It is over two years since Ofwat set increasing trust in water as its key objective for its 2015 five year business plan.To establish what has happened since, I interviewed 19 senior and influential figures across all parts of the water sector. I am seeking wider perspectives via a survey (click HERE to participate) and hope this article will stimulate you to take part.
Unsurprisingly interviewees consistently indicated that customer trust in their water company to deliver a reliable, high quality and fairly priced water supply was the key priority. In general interviewees considered that customers did have a high level of trust in their water services, quite the reverse of a crisis. This is consistent with CCWater’s surveys of actual customers which show satisfaction with service and perceptions of value for money are high. A major theme from many interviewees was their belief in the lack of engagement of most customers most of the time with their water companies. As one senior figure put it: “…As long as the bills aren't too high and they don't notice them, and they continue to get their water, it doesn't impact on their consciousness.” Interviewees were clear though that this could all change if there was an incident. Many referred to the significance of various incidents of cryptosporidium.
On a positive note, interviewees generally thought water companies had become much better at handling incidents. As a senior quality regulator explained: “The biggest thing that has happened in the industry from our perspective is that, we have moved from a situation where companies and the water supply industry was reactive. In other words, it reacted to impacts on consumers. To an industry that is now proactive and preventative.” However there was also a cautionary note.
Most interviewees had stories of situations where things had gone wrong and the results of that could last for decades. All agreed that rebuilding trust with customers can take a very long time partly due to their lack of interaction with water companies. So as one interviewee put it, water companies are always an incident away from losing trust for a long time.
The other key driver for customers starting to focus on their water companies is, of course, rising bills. As one adviser to utility investors put it: “The main lesson from the energy sector is that consumers resent having to thinking about their utility bills.” So this raises the question as to whether monitoring customer trust in water companies has any real significance or at least any use: once this indicator dives down, might it not be too late to do much about it – the horse has already bolted?
Perhaps instead we should focus on the trustworthiness of water companies? If they are trustworthy, then when the spotlight is on them as prices rise and/or incidents happen, might they not be more likely to survive the scrutiny?
Furthermore should we be encouraging customers to trust water companies unless they are truly trustworthy? Trusting organisations that are not trustworthy is surely a mistake. Can water companies be trustworthy? For one senior water industry figure with a training in economics, there was no real sense in which water companies could be seen as trustworthy, beyond responding to incentives: “Water companies are profit-maximising, relatively rational beings within the incentive structure. If you change the incentives, they will move… I would trust them, I think, to respond rationally to incentives.” Trusting some-one to act effectively in their self-interest would probably not count as trust in most people’s books. It is really saying the question of trustworthiness isn’t really relevant.
Either something is in the interests of water companies or not. A number of interviewees outside water companies thought what customers really had to trust was the regulators’ ability to ensure water companies acted in the public interest. A senior economic regulator suggested Ofwat could never really trust water companies as it was not in their DNA as a regulator. At the end of the day, Ofwat knew that if they were up in front of a Parliamentary committee, saying they had trusted a water company, it would be unlikely to cut any ice.
A senior figure characterised the relationship between Ofwat and water companies thus: “Effectively, it's a gaming, adversarial relationship…it’s correcting a market failure, and the water companies have a vested interest in the market value being perpetuated, because they can charge more for it. It is, inevitably a game.” But if it is a game and there is no room for trust, how can we escape escalating regulation and micro-management as each player counters each others’ moves?
Ofwat has made it clear that it in fact it wants to reduce micro-management. Interviewees outside Ofwat do recognise that this has happened. One said: “I think we've moved away from massive micromanagement of these companies by the regulator to a set of outcomes which are much more focused…” There were also interviewees who clearly believed that water companies were seeking to be trustworthy. As one water company senior manager said: “We need to develop more trust within that regulatory loop, if you like, such that we all feel we're pulling together, rather more than having different objectives.” However if we conceive that water companies’ managements could be trustworthy, aren’t we forgetting that ultimately they are at the beck and call of their investors who most interviewees saw as only caring about their dividends?
As an interviewee put it: “One of the few things I think that can make a water company chief exec lose his job, other than a catastrophic service failure ..., is failure to please the institutional investors.” Can investors be trustworthy? Ofwat chairman Jonson Cox has publicly berated water companies and their investors for a range of practices. For instance, in 2013: “Some water utilities are taking out annual dividends of up to 24pc of their regulatory equity. It has also been alleged that some companies use shareholder loans to avoid UK taxation. At the same time, hard-pressed customers have seen annual bills rise by 13.5pc since 2010-11, while their incomes have fallen.” Water company interviewees recognised this was a real issue in terms of external perceptions of trustworthiness.
