Regina Finn’s speech: “delivering essential infrastructure and services”, given to the Canadian Council for Public-Private Partnerships, is available here.
Delivering essential infrastructure and services: the UK Water and Waste Water regime
Presentation by Regina Finn to the Canadian Council for Public Private Partnerships (CCPPP), November 2013
I am delighted to have been asked to speak at the CCPPP annual conference – one of the biggest PPP Conferences in the world. And because I have been able to visit many of the sessions and talk with delegates and speakers, I hope to be able to put my presentation into the context of the Canadian PPP experience.
One thing that has struck me is that, at the heart of the Canadian PPP model is a desire to deliver essential infrastructure – and to a degree services – at the best possible value to customers and taxpayers. And to do so through the effective deployment of private capital and private sector skills and expertise. I can confidently say that these goals are at the heart of the UK water and wastewater regulatory regime too.
So as well as describing that regime, I hope to be able to draw some parallels, perhaps point out some differences, and see if each model can learn something from the other.
The UK regulatory model
In 1989 the water and wastewater sectors in the UK faced significant challenges. The legacy infrastructure, which was mainly publicly owned and operated, was crumbling and needed significant investment simply to maintain services never mind improving those services. At the same time, environmental standards were being imposed by the European Commission which in turn created a need for significant new infrastructure and investment if the UK was to be able to shed it’s reputation as the ‘Dirty man of Europe’. And, finally, Government did not have the capital to make this investment; the coffers were empty.
So the UK put in place a new paradigm – a regulated private sector delivery model. The water and wastewater companies in England and Wales were privatised in 1989. In parallel, the independent economic regulator – Ofwat – was established with the twin duties of protecting the interests of consumers (now and in the long term) and ensuring that efficient companies could finance their functions.
This model, as the Canadian PPP model does, sought to attract private sector finance into the new companies at the lowest cost possible; it also sought to get private sector expertise involved in delivering services and infrastructure more efficiently. Unlike the PPP model, the UK model also sought to harness private sector expertise in the procurement of new projects. By privatising on a company basis rather than a project basis, the risk of procurement along with the ability to balance a portfolio of projects, was placed with the newly privatised companies. At the same time, the regulatory regime, by setting price controls, gave a level of revenue certainty that de-risked the system for private investors.
The Outcome – 25 years on
So was the model successful? To answer that question we need to look at the evidence of 24 years of operation.
First, more than £116 billion ($194CAD) has been invested in maintaining and improving the water and wastewater system over that time. And this has been done at no cost to taxpayers – all investment has been provided by the capital markets, and is funded through customer bills.
Second, the services delivered to customers (including the environment) have improved radically. There are salmon in the river Thames again; the UK has over 150 Blue Flag beaches compared to 12 in 1989; and customers are 100 times less likely to suffer from low water pressure.
Third, the efficiency of this investment and the cost of the investment has been transformed. Prior to 1989 bills were increasing by 7% above inflation. Since then, bills have continued to increase – but by the much smaller amount of 2% above inflation, while the rate of investment has doubled. Because of the efficiency challenge imposed by the regulatory regime, customer bills are one third lower today than they would otherwise be – saving every bill payer £120 ($216 CAD) every year.
Importantly those efficiency savings come from both more efficient capital schemes, but also from operating savings. I have heard today’s conference speak frequently about how to tackle the need for investment in the core water and wastewater networks – the ‘linear’ infrastructure. And I have heard you ask how to tackle the ‘M’ in PPP projects that have so far concentrated on the ‘DBF’ part of the projects. I think you are asking the right question. I believe there is significant value for customers and tax payers from driving more efficient maintenance and operations of this type of infrastructure. Perhaps some elements of the regulated model might provide some useful food for thought?
Finally, the model came through the recent global financial crisis with flying colours. Premier Wynne showed you a graph at the opening of this conference, depicting the fall off in infrastructure spending in the US since 2008 – and that fall off was dramatic. By contrast, the water sector in England and Wales will have invested £22billion (£37billion CAD) between 2010 and 2015. There has been no fall-off in the pipeline of projects and no drying up of available funds from the private sector. In fact, investors, and the rating agencies, have called the UK water regulatory regime ‘gold standard’, and every time the UK markets closed during the financial crisis, they re-opened on a water transaction.
The Challenges of the Future
But the regulated model is facing significant new challenges – some of which you have been talking about at this conference, and I think there is something we can learn from the Canadian model.
The first of these is affordability. I said earlier that the UK water and wastewater sector is funded by customers through bills. And notwithstanding the efficiencies that have been achieved, those bills have gone up by more than 40% in real terms over 24 years. But over the past four years, customer incomes have not kept track with those type of increases. In fact as inflation has risen, real incomes have fallen. The UK regulated model relies on the stability and certainty of the regulated revenue from customers. So water companies have to look hard at how they balance their costs, the need for investment and the ability of their customers to afford their bills. Luckily they have a chance to do this. Debt costs have fallen significantly and unexpectedly over the past four years. So companies can secure low cost financing and continue with current investment levels while reducing bills.
The mirror image of this challenge is the continued driver and need for more investment. Environmental standards continue to tighten – the UK Government has estimated that if the UK is to meet all the requirements of the EU’s Water Framework Directive by 2020, it will cost £300 billion using current technology. (more than £500 billion CAD). Add to this the need for the sector to adapt to the challenges of climate change and more volatile weather conditions as well as a growing population, and it becomes clear that companies will have to become far more innovative in how they deliver their services. Some progress has been made here already with companies looking for ‘soft’ solutions to meeting demand, compared to more major infrastructure projects. For example some companies are installing universal metering in all households to control water demand, instead of investing in costly new water sources.
Finally, the sector is facing a significant public trust challenge. Starting with the banks, customers have become increasingly cynical and hostile to private enterprise and private profits. This has spread to the utilities in the UK, including water companies. A backlash against foreign ownership, tax policies, dividend payouts to shareholders and pay and bonuses are all coming together in a perfect storm of opposition. This has sparked political debate about renationalising the businesses, or imposing windfall taxes on profits. This type of debate is ill informed and inflammatory. It also undermines the very ‘gold standard’ system that has kept costs down and delivered improved services to customers.
And this is where I have been struck with the Canadian PPP experience. I have listened to politicians here at this event giving you the sort of vocal and public support that is crucial to public acceptance of these projects. And I found the statistics on public support for PPP projects presented on the first day fascinating – to achieve public support in the high 60%s is fantastic. Finally, I had the privilege of speaking to the Mayor of Regina about the referendum that was held to decide on the delivery model of that city’s wastewater facility. That referendum was won by 57% – again an amazing result.
I believe active engagement by the service providers (in the UK the water companies; in Canada the Municipalities commissioning the project or the project delivery company) with the bill payers (in the UK the customer, in Canada, the citizen or rate payer) is crucial to public trust and acceptance. I have seen the outcome of significant work here in Canada on that front and I urge you to build on it. I think we have something to learn from you there.
In conclusion, I think we share many challenges and can learn much from each other. The success of the Canadian PPP model is impressive, and as I said earlier, I think you are asking the right question as you consider how to extend that success into operations and maintenance. The UK model has delivered much but in the light of public sentiment we face a huge challenge to try to generate the sort of public support you have worked so hard to achieve here.
Thank you again for the chance to present to you and I look forward to the discussion during the debate.