Thames Water is the UK’s biggest water company. Antony Oliver talks to chief executive Martin Baggs about the challenge of new reservoirs, the Thames Tideway, his ongoing £1bn a year capital programme and meeting the needs of 13.8M customers.
Walk down virtually any street in London and it will not be long before you find a Thames Water contractor digging holes and replacing the capital’s aging Victorian water mains.
While road users may despair at the constant and seemingly never-ending road closures and congestion caused as a result, Thames Water chief executive Martin Baggs concern lies more with his inability to do more.
“I would like to see us doing far, far more on leakage and on replacing Victorian mains,” he says. “Some of those pipes out there are 100-120 years old and when you dig them out of the clay you can literally put your finger through them. That can’t be right.”
£1bn a year upgrade
Although the company is already spending some £1bn a year upgrading its infrastructure, it is clear that Baggs passionately understands why more of this kind of work needs to be done.
“In my career as an engineer I have worked through some pretty hairy times in terms of droughts”
Unusually for the boss of a major utility, Baggs is a civil engineer who knows his infrastructure and the issues affecting it intimately and very technically.
Over the last 25 years Baggs has worked his way up from graduate recruit with Southern Water to being responsible for the UK’s largest water company. He now has 13.8M customers to service and a 4,600-strong direct workforce looking after 43,500km of sewers, 349 treatment works and delivers millions of litres of drinking water every day.
Running such a large company requires an appreciation of the bigger picture. Yet Baggs is proud to retain the engineering enthusiasm that has driven his career, often hopping off the Tube a stop early to drop in on the numerous work sites around the capital.
Scale of operations
“One of the things that fascinates me about Thames Water is the scale of its operations,” he says pointing out that they serve some 25% of the UK population. “We are running a £1bn a year capital programme, so there is a huge amount of investment going into the base,” he adds highlighting the on-going £700M investment being made in the Lee Tunnel as an example of this commitment to the on-going leakage and sewer replacement programme.
For Baggs, the frustration is that, under the current regulatory settlement, he is effectively prevented from investing more. The regulator’s cap on the amount he can charge customers each year limits the amount that can be funded to invest in a better service.
Of course the regulator’s job is to protect the public from greedy monopoly utilities and to force them to deliver highest quality service. And while Baggs identifies the need to boost his customer service as a major challenge, he fears that the current five year settlement might be hindering these efforts.
“It sounds a feeble excuse to say that this work is not funded by the regulator but it comes back to the balance - we are only funded to carry out a certain amount of business and that is what our investors have signed up to,” he says. “Clearly there has to be a balance between risk and return for investors. This industry is hugely dependent on the investors that sit behind it and to attract that level of investment you have got to have the balance in there between risk and reward.”
He is quick to point out that Thames Water customers pay some of the lowest bills in the country for their water supply and sewerage services - on average £319. In fact, he adds, the £12 of the £13 increase on last year’s average bill was inflation.
The fact that the regulator has set Thames a flat target for leakage reduction over the next five years means, he says, that there is no business case for his owners - as of 2006 Kemble Water, a consortium led by MacQuarrie Bank - to invest.
“This is where for me the theory overtakes the practice,” he says. “I am a very simple engineer and from a common sense point of view we should be doing a lot more. But if economically it doesn’t stack up and we have got a flat target (for leakage) over the next five years which limits what we do, I question whether that right.”
He maintains that, on the whole, customers remain very supportive of the strategy of upgrading the Victorian system to drive down leakage and reduce sewer overflows and flooding.
Regulatory reform is likely to be around the corner following last year’s Cave review. However, for all his concerns about the current system, Baggs is adamant that now is not the moment to rip everything up.
“Some of those pipes are 100 to 120 years old and when you dig them out of the clay you can literally put your finger through them. That can’t be right”
“Is there need for wholesale change (in regulation) - definitely not,” he says pointing out that Ofwat has “done a fantastic job over the last 20 years” with £90bn in investment levered in along with greater efficiency and improvements in environmental and water quality standards.
“But is there room for changes around the edges? Absolutely. But wholesale change - definitely not if we are to retain the confidence of our investors to deliver that programme,” he explains pointing out that investors like the current mature regulatory regime which promotes a neither high risk nor high reward environment.
