Feature

The sewage hits the fan

The Water Bill entered its committee stage amid growing doubts over the government’s claim that it will yield substantial benefits to consumers and the environment. The Department of the Environment’s (DoE) case for privatisation is that introducing competition will increase efficiency in providing water and sewerage services, and that regulations will mean that these gains go to the consumer in the form of lower prices and better quality service. Simultaneously the new system of environmental regulation by an independent body, the National Rivers Authority (NRA), will lead to a better environment: cleaner rivers and beaches, purer drinking water and a more vigorous pursuit of water system polluters.

But the environmental aspects of the bill were forced on the government. Industry as well as the environmental lobby rejected the original idea of privatising the regulatory functions of the water authorities along with water supply and sewerage; and the growing range of EC environmental directives and increasing impatience in Brussels with the UK’s performance on the environmental front, forced the government’s hand on higher environmental standards.

It is now generally accepted that consumer prices will rise substantially after privatisation. According to the DoE, prices rises will be needed to pay for the investment in environmental improvements still to come — and hence not caused by the sale of the industry.

This claim by the government has to be viewed with some scepticism.

The reality is that there is little prospect of substantial profits being made from supplying water services to the domestic consumer except by the new companies exploiting monopoly powers. Demand is virtually static and likely to remain so.

What is true is that under the bill the costs of investment to meet environmental standards can be passed on to the consumer in higher charges, but with the addition of a rate of return on the investment. Making environmental improvements profitable means that the increase in prices to finance them will be greater than they would have been had the industry remained public.

Higher charges for water services will have their greatest impact on the poorest households, which are likely to experience less tolerance over delay or default in payments of water charges and a greater readiness to disconnect supply.

Higher charges will not discourage households from using water, but metering supplies will have this effect: studies in the US suggest an impact effect of 12-15 percent reduction of normal supply on the introduction of metering. The DoE sees metering as the desirable means of charging for water services. Charges will be adjusted so that water utilities do not lose revenue as a consequence of changing to metering.

The prospect of poor households economising on baths and toilet flushes is not pleasant. There is no economic case for this change since with existing capacity the country has a surplus rather than a shortage of water.

What of the environmental gains that are promised? If profits from basic water services are likely to be modest, there are potentially enormous gains from the exploitation and development of the substantial land holdings of the water industry. This is causing great concern to conservation bodies. Water authorities have major holdings in national parks and heritage areas and own a number of high value sites. Additionally, they possess many sites of special scientific interest outside of national parks as well as valuable green areas in the major conurbations. Loss of access and intensive commercial recreational development can be expected on the rural sites. Conversion of land holdings and ‘redundant’ reservoirs to housing, office blocks, retailing centres and theme parks are more likely scenarios for the conurbations, and indeed such plans for London sites are even now well advanced.

The system of pollution control of rivers and coastal waters is that the National Rivers Authority will issue and monitor licenses to discharge pollutants and prosecute any licensee which exceeds its permitted levels of discharge consent. Water authorities in their role as sewerage agencies are major polluters of rivers and coastal waters. As a result of cuts in investment in sewage works river water quality in England and Wales has rapidly deteriorated since the mid 1970s. Currently some 20 percent of sewage works discharge pollutants in excess of their permitted consent levels.

This figure would have been considerably higher had these consent levels not been revised upwards in the 1980s.

In the run-up to privatisation the government has accelerated the investment programme in an endeavour to bring all works up to consent standard by 1992. IT is likely to fail, not only because the industry lacks the capacity to deliver the investment on the scale required but also because the EC is moving the goal posts by insisting on more stringent requirements.

The government has also been forced to concede that its interpretation of the EC Bathing Beaches Directive was incorrect, with the result that about 350 need improvement instead of the handful originally identified.

This again requires substantial investment in sewage works and outfalls and the problem will not be solved until 1995 at the earliest.

Thus the water authorities will enter the private sector without the capacity to meet their existing environmental standard. The solution that the DoE is pursuing appears, not surprisingly, to be a temporary further relaxation of consent standards. In the meantime river and coastal waters remain polluted and the new utilities have an incentive to delay their investment so as to postpone the day of judgement. An acceleration of investment is only likely if the guaranteed returns are sufficiently attractive — if the price rises placed on the consumer are made even greater.

The prospects for early improvement are, if anything, even less rosy for the quality of drinking water. Supplying water that is unfit to drink is to be made a criminal offence under the bill. This sounds like a welcome and needed improvement. But it is far from clear what it will mean in practice.

The government is fighting a strong rearguard action with the EC over drinking water standards. Attention is currently focused on nitrates but arguments will arise on the maximum aluminium and lead concentrations; and on pesticide and tar residues. The EC is seeking to toughen quality standards for drinking water: the DoE’s view is that existing UK standards are adequate and the scientific evidence does not justify further restrictions. The government’s position is motivated by its perception of economics. Higher standards mean more expensive investments. Where this is at the treatment works, the cost is predictable and containable. Where it effects the distribution system — contaminants added by old pipes — cost is likely to be high and uncertain. The water authorities are behind the DoE: leaked documents show that they want no strengthening of standards and environmental controls, and immunity from prosecution as well as a rapid pass-through of costs into higher prices.

The need to improve the quality of drinking water as well as to clean up rivers and coastal waters is urgent.

Putting the industry into the private sector is likely to mean that improvements are delayed, that costs will fall wholly on the consumer and not the taxpayer, and that the price to be paid for these benefits will be much greater than is necessary.