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Aqua vitae

Privatisation within a strong regulatory framework and driven by tough European environmental directives has totally transformed the water and wastewater industry in ten years.

This decade is set to become one of historical significance marking the radical improvements that have been made to the quality of the nation's drinking water, and cleansing of polluted rivers and filthy beaches. People will look back on the 1990s as a time of extraordinary and rapid progress.

After 2005, when the catch-up work on pollution is substantially complete and no English or Welsh beach is tainted with excrement, people will wonder why such pollution was ever tolerated.

The difference to the rivers and coastlines is likely to be even more dramatic than the improvement in air quality in towns brought about in the 1950s by the Clean Air Act and switch away from coal. That is the view of those in the industry who are close to what is being achieved.

'Never before in the history of Britain has so much been spent to clean up the environment,' says Northumbrian Water's environment manager Dr Chris Spray.

Vigour, enthusiasm and a drive for efficiency have replaced the lacklustre performance that was all too common when water was in the public sector. Successive governments' reluctance to fund essential capital works and environmental improvements had put a deadening hand on the water industry, causing a run down in the infrastructure of what had once been high quality public utilities.

'Privatisation has transformed investment since we are no longer part of the Public Spending Borrowing Requirement,' says Richard Oake of Thames Water. 'Previously we were in the position of few industries - spend next year what you spent in the last.'

South West Water's chief executive Bob Baty, who moved to the South West specifically to work on the Clean Sweep coastal cleanup, adds: 'The last ten years have been a tremendous catch-up exercise, bringing the environment back up to the standard.'

Baty recalls how difficult it was raising capital for projects under public ownership. When a dam was built the finance might be raised to build the dam itself but the pipelines linking it to the supply system were likely to have to wait until another year's budget.

Northumbrian Water Limited's managing director Tony Harding recalls: 'There was a counsel that private shareholders would neglect assets. When we did the asset management plans we realised that we had been underinvesting. Capital expenditure has risen two to four times since privatisation.

'Before privatisation there was an attitude 'if it ain't broke don't mend it'. Now, industry and civil engineering can be quite proud of what we have done. Within tight timescales the efficiency of the partnership approach has enabled us to deliver.'

Performance of inland wastewater works was very poor before 1989, despite obligations under the Control of Pollution Act. 'The legacy from pre-privatisation was a fairly lax scheme,' says Southern Water's planning and development manager Stephen Peacock.

There wasn't the drive to comply, or the funding, only a corporate consciousness that things should be better, according to Peacock. 'Now there is a zero tolerance attitude to pollution.'

He says that the performance of treatment works has improved to 'high 90s% compliance. It had been languishing at around 40% to 50%'.

'Twenty five years ago a list of failures was the norm. Now one failure is not acceptable. It's been a revolution - a cultural thing,' says Peacock.

There have also been substantial improvements in drinking water quality. 'It was a major issue and there has been a big transformation,' says Richard Oake of Thames, which now measures 99.984% of its samples passing all tests.

Severn Trent's head of quality and environment Bob Breach agrees: 'One of the benefits of privatisation is that for the first time we had clear unequivocal standards. There have been huge improvements in the quality of drinking water.'

Charges to customers have also gone up, reflecting the higher standards of the products being delivered. Unfortunately there is still the perception that rain is free when it falls.

Although the marginal cost of supply is perhaps only 5p/m3, the cash required for essential new capital investments makes the cost of supply nearer 30p/m3. And the bill for carrying away and cleansing dirty water is twice that.

In some areas high charges are an inevitable consequence of the geography and the somewhat artificial domains of the ten major water and waste water companies. Cleaning up of previously neglected discharges to the sea has involved huge amounts of capital expenditure by those responsible for long lengths of coastline.

For companies such as South West Water and Hyder serving relatively small populations concentrated in coastal towns, this essential work has cost several hundred pounds a head for every customer.

Takeovers or mergers among the big ten would have much to commend them in terms of creating more sustainable entities. So far this has been resisted by the Office of Water Services, Ofwat. Industry Regulator Ian Byatt favours having ten companies whose performance can be compared and contrasted. But Byatt is due to hand over to a new Regulator in March. He or she may well have different ideas.

Industry talk is of consolidation to half a dozen companies or less. Fewer, larger companies could be a boost to overseas projects. Several companies are proving successful internationally after some early burned fingers. Britain's early privatisation has ensured that the industry has experience that is marketable worldwide as governments realise the advantages of using private capital for infrastructure investment.

Whether these mergers would involve overseas companies buying shares, as happened with Wessex Water and Northumbrian Water, can only be guessed at. At present many of the water companies themselves are carrying very substantial levels of debt which might inhibit inter-industry takeovers.

The group companies of Hyder, Severn Trent, Thames and North West (United Utilities) between them owe an impressive £11.5bn.

In the code of the industry the first and second five-year investment plans agreed by Ofwat for each company were named Asset Management Programme One, and AMP2. Detailed targets and prices were set in each for the upgrading of infrastructure that had to be completed.

Now the industry is still enmeshed in final bargaining on the Regulator's determination for AMP3 - running for five years from April 2000. The verdict will determine how much companies can charge and what they can spend on specific infrastructure improvements. It will be announced at the end of this month.

Companies are protesting vigorously.

'I think we are going to find an industry that's in dispute with its Regulator,' says Wessex Water's director of quality & regulation, Gareth Jones. 'It is questionable whether we'll be able to successfully fund our activity.'

Severn Trent's director of engineering Ian Elliott says: 'In the draft determination Byatt wants to take 15% off charges and capex is 25% off what we hoped for. He wants us to do a lot more for a lot less. It is creating huge tensions.'

Jones says that the response to a public consultation exercise pulling in a substantial 10% response from Wessex's 1M customers was that they wanted 'steady bills, not a one off cashback' (as is being proposed by the Regulator).

'Our customers want an improvement in environmental standards and the elimination of sewer flooding,' says Jones. 'We also have a big argument with the Regulator on infrastructure maintenance.'

Northumbrian Water Limited's managing director Tony Harding says: 'The days of teak doors and brass handles are gone.' But he is very concerned that the Water Regulator is not allowing enough margin for future maintenance: 'In terms of capital maintenance we are in danger of taking a short-term view of what is a long term industry.'

Harding says that much more needs to be spent on maintenance even where ageing infrastructure does not make itself obvious by failing.

'We've said you can only demonstrate this when things go wrong,' he adds. The difficulty for the water industry in explaining the need to spend money repairing apparently sound infrastructure is that: 'We have an asset base which is capable of short-term neglect without it showing.'

Consultant Binnie Black & Veatch director of business Richard Coackley is very concerned over training of engineers within the reshaped industry.

'I see a big problem. We don't just need managers. We need to put a lot of effort into producing first rate thinkers and use them overseas. It is a long-term thing. We have got to keep our minds on where the whole world is going.'

Predicting future water demand and the likely effects of climate change are also exercising the industry. 'Climate change is the thing we are shouting about,' says Severn Trent's Elliott.

'We think we will have milder, wetter, winters and dryer summers,' adds South West Water's regulatory and finance director David Dupont. 'We will need to catch more water in winter and use it better in summer. If we get Mediterranean summers we can expect more tourists and will have a higher peak demand.'

Anglian Water has developed very sophisticated computer modelling techniques aimed at trying to identify where best to invest money in the long term to guarantee supplies with a growing population and a more extreme climate.

'If we don't plan ahead and develop new reservoirs we are going run out of water in 15 years,' warns Dr Peter Spillett of Thames. 'Water companies have to think long-term. We have asset lives of 100 to 300 years. But instead we've got short-term politics.'

Much of the work in AMP3 will be dealing with unsatisfactory combined sewer overflows. North West Water has 265 CSOs to deal with by 2005. 'That's one a week at a cost of up to £0.5M each,' says NWW commercial director Richard Bradbury.

Often they are in difficult places to access. The solution is to make some operate properly and screen them while others will need total reconstruction. 'It is a distributed problem and needs a lot of brainpower,' summarises Bradbury.

Processing increasing quantities of sewage sludge into socially acceptable fertiliser and landfill material has been, and looks set to continue to be, a major preoccupation of the industry. Different companies are at loggerheads over whether to virtually give away pasteurised sludge pellets or charge a premium price for what appears to be an environmentally acceptable product.

The current row over French cattle feed could add to market resistance by a people who until recently often swam in the raw material every time they took a dip in the sea.

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