Maintaining this confidence is particularly important right now as Thames Water presses ahead with its £3.6bn plans for the Thames Tideway - a project that sits outside of the regulated business but remains nevertheless central to its efforts to meet legal requirements for pollution discharge into the River Thames.
So far, says Baggs, the first stage consultation has revealed considerable support for the project as the public becomes aware that the capital’s Victorian sewer system simply cannot cope with modern London and that allowing 39M tonnes of sewage to end up in the Thames each year is unacceptable.
Getting to the starting line
But Baggs is clear that there is still a huge amount of work to do to get the project to the 2012/13 start line for construction.
“For a massive engineering project the thing that makes me lose sleep at night isn’t the engineering,” he explains. “The uncertainty that we have around the project is about getting the necessary planning permissions in place and then the regulations that surround it in terms of how it is going to be financed and who is going to be responsible for actually delivering the project.”
The scale of the project means that, while Thames Water funds the initial feasibility work from its regulated business, it is likely that the actually delivery will be via a separate, specially formed entity. And as Baggs points out, the £3.6bn price tag is simply an indicative 2008 price used to benchmark options and so will inevitably increase at outturn once project risk and the financing cost is added in.
“Ideally we are looking to start stage two consultation in September this year which will enable us to move forward with the overall planning application and start the main construction programme in 2013/2014,” he explains. “We are doing the right thing and pressing on with the preparatory work but in terms of who is actually responsible for the delivery of that project, who will finance it, who will manage it, that still hasn’t been decided.”
He points out that the outcome of the recent consultation on the Flood & Water Management Bill will be crucial in setting this vital regulatory route for the project. Meanwhile his priority is to work with local stakeholders to ensure that local objections to plans at the project’s 22 work-sites are mitigated and project’s best, most appropriate engineering solutions taken forward.
Thames Water has, of course, come face to face with the power of the democratic planning process most recently over its plans for a new reservoir in Abingdon, Oxfordshire. A public inquiry in March ruled against Thames Water’s water supply plans to include a new 100Ml facility.
Baggs accepts the inspector’s decision but maintains that, notwithstanding the need to work with the local community, it represents a short-sighted approach to water supply management.
Biggs’ point is timely, given that this week the Environment Agency declared a drought in East Anglia.
“I get very excited when people start asking ‘do we need a reservoir?’” he explains. “In my career as an engineer I have worked through some pretty hairy times in terms of droughts.
“People can get carried away with their theoretical models and trying to decide exactly what size of reservoir we will need and do we need it in 2025 or 2026 or 2027?” he adds. “I don’t know the answer to that but I do know that at some point in the future we will need one. The real frustration in the UK is that if we took a decision today to build a reservoir it would probably take about 15 years to build it. You cannot keep pushing these things off into the long grass.”
Investment in capital works is vitally important in delivering customer service and meeting environmental standards. But Baggs says there is a need to boost public appreciation of the value of water as a commodity.
He adds that, right now, by comparison to other household bills, water is still quite cheap and that most people know neither how much they pay or how much water they use each day.
“Water resource planning as a whole is not just about building a new reservoir or replacing a series of pipes. It’s not just about metering or water efficiency. It’s about all of those things becoming joined up,” he says. “Water is a precious commodity that is taken for granted - the whole message about making sure that it is not wasted is absolutely key. One of the issues that we face in London is that only around a quarter of our customers are actually metered.”
The decision last month to sign up as the official provider of water services to the London 2012 Olympic Games is partly, he explains, about generating an opportunity to reinforce this message and to highlight the huge amount of effort that goes into managing water services.
Baggs is also acutely aware that the water industry still has some way to go in terms of efficient and effective delivery and one of his key challenges is to drive further innovation into Thame Water’s operations to reduce costs and boost standards.
And as chairman of the British Construction Industry Awards this year he has been taking the opportunity to inspect at first hand the successes and innovative approaches adopted elsewhere in the industry.
“The water industry is a very small world and as a result we have become quite insular - there is a lot more that we can learn from other sectors,” he says. “I’m not interested in squeezing the extra half a percent out of digging a hole - that is not the answer to me.
“It’s about asking the question do we need to dig the hole in the first place.”