Regional government, greater competition and climate change add up to an opportunity for water companies to take a lead
The structure of regional governance in the UK is being transformed: the opening of a Scottish Parliament with tax-varying powers and the creation of a Welsh Assembly co-exist with a more cautious approach in the English regions as the Regional Development Agencies get going. Despite considerable unevenness in the pace of change and style of governance, a range of regional bodies (Government Offices, the Regional Development Agencies, regional assemblies of local authorities, regional offices of the Environment Agency) and the regionalisation of a whole raft of voluntary, private sector and environmental groups are creating a rich new tier of devolved institutions that offer great potential to shape local economic, social and environmental futures.
But what does this shift mean for our largest regional companies, the privatised and publicly regulated water and waste utilities? Water utilities are a complex physical infrastructure, connecting almost every household and business to water-supply and waste-disposal systems. These networks are the most "embedded" forms of capital imaginable. Unlike footloose or mobile capital that can move across national and international boundaries in response to changed economic conditions or low labour costs, a water network is quite literally sunk within a particular regional territory. If a regional economy is performing poorly, a water utility facing reduced demand for its services cannot simply move its greatest capital assets - the water network - elsewhere. Yet in the debate about new regional strategies, the role of some of our most significant embedded assets seems to have been entirely neglected.
Water networks and regional futures are closely intertwined. Water utilities are often the largest headquartered company in a region, making them major employers and the most significant source of regional capital expenditure. Water utilities are acutely aware of their responsibilities, and not surprisingly the visibility of regional brands has intensified in recent years through community development schemes, arts sponsorship and environmental initiatives. But as regions gain more powers, established roles will be questioned and tested; water utilities and regional institutions will ask more of each other.
What type of relationship might develop? If we look to international experience, we see quite varied arrangements. In France water companies compete for franchises to run water networks for municipalities over a 30-year period. While the returns from the water operations are relatively low by UK standards, the company uses its position as franchisee to build up information, knowledge and contacts within the region which can support bids for other services, such as refuse collection and disposal, and energy supply. By contrast, the highly fragmented local government system in the US has allowed water and energy utilities to lead and sponsor growth promotion and strategic economic development. Utilities can become engines of economic development, controlling land-use planning through water network extensions, building models and scenarios of future economic development and actively promoting inward investment and economic growth.
As yet it is impossible to discern any single model of engagement between water companies and regional authorities in the UK. But three key challenges will shape their future relations.
The first challenge is the opening up of competition in the water sector. Water utilities are still, in effect, vertically integrated monopolies; they have not been subject to the liberalisation that led to the "unbundling" of energy and telecommunications networks. Now debate is raging about how the monopolistic and competitive elements within the water networks can be split. Customer billing, call centres and network maintenance could become contestable commercial activities; access to distribution networks could be opened to new entrants.
Although it is unlikely that individual domestic water users will have the same level of choice as in energy or telecoms, large water users are lobbying to open up the commercial and industrial market. If, as expected, Ofwat lowers the threshold for competitive supply deals across water company boundaries next year from the present 250 million litres a year to 100 million litres, the competitive market would expand to 2,000 customers, including large industrial, commercial and public-sector users such as hospitals and universities.
The regional development impact of competition will vary according to the local level of water resources, the structure of demand and the commercial strategies adopted by the companies. But water utilities are likely to look outside their host region to cherry-pick the most lucrative large users, while at the same time attempting to lock their most valued local users into their own network with the lure of special tariffs and additional services. Any tariff rebalancing that lowers costs for large users will certainly arouse the concerns of social policy groups about concomitant rises in costs to small users. In short, it is imperative that a regional dimension is built into the current discussions about competition, to ensure that costs and benefits are not distributed unevenly between regions and by different classes of user within regions.
The second challenge of regional development comes with the emergence of new intermediaries who sit between water users and water utilities. The restructuring of the water sector is stimulating the emergence of intermediary organisations - public and private - for both the use of water and the production of wastes. The motivations of these new players vary: water savings, environmental protection, waste minimisation and commercial objectives are all driving their formation. Some house-builders, for example, are constructing estates that incorporate "grey water recycling", using treated bathing waters for flushing toilets. These decentralised systems allow homes to be built in areas of water shortage; by inserting decentralised technologies into centralised networks they also decrease reliance on water utility networks.
This kind of development has its parallel in the industrial sector, where intermediaries are approaching groups of industrial users and offering to manage waste flows. They fund their investment in waste minimisation and treatment technologies by negotiating lower waste charges with the utility. Incumbent water utilities have responded to these shifts by creating their own intermediary agencies through which they form partnerships with house-builders and negotiate special services for large users. Again, the implication for regional development is a trend towards much more highly customised relationships between water companies and large clients.
The third challenge to the strategic role of regional water companies is the sustainability agenda. The new Regional Development Agencies, the Government Offices and the Environment Agency are all formulating their own quite distinctive notions of sustainability. While the water utilities are already responding to a wide range of environmental regulation from Europe downwards, very little work has been done on the implications of their sustainability plans for water networks. Recent climate-change research indicates that variations in water resources are on the increase, with drought conditions developing in unexpected areas. The Yorkshire drought of 1995-96 illustrated how quickly a regional water network can break down because of an unanticipated change in rainfall.
Regional Development Agencies and water companies therefore need to co-operate in considering what degree of resilience should be built into networks to cope with these uncertainties. These are complex technical, economic and social questions. Recent experience suggests, for instance, that water company calls for emergency water savings may elicit very different consumer responses in different parts of the country. Yorkshire Water customers lost faith in the utility and refused to adopt the role of "water savings user". Experience in the drought-affected South-east demonstrates the importance of forming close relations with users and actively helping them to conserve water. Increasingly companies will have to work with appliance manufacturers, builders and the garden industry to produce white goods, houses and gardens that use less water.
Overall, the logic of privatisation and the imminent prospect of increased liberalisation is that water utilities are likely to form more complex relationships with users and places, with more diverse roles in shaping the regions' social, economic and environmental management.
Policy-makers and planners have been slow to understand the importance of utility strategies for regional development. But this is changing. Voluntary and community groups have tried to ensure that low-income households gain affordable access to water, energy and telephone services. Economic development agencies have begun to realise that utilities can act as powerful allies in growth management. Environmental groups have recognised the benefits of policies to cut demand and are working with utility companies on energy and water saving.
Regional policy-makers need to go further, to develop an understanding of where a privatised utility company's commercial strategy underpins or conflicts with wider regional development objectives, and to build partnerships for mutual benefit. These will need to look at some of the broader issues, such as protection of low-income households and communities, the development of environmentally sensitive demand-management activities, the co-ordination of urban planning and infrastructure provision and how best to facilitate inward investment and increase the competitiveness of existing businesses. And at the national level, the content and style of utility regulation will need to be sensitive to the quite different social, economic and environmental needs and policy agendas of UK regions.
Ahead lies a tremendously complex task for the regions that will produce very diverse results. Demands for regional self-sufficiency and the application of water demand-management measures are likely to co-exist with increased water trading across geographical boundaries as competition is rolled out. The prize for the bold is to begin to turn messy and complicated visions of sustainable futures into an embedded and durable reality.
Simon Marvin is United Utilities chair of sustainable urban and regional development at the University of Salford