Stale to fresh: shifting how water companies work

UK water companies need to change if they are to operate successfully in the long-term, even while the industry around them changes. Vicky Vanderstichele outlines three key areas of change water companies need to address.

In our first blog on the Cunliffe Commission, a review of the UK’s water sector and its regulation, we outlined how the management of water needs to change to consider the whole economic system on which water is built.

This second blog looks at the inner workings of water companies and outlines three key areas which need to change to enable water companies to operate successfully in the long-term: business model, resilience, and accountability.

Water as a not-for-profit enterprise

Water companies were privatised in the 1980s to increase investment in the water sector. From this perspective, privatisations succeeded. However, one of the most detrimental outcomes of this is that water is no longer managed as common resource, vital to the functioning of our economy and society but instead as a commercial investment.

In response to this, there have been calls recently for water companies to be renationalised. But a different way of getting the same outcome in a more effective manner could be to turn water companies into not-for-profit social enterprises. Shareholders would of course have to be bought out to enable this transition, and debtors convinced to go along. This would allow water companies to focus its resources on improving the water system and creating systemic value for society rather than only monetary value for shareholders.

In this way, water companies can still operate separately from government (thus not being on the government’s balance sheets), continue to receive investment in the form of debt and also focus on creating systemic value  through the investment of their profits.

Dwr Cymru (Welsh Water) did shift to a not-for-profit model in 2000, where it gets to retain its earnings rather than pay out dividends with its profits. This has not been an unalloyed success as Dwr Cymru’s environmental rating has dropped over the last four years. But it shows that a different organisational structure is possible.

While the move to a not-for-profit model can help take away the pressure generated by the for-profit only shareholder model, changing legal structure is not sufficient per se: we also need adequate measures of the resilience of water infrastructure, as well as ensure sufficient accountability at executive levels of water companies.

Resilient infrastructure

Current measures of water infrastructure resilience are insufficient.  Water is a crucial system for the functioning of our economy and society. It is one of our most precious assets. Like any other asset, it needs investment of time, money and skills.. But its not just about maintaining a status quo: we should also be enhancing that asset to ensure that, with increasing population and the pressures of climate change, the assets can keep performing .

Ofwat, the water regulator, mandates a certain level of investment for maintaining and enhancing assets through the Price Review Mechanism. However, this mechanism does not provide a full understanding of the state of those assets, particularly in relation to their resilience.

At the moment, Ofwat uses three metrics for measuring resilience: sewer collapses, mains’ repairs and outages. Data on these metrics overall point towards stable or improving infrastructure resilience. But we should also ask: how is it that these metrics give us a positive picture of asset health when the National Infrastructure Commission is also estimating that “there is a 1 in 4 chance over the next 30 years that large numbers of households will have water supplies cut off for an extended period due to severe drought”? This suggests that our water assets are not resilient enough to weather the future pressures of climate change, and would contradict what the metrics say.

In short: using data on sewer collapses, mains repairs and outages provides insights into immediate physical performance but does not translate to a a sufficient picture of resilience, putting our water infrastructure at risk. Resilience should encompass factors such as adaptability, recovery times and sustainability rather than just asset performance. This is harder to do but may give us a clearer picture of where investment in infrastructure is needed.

Rules for senior managers and directors

At present, senior managers and executives are shielded from consequences when their companies do not meet environmental standards.

Ofwat instituted a regime in 2014 to require the water industry to be accountable for its actions. This includes a duty to act in the best interest of customers and a duty to ensure their companies meet the environmental standards set by the Environment Agency. There have been notable sanctions in recent years, particularly for Thames Water and Southern Water, who were respectively fined £4.3 million and £90 million for breaches of environmental standards. But these fines fell on the companies, while executives remained focused on short term goals of compliance with environmental standards.

There was an opportunity to change this focus with the enactment of the Water (Special Measures) Act 2025. Rules for senior leadership of water companies have been tightened under this Act. Ofwat is now empowered to prohibit performance related bonuses for directors of water companies and the Act also introduces criminal sanctions for senior executives who obstruct investigations by regulatory bodies.

While Water (Special Measures) Act 2025 is significant, senior management still do not have personal accountability for environmental damage. Furthermore, simply limiting directors’ bonuses is not enough. To positively reinforce Ofwat’s message, bonuses should be tied to long-term performance and sustainability, with requirements for adaptation to climate change, planning for resilience and managing water resources in the long term.

Fundamentally, the regulatory framework needs to ensure that the leadership of water companies can be held to account. As the water industry stewards and maintains a public asset that is also a monopoly asset, we should expect a high level of accountability from the people who manage as well as profit from that asset. 

Changing the rules for water companies in these three areas will do much to assist the overarching aims set out in the earlier blog on the Cunliffe review. However, we also need to appreciate that the water industry needs to be continuously kept up to date with changing economic needs and social context. None of us wants to see a polluted waterway headline. But we must not throw out the baby with the bathwater. We need to stay engaged with the broader water challenge and not just box in polluted waterways as being just a water company or government problem. It is on all of us to be part of the work to ensure that our society and economy has enough clean water to ensure our continuation and prosperity.

This blog post was developed with support of the Future-Fit Foundation. North Star Transition leads the funding and finance workstream of the Ofwat Innovation funded programme for Mainstreaming Nature-based Solutions. This blog builds on the submission made by the MNBS programme to the Cunliff Consultation.