We've now looked at the historical setting, prerequisites and sale price of the England and Wales privatized water industry. We'll next look at outcomes from the privatization. We're going to split this into three videos. First in this video, on the good news from the water privatization. Second, we'll look at outcomes that you could think of as bad news. Thirdly, we'll look at some outcomes which for now still seem unclear. Before we get to the issue of what indicators you might choose to evaluate the outcomes of this water privatization. Let's start by asking, from who's perspective should you consider outcomes? Well who would you ask? Whose point of view should we take? To do an economic analysis of costs and benefits, we'd think about the outcomes from the point of view of the citizens of England and Wales. But it does help you to know a little bit about the various stakeholders involved in the sector first. Here's an overview of organizations and groups with an interest or stake in how the England and Wales privatized water industry performs. This illustration is from Andrew Beaver, Director of Strategy at the Water Sectors Economic Regulator, the Water Services Regulation Authority or Ofwat, for short. At the top, we can see boxes for the democratically elected UK government. The default Welsh Assembly Government and the European Union which consults with its member states about environmental and other regulations that are then binding on its members. Below that still in pink, we can see Completion Commission, CