Colin Skellett recently announced he’d be handing over the CEO reins at Wessex Water later this year after 36 years at the helm, though he’ll continue to run the wider YTL group. Alastair Chisholm sat down with him to discuss the current controversy around water companies and how they can best deliver the improvements people want to see.
I start by asking Skellett what he makes of the current furore around the water industry and whether there were any parallels in the past. “For the people in the industry – lots of great people doing really important things – it’s a great shame we’ve got to this place”, he says.
But he understands the furore about storm overflows: Campaigners have been very good at getting their message across. It wasn’t dissimilar in terms of controversy to the time of privatisation. When that took place there was a surge in investment. And he says that’s the upshot of the current political concerns: “We’re likely to get realistic investment again”.
Skellett has seen both public and privatised sides of the industry and knows where he stands in terms of future prospects of being able to do what has to be done to get the environment into a state people want to see. He says that when the regional water authorities were created (in 1974), there was significant investment, but that inevitably got pared down as political priorities meant the Treasury focused on schools, health and so-on.
He also mentions efficiency. To some, this has become shorthand for asset sweating. But he says there was logic to inefficiency in the public sector: Whilst there were ‘performance aims’, if you trimmed your costs too far you lost budget, Treasury would never give it back. So he’s adamant there were real efficiency gains made in the early years of privatisation if nothing else because there was plenty of low-hanging fruit.
Early years
I make the point that many ex- (and some current) industry folk have pointed to a honeymoon period post-privatisation when the UK went from being the dirty man of Europe, through rapid investment in better sewage treatment and disposal, to something far more palatable.
But bills did rise as a consequence and that wasn’t popular politically. Profits had risen too (as they do with big investment programmes) and a windfall tax was levied under New Labour in 2004. From that point, political pressure on future bill increases became a trend.
But it was during these early years that the shoots of today’s problems started to grow Skellett tells me. Companies – as private companies do – explored various ways to maximise profit. They were privatised with clean balance sheets. Money from selling shares at privatisation made this possible as most companies then were publicly quoted. “Nobody said at that time those balance sheets were solely to carry out your regulated functions” he says. “Welsh bought hotels and leisure. Thames went global and there was almost
a pride in keeping bills down and focusing on the international business, and the international business became more important than the basic services that Thames were there to deliver”.
This wasn’t being done with shareholder money, but with the balance sheet that was supposed to be used for infrastructure investment he tells me. In theory this global expansion was more lucrative than the monopoly utility service but – as history is testament – water companies “weren’t very good at it. So a lot of money was thrown away in doing that.”
Skellett says that at Wessex, they were determined not to use the balance sheet that way. They did form a solid waste business, UK Waste, but that was entirely funded by the partner company buying a share in Wessex. “We took a view that we should keep the regulated bit entirely separate to the commercial.”
The initial Ofwat regulatory system under Sir Ian Byatt was strong, in Skellett’s opinion. At that time he says, comparative competition worked well and Ofwat were good at comparing companies and holding feet to the fire.
Securitisation nation
Less-so in the early 2000s. Skellett says he isn’t sure Ofwat at that time quite understood some of the consequences of what was being done. Securitisation became fashionable. Wessex, from being publicly quoted were acquired by Enron – at that stage lauded as one of the most innovative companies in the United States. “They were, with their balance sheets and their off-balance sheet funding” he notes wryly, nodding to Enron’s collapse.
He says Wessex were saved from asset stripping by independent directors on the Board being able to veto extracting of cash – something Byatt insisted on when Enron bought the company.
When it went bust, Wessex was bought by Malaysian infrastructure conglomerate (“Who the hell are?”) YTL. “They’ve been ideal. A 23-year ownership and they have a long-term view. They recognise the investment for what it is: a regulated return plus some benefits for outperformance.”
Other industry investors weren’t so conservative, gearing went into overdrive and meanwhile, Ofwat’s view was that balance sheets were a matter for the companies and not the regulator.
Skellett feels things could have been quite different: “It only needed the regulator to criticise it. And Ofwat were then in a position where they were effectively vetting people who were buying water companies and that’s the point when more and more private equity was coming in. Some of that private equity has been good and some has done what you absolutely don’t want it to do, which is take as much cash out of the company as it can.”
Regulators getting tough now is rather late in the day, he says, particularly when it comes to companies like Thames Water: “It’s all very well shutting the stable door. The horse hasn’t just bolted, it’s eaten every scrap of hay in the place and done a runner.” One of the problems is the people who ate all the hay have now exited and you’ve got new owners saddled with the fallout. I ask whether there might have been better due diligence on the part of these owners and whether they should have foreseen a tightening regulatory net, climate change challenges and more.
Skellett feels there was an assumption things would continue unchanged. He also points out that investment programmes were contracting, no longer at the expansive levels immediately post-privatisation. Yet there was a belief investors could continue to manage within these highly geared structures and still get a rate of return. He’s not the first to suggest those who bought into Thames and similarly-geared companies might have a case for going to their advisers and asking for their money back.
Reputation
I ask whether, given the noxious state of things, the industry’s reputation is beyond recovery. “It can’t be, because we provide the most fundamental, important services and we need our customers to work with us. If you have to do water efficiency and such like, we need them on our side.”
If you go back immediately post-pandemic, water companies got through that well there were no issues around service, interruptions and so on. It seemed to be doing a pretty good job.
