Utility Week

16 | 16TH - 22ND MARCH 2018 | UTILITY WEEK Policy & Regulation Analysis I t seemed somehow appropriate that envi- ronment secretary Michael Gove should be the man to give water company execu- tives some blunt PR advice this week. The consummate political survivor, who dely transformed his own image from Boris betrayer to environmental crusader, knows all about reinventing public perception. And he warned delegates at Water UK's 18th annual City Conference that their time for a serious rebrand had arrived. "Change," he announced, "has to come… Public con- cern about the way the water industry oper- ates is growing – and I understand why." His stark assessment was far more than free marketing advice, more a government edict for water firms to clean up their act – particularly with regard to offshore finance, leveraging, dividends and executive pay. Greater transparency, leaks, flooding, drought and the environment were all listed, with consumers now watching utilities more closely than ever. "You may be private companies but you have a responsibility to the public who cannot take their cus- tom elsewhere." Instead, he asked, what does the public see? "An industry slow to stop leaks, slow to repair them, slow to stop pollution and slow to say sorry." He continued: "My priority as we gear up for PR19 is to support Ofwat – and the Environment Agency – in ensuring that water companies are now and in the future working as diligently on behalf of consumers and the natural world as they are for their owners." Gove acknowl- edged that some had made great strides in tackling the issues, but his comments will have still been difficult makeover advice for many in his subdued audience to hear. Not that they hadn't been expecting it. An opening salvo, back in January, talked of cracking down on water companies' "exces- sive profits", high gearing and the use by some of "opaque financial structures based in tax havens". Gove has now reaffirmed his new year message, this time in person, from the podium at the water industry's flagship event for investors. As one sector observer pointed out to Utility Week aerwards, the significance of the high-level cameo appearance was unmis- takable. "It's unusual for a secretary of state to attend this – a minister perhaps – but not a cabinet minister. That's pretty serious." Indeed, Gove grasped his chance to tell as many CEOs and industry players as he could find in one place that the time for "excuse-mongering", as he saw it, was now over. And any hopes of them citing the past positives of privatisation as pub- lic relations quick-wins were soon dashed. Although acknowledging private companies had done much work for the public good and brought signifi- cant benefits to the environ- ment and consumers, Gove said it was "crucial" that progress did not stall. Since privatisation, about £140 billion has been invested in infrastructure, leakage is down by about a third, and two-thirds of beaches are classed as excellent – up from one-third before privatisation. He added: "Whilst accepting undoubted gains, efficiencies and investment since privatisa- tion, the system is not work- ing as well as it should. Far too oen there is evidence that water companies, your water companies, have not been acting sufficiently in the public interest." The past decade, he said, had also shown that some were not being as transparent as they should. "They've shielded themselves from scrutiny, hidden behind complex financial structures, avoided paying taxes, rewarded the already well off, kept charges higher than they needed to be and allowed leaks, pollution and other failures to persist. "And when there has been an acknowl- edgement that change is required… far too oen there's been prevarication and procras- tination, ducking and diving and dragging of feet. Change, having been promised in many cases, hasn't happened or hasn't happened quickly enough." Multi-layered corporate structures of "diz- zying complexity" involving multiple subsidi- aries, some based offshore, had only added to the image problems of some, and the sector as a whole, he added, with customers having an absolute right to question their use. Generous dividends can be justified, he said, if they've been guaranteed by the effi- cient running of an operation – and have been paid out aer appropriate capital invest- ment. But the £18.1 billion paid out to share- holders of the nine large English regional water and sewage companies between 2007 and 2016 represented 95 per cent of the £18.8 billion profit over that period. Turning his attention to corporation tax, he highlighted how some water companies had been able to minimise theirs because "some of their best brains appear to be as intent on financial engineering as they are real engineering". Cox keynote The environment secretary's words seemed to have the desired effect, especially aer an unequivocal keynote address from Ofwat chair Jonson Cox. Railing in particular against his seem- ingly least favourite acronym – HLCs, highly leveraged companies – Cox called for vari- ous moves to fix an industry facing a "crisis of confidence", including better corporate governance, appropriate dividend payouts and bills reductions in keeping with cash to Water must reinvent itself Water companies have been told to improve their image – and fast – by someone who knows a thing or two about profile. Suzanne Heneghan reports on Michael Gove's timely tips for the industry.

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