One interviewee suggested there was sometimes a challenge in large companies joining up their treasury functions with stakeholder engagement – hence PR problems could arise. Another suggested there had been some improvement in some companies regarding dividends, at least in terms of providing explanations to stakeholders. But as one senior water company manager put it, large bonuses, complex company structures, tax avoidance etc were difficult to avoid as they were just standard practice for the City and capitalism.
Cox has promoted independent directors and increased transparency as the means to counter behaviour which he saw as “morally questionable in a vital public service”. However interviewees were not all convinced that independent directors had any ability really to oversee company practices or ability to represent the diversity of public interest. Water company interviewees saw engagement and openness to stakeholders as the key to demonstrating trustworthiness: “You should take our target stakeholder groups, for example parish councils, river groups, NGOs, local authorities, CEOs, council leaders. In my mind, that's the sort of target group we're trying to build trust in.” Many other interviewees who dealt with water companies saw their engagement with stakeholders as key.
One stakeholder said of a water company: “I think they've opened themselves up to outside influence as well, which is part of what's driven it [increased trust]…And there's evidence that shows they do respond to that. In fact, it's part of what has led me to think that they are more trustworthy than they were thought.”
Water Resources East was also often cited as a very successful model for demonstrating water company trustworthiness. It was seen as a very good model for collaboration amongst stakeholders to delivery public benefits in a complex system: “…You have the altruistic element of the public situation making certain that the people that are meant to benefit from this actually do benefit as opposed to just the shareholders and private element. But if you can ally that to a private element, which is efficient to actually producing the goods, in theory you can get the best of both worlds. The question is how well that is governed and managed, to make certain that it is done in a way that is actually sustainable."
The Conservative manifesto addresses the question of governance indicating boards should take account of the interests not just of shareholders but employees, suppliers and the wider community. In government, maybe they should look to build on the range of innovative models emerging in the water sector.
Trust in regulators
Various interviewees, when asked to recollect a major incident which has significantly affected trust in the water sector, reflected on the period of 2012 when Ofwat sought to increase their flexibility to change water company licences. This was seen by many as creating a major breach in trust between Ofwat, water companies and investors, which was only mended by the removal of the serving Ofwat chief executive and many years of work to mend fences: “Under Regina Finn, there was a … fundamental breakdown of respect between the two organisations, and that was dangerous, I think.”
Generally interviewees thought that Ofwat had much improved by being more engaging and open, and as a result getting the flexibility in licensing they sought initially and failed to get. However some considered that their remained questions as to Ofwat’s ability to judge water company proposals from a holistic perspective and their tendency sometimes to use simplistic costing models as criticised by the CMA in its price determination of Bristol Water. Ofwat’s assessment of enhanced status in PR14 was also questioned, as it was perceived as ignoring wider performance of water companies on such things as environmental protection and water efficiency.
One water company manager even suggested they were systematically discriminated against by Ofwat and thought: “There was nothing they could do to get fairer treatment from Ofwat.” Some water company interviewees saw themselves as attempting to demonstrate trustworthiness but had limited confidence in Ofwat’s ability to actually make a fair judgement on trustworthiness. If Ofwat can’t do that, then their ability to stand up in front of a Parliamentary enquiry and justify trusting water companies in an area that then goes wrong, could be seriously compromised.
This raises the question as to whether Ofwat has the right skills and capacity to judge trustworthiness when this has not been a traditional element of economic regulation theory.
Trust on the line?
There was a widespread perception that over recent years, the water sector had had it easy. Reducing interest rates and low inflation had meant customer water prices could be kept relatively low and water companies had yet to face up to major investment challenges.
As a senior figure explained: “In my view, there is an impending trust issue for the water industry. As bills start to go up, and if inflation picks up, bills will go up as well, in cash terms, if not in real terms. It's cash terms people notice. I think in about seven years' time, there will be a trust deficit, and a trust issue for the industry.” The recent Water UK report set out the need for investment in resilience in the face of climate change which also is likely to put pressures on bills. To avoid these pressures, change was required: “My thesis is that there is a burning platform for two things in the industry. One is a step change towards innovation, and the second is a completely different approach to land management for water policy.”
Standard economic theory suggests increasing competition is the answer to driving innovation. Hence it was interesting that a potential new entrant innovator did not see it that way: “We've been communicating with incumbents not on a competitive ‘we're going to chuck rocks at you’ basis, but on a more collaborative approach saying, in effect, ‘We're prepared to offer you market testing. We're prepared to share with you our economic analysis of what innovation looks like…We’re prepared to share that with you as long as you'll provide us with an equivalent degree of transparency on the proposals you have particularly to meet the growth agenda’…We are starting to see some very positive signs of companies wanting to engage with us.”
On land management, clearly collaboration with a whole range of stakeholders is crucial such as water companies, the Environment Agency, farmers, environmental NGOs, local councils etc. This creates even more relationships that can only work if organisations are considered trustworthy. One interviewee said farmers often feel they have always had the rough end of the deal when it comes to water due to S57 in the Water Resources Act 1993, which means that irrigators are constrained in times of drought before anyone else.
Another that farmers tend to have had a jaundiced view of water companies: “I would say that in 2010/2012, that view from the farming community of water companies who really didn't have to comply with anything in the way that farmers do, that's pretty much unfair. That can result in some resentment.”
Environmental NGOs which see the need for collaboration in innovation in catchment management are looking to understand which water companies are essentially trustworthy so they feel comfortable supporting them even when things go wrong. It is of course a risk to them to be seen to be in bed with polluters: “So there are some companies who invite us into a kind of long-term relationship and openness…they kind of invite people in to discuss and comment and [a] genuine exchange of ideas. There are other companies where essentially you're consulted.”
Again Water Resources East is seen as a great model for building relationships, with a lot of credit going to the Anglian Water chief executive: “I've said to the WRE team, one of the reasons why I think farmers and food businesses physically trust that process is because the chief exec has turned up at meetings; he's seen driving it.”
So there is a widespread understanding of the need to build trusting relationships to underpin innovation and catchment management and a sense that progress has been made over the last five years. Furthermore innovation can also lead to risks and incidents bringing the water company into the consciousness of consumers, who may then judge them harshly if they are not trusted. However there are worries that an increasing emphasis on competition could undermine this, even from the limited non-household retail competition: “I had a meeting with a company just a little while ago and it was about issues that have a bearing on retail non-domestic customers and where in the past they would be very happy to share information and be very open, the question was raised: ‘hmm, I think we can provide you with that. But if we give it to you, it's in the public domain in which case it's open to competitors as well’.” Collaboration is also already seen as difficult with the energy sector as water users; they are unwilling to publicly share information about their likely future demand.
On the face of it, water companies can be justifiably proud of improvements over the years in their reputation and the trust in which they are held, albeit from a low base in the ‘90s of being seen as run badly by ‘fat cats’. There may be a temptation to take the view that a focus on trust does not need to be a priority at the moment, especially given all the pressures on the sector from PR19.
This could be complacent though, as low interest rates over the last decade have meant the sector has had an easy time as customers’ attention has rarely been on it. Furthermore, focussing on customer trust may not be the most useful measure to prevent future falls in trust. If customer trust dives as prices increase and incidents occur as water companies seek to take risks and innovate, then it could be too late or at least very expensive and time consuming to do anything about it.
The energy sector could be taken as a case in point. If customers do start becoming more conscious of the sector, the behaviour of water companies in terms of returns to shareholders, tax affairs, salaries etc could come under a lot more scrutiny. There may be some way to go in terms of developing governance models to reduce this vulnerability. From the interviews, it is unclear as to whether there is a shared understanding across the sector of what is required to build and maintain trust.
This may be at least partly due to a tension between different perspectives: the more traditional economic model dominated by increasing competition of profit maximisers where trust is seen to have a limited role; and the emerging model dominated by collaborative relationships and good governance to manage innovation in complex systems with markets as a supporting factor.
One interviewee saw the sector being pulled in different directions: “I'm kind of bewildered by the focus on trust, really, because I don't see the direction of travel of the industry as a whole, I don't see that as being particularly conducive to building trust.”
Now it is a matter for the new government, ten years after the Cave Review set the sector on the road towards increasing competition, to consider what the right strategic direction is in the post-Brexit world. Why don’t you give them a hand by saying what you think in response to this survey ?
Henry Leveson-Gower is carrying out this research in his role as a research fellow at the Centre for Evaluating Complexity Across the Nexus (www.cecan.ac.uk).