He felt during the pandemic two things changed. People used water bodies more, recreationally, and campaigners made effective use of newly emerging event duration monitoring data on storm overflows.
From a water company perspective Skellett says the main driver for focus environmentally-speaking were reasons for not achieving good ecological status under the water framework directive and says in Wessex’s patch, storm overflows equate to 0.9 per cent of this.
It was clear that as more monitoring data came on-stream, a wider range of issues would be discovered. He feels the industry as a whole didn’t wake up to this very early.
And it didn’t acknowledge that just because overflows have been there for a long time and always spilled, in the public’s mind in the 21st Century, they really should not be part of the sewerage network. “We as an industry have to recognise we weren’t on the ball” he says.
A fresh water future?
Skellett has been frustrated and outspoken on the lack of flexibility around what can be used to address some of the problem. He kicks off by describing the challenge Wessex has with groundwater.
This year has been wet and so groundwater ingress into sewers has been a particular problem (it can enter through cracks and joints at surprisingly high pressure and cause overflows to spill). It’s a particular challenge for Wessex given underlying geology. He says 200 of their 1300 overflows are groundwater-driven and these can run for weeks on end as long as groundwater levels are higher than the level of the pipe.“What’s not appreciated is that only 23 per cent of the sewer network is owned by us. 70-odd per cent is privately-owned and a large part of infiltration comes in through sewers we don’t own.” So fixing pipes to stop the overflows is a massive challenge. Instead, Wessex have been treating some of these overflows using reed beds.
Skellett says he can point to five or six years’ data which shows the water coming out the other end is cleaner than river water. “But they still class as overflows and it’s been a long-running debate with Defra and the Environment Agency as to whether we can treat them using consents” (essentially as treated effluent). Wessex could deal with around a third of their overflows this way but the regulators are yet to be convinced.
He says, of course, it’s going to take time to fix the problem. But he’s adamant lots of bigger concrete storage tanks shouldn’t be the default solution. “It’s incredibly power and carbon intensive. We have to recognise the need to address climate change and we have to start separating out surface water from sewage before it reaches combined sewers. Runoff from an average roof is equivalent to the foul sewage from 100 homes”.
Intercepting roof drainage, whether through water butts (smart, leaky or just downpipe disconnection and draining into the garden) is an easy solution – Wessex have a pilot in Chippenham that’s proving popular with customers. It’s not applicable everywhere – it doesn’t work in apartment blocks and other properties without gardens – but it’s a decent contribution.
I ask if there are any regulatory blockers to rolling this out at mass-scale. He says not explicitly, butgovernment policy is less science-based and more diktat in terms of what it’s demanding: spill numbers not environmental outcomes. This is reducing the range of approaches that can be used and increasing cost, hence the grey and pricey look of the latest round of draft business plans.
So how far could nature-based solutions (NBS) go does he think, given a bit more flexibility? “Sewage treatment is straightforward, you use nature anyway – in percolating filters, activated sludge plants and so-on – it’s all bugs and nature. NBS is the slow-cooking version of this.”
He says it’s horses for courses though. In some places there will be no alternative to a big tank or bigger works. In less densely-populated areas with a bit more space then you can do things differently.
A SSWAN?
It’s all about looking at the catchment scale and treating it holistically – don’t focus all the monitoring on a point source but on the outcomes. NBS isn’t as absolute as chemicals. Regulation should reflect that. Look beyond just water companies to deliver outcomes; work with farmers, landowners and others too. It was something Skellett says HRH King Charles III advocated Wessex do twenty years ago. “Now everyone’s done it, but we need to do it much more”.
Skellett harks back to 1974 and says the biggest achievement was the catchment configuration, with Catchment Boards (run by the National Rivers Authority but with broad interest representation on them) providing strategic direction on priority activities. He’d like to see this kind of thing return – something the Sustainable Solutions for Water and Nature (SSWAN) proposal Wessex led and published recently advocates, alongside more outcome-focused regulation. He emphasises this isn’t some wriggle-out of being held to account. Catchment boards should set the targets based on a whole-catchment context. Those feed through into plans including water company investment plans. Then, absolutely hold companies to account to deliver against the targets he argues.
Poole Harbour is a favourite example. 40 tonnes of nitrate needed to be removed from the harbour. Wessex did this working with farmers, more cheaply and effectively than by traditional means. “We still had to build the Wareham ‘white elephant’ chemical treatment plant though” to satisfy the regulators.
The other area of regulation Skellett feels should change is the planning cycles. “The five-year cycles have become an event in themselves. Our business plan was 3500 pages plus appendices. There’s no reason why we couldn’t set out 25-year base infrastructure plans and have the National Infrastructure Commission validate them”.
One thing he wouldn’t change though is a privatised approach. No need for not-for-profit or other purpose-led configurations (he says yes, the model is good in Wales but there’s no need to go that far in England, and it goes without saying he thinks renationalisation would be a disaster).
“The UK doesn’t have a lot of money, so we need investors.” But, he’s clear they need to be the right, long-term investors who recognise what the industry has to do. This needs regulatory certainty, the right planning frameworks, and proper independence of regulators from politics to drive strong performance.
Right now, in the run-up to an election, isn’t the right time for political clear-headedness. “Afterwards, we need a stocktake of what we’re trying to do and how we’re best placed to do it.” Hear hear.