go about their work.

3. Relationships with customers and communities

The final component to a fully resilient sector is, I believe, a strong relationship between the companies and the customers and communities they serve.

Customer behaviour will need to change if the sector is to tackle the challenges before it.

• We may need to accept smart metering and other kit in our homes to help us use water wisely

• We may need to change habits about using water

• And we may need to accept some use of recycled water or the creation of a reservoir on their doorstep

Of course, behaviour change will come all the more easily if customers trust their water company and believes it has their interests at heart.

Companies have taken a good step forward in building up relationships through the customer engagement they have conducted for their business plans for 2020 to 2025. But they need to keep listening and responding to customers’ needs, become more sophisticated in understanding the customers they serve and build an ongoing conversation about how, together, we can address the strategic challenges the sector – and indeed the nation – faces.

As I visit companies across the country I am struck by the passion for public service that people in the water companies have. I am struck by the desire to bring benefits to the local community and the local environment. But the suspicion that companies care more about profit than their customers or the planet remains and needs further attention.

I therefore applaud all those who are considering offering up a set of commitments to their local communities through a “social contract” and encourage them to be truly ambitious in how they go about this. To be successful and win support, it must represent real, progressive change.

Implications for Ofwat

I’ve talked a lot about how water companies face a burning platform for change. But I want to end with a few words about Ofwat. Because it’s important that we challenge ourselves about how we regulate as well.

The sector is unlikely to be able to make the shifts I’ve talked about if Ofwat doesn’t change too. This is something we are thinking deeply about as we consider Ofwat’s strategy from 2020 onwards.

It’s clear to me, for example, that we need to do more to encourage innovation than we have to-date. The outcomes based incentives approach that Ofwat has been using is, of course, “innovation friendly”.

However, as I look at the speed of innovation and the scale of challenges the sector faces, I think we need to do more – and we can’t wait for our 2024 price review to do it. We will shortly be consulting on options we are considering and I’d welcome your input as we do this.

In tackling the water resources challenge, we’ve broken new ground in forming a joint team with other regulators in the water sector. But there is scope for much greater collaboration.

We have started early talks with other regulators on establishing some longer term targets that should help provide a clear focus for the sector and drive innovation. These targets could sit alongside commitments companies themselves set. And they could help Ofwat to see if the tools we are using are having the desired effect and to review and improve our approach more readily.

Turning a burning platform of change to a beacon of hope

The challenges before us are significant – and we mustn’t kid ourselves – meeting them isn’t straight-forward. In responding, we must set our ambitions high.

This ambition is achievable if the sector look outwards, is braver and collaborates and connects with society. It is achievable if the sector focuses on delivering for people and the environment – not just making profits. This is a change the sector is inching towards and we are committed to playing our part to bring it into reality.

If we are successful this will set the sector off on a new direction. 30 years after privatisation this could be its saving grace… turning a burning platform of change to a beacon of hope.

^{This was originally delivered as a speech by Rachel Fletcher, Chief Executive of Ofwat at the Twenty65 Conference on 26 March 2019.}

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