A few days ago the Environment Agency of the UK government issued a report. Its Chairperson declared, “In 2021, the environmental performance of England’s nine water and sewerage companies was the worst we have seen for years. Southern Water got a one star rating, which means a terrible performance across the board.”
The report goes on:
“The sector’s performance on pollution was shocking: much worse than previous years. Serious pollution incidents increased to 62, the highest total since 2013. There were eight of the most serious (category 1) incidents, compared with three in 2020: and most companies, seven of the nine, were responsible for an increase in serious incidents compared to 2020.”Environment Agency report on water companies’ performance, 2021
Crime and punishment
The Environment Agency appears to think that punishment will remedy this.
“Company directors let this occur and it is simply unacceptable. Over the years the public have seen water company executives and investors rewarded handsomely while the environment pays the price. The water companies are behaving like this for a simple reason: because they can. We intend to make it too painful for them to continue as they are.”Op. cit.
Fines and prison sentences should be imposed. The Environment Agency says:
“The water companies will only stop behaving like this if they are forced to. The amount a company can be fined for environmental crimes is unlimited, but fines currently handed down by the courts often amount to less than a Chief Executive’s salary. We need courts to impose much higher fines for serious and deliberate pollution incidents. The threat of significant impending financial penalties has an impact. Investors should no longer see England’s water monopolies as a one-way bet.
“Repeat offenders can now expect criminal prosecutions for less serious environmental incidents where once the Environment Agency would have used civil powers. We would like to see prison sentences for Chief Executives and Board members whose companies are responsible for the most serious incidents. We would also like to see company directors being struck off so they cannot simply delete illegal environmental damage from their CV and move on to their next role.”Op. cit.
Southern Water was in fact fined £94 million in 2021 for incidents that occurred before 2015, during the regime of the previous CEO Ian McAulay, who himself finished his stint as CEO on 30 June 2022. So it would be rather a case of catching which CEO is responsible, when they have already moved on to another position – and what would that do to the recruiting process for a new CEO?
I am surprised to see such naïve remedies suggested by a government agency. Doubtless it is swayed by the increasingly loud public outcry about “stop the poo in our rivers,” which LibDems in recent by-elections have found is a powerful slogan during by-election time. Of course, I am also against poo in rivers and keen to see some remedies, but it is irresponsible to indulge in a blame game which fails to educate the public (and local elected government representatives) into the causes of sewer overflows and what can be done about it.
There is a lot of information in the Annual Report recently produced by Southern Water. Although the salary of the CEO cannot be found in it, the fine of £92m plus costs by the EA on Southern Water features prominently. As a matter of fact, it was one of the reasons why the company did not issue any dividends to shareholders in this past year, compared to £4 million disbursed in the previous year. Profit in this prior year was £138.8m compared to the low £19.8 million in 2021, mainly due to this fine.
How many years can investors keep their money in water companies that do not pay dividends? Some people state water companies should never have been privatised, but they forget just how badly British beaches were polluted before 1989 when most sewage (some 350,000m3 per day) ultimately flowed, barely treated, out via shoreline pipes. Since privatisation, £7.1 bn (£2.2bn via Southern Water) has been invested in the UK water industry. Could equivalent money ever have come from the government (in competition with NHS, Defence, Education, Research etc)?
How to serve two masters
The Southern Water board has to do the best both for customers and for investors: “We manage risk and provide an appropriate return, where we can. We invest the money to provide for growth and resilience. Regulatory price controls help align shareholder value with customer and environmental priorities.”
Southern Water is particularly proud to have gained a new investor this year: the Macquarie Group, which has advanced £530 million, a sum which has enabled Southern Water to accelerate some of its infrastructure improvements, and also put £145 million into PIRP (Pollution Incident Reduction Plan) to reduce pollution incidents up to 2025.
The sheer scale of its operations means there is plenty of opportunity for pollution. It maintains 39,900km of sewers (some made in Victorian times) with 3,476 pumping stations, gushing out 11,371 million litres per day, and eventually putting effluent through 367 waste water treatment works. The reason that water companies get licences to release untreated effluent into water courses is to halt severe flooding which would cause environmental pollution and possibly injury to humans.
The EA, and the public, claim they are using this remedy too often as an excuse not to put things right. But Southern Water says the causes are varying rainfall patterns, extreme weather events, rising sea-levels – all of which are flood risks. These seem to me to be caused by climate change not by lazy, overpaid CEOs.
Dr Nick Mills, head of PIRP for Southern Water, lists three types of remedies:
- Controls at source, for example rainwater harvesting , permeable paving, and green roofs.
- Optimisation – better use of existing connections and equipment.
- Enhancements – bigger sewers, storm tanks and treatment works (all of which cost big money).
For (1) PIRP plans to work “with simple actions that everyone can take to help, such as water butts to recycle rainwater, and reducing the amount of paved garden and driveways.” For (2) there has been a successful trial of sewer linings in North Hampshire that will be rolled out in Kent this summer. For (3) – as stated above – the new investment by Macquarie has accelerated infrastructure plans.
How will water companies respond?
So will the threat of heavier fines make any difference to PIRP?
“At each stage in the cycle there are several opportunities and risks, including penalties and rewards applied by OFWAT.”
What the EA report fails to mention is that all the financial decision-making (including prices for customers, proportion of income to be invested etc.) is overseen by OFWAT, in the five-year plans they submit and in monitoring them. Nonetheless Southern Water is rattled by the threat of more fines, as stated in prim corporate language: “The ongoing debate on the future of Combined Sewer Overflows (CSOs) … could lead to a significant change in our operating environment.”
This is one of four significant risks listed in the Annual report along with the cost of capital, cybersecurity, resources (because of Brexit and Covid).
Are CEOs alone to blame?
What I question is whether it is wise to heap blame on CEOs. Finding and punishing the individual culprit is a primitive instinct from revenge cultures. But blame often resides in multiple factors within communities. For example, in discussing coastal pollution, this report lists all these as possible causes:
- How local authorities deal with fouling by dogs and sea birds
- FOS (fat, oil and grease) tipped down drains causing blockages
- Defective sewers
- Grazing animals
- Holiday park owners
- Properties not connected to mains sewers
With an identity parade to find the culprit of pollution caused by all or any of these, why pick the CEO to charge and imprison?
What I dislike about the language of punishment in the recent EA report is that it oversimplifies the causes of pollution and takes an unnecessary pessimistic view of human nature. As if the threat of punishment is the only thing that will make the water industry innovate and remediate!
Just read through the 276 pages of the Southern Water annual report and see their detailed planning and resourcing for improvements. They and the other eight companies all want to do a good job. Fining them will not help – it just gives them less money to invest, and makes investors nervous.
Social media bite-size chunks obscure truth
Frankly, I can see that the first paragraphs of the EA report are designed for Twitter size public bites which will circulate to thousands of people but will not make the causes and remedies of water pollution in the UK any clearer. People enjoy an outrage culture, but not one of patient democratic involvement in the detail of remediation via local council planning decisions or participating in the water company consultations this year.
That said, I can understand why the Environment Agency wants to make a publicity splash. They are starved (by the tax-cutting Tory government) of resources to do their job of monitoring pollution. They are supposed to monitor not only the self-reporting of incidents by the water companies but also all the damaging nitrate inflow into water courses from agricultural land that is chemically farmed, and chicken poo from battery hens. Let’s grant them more money to pay staff to monitor that, but not from more fines on water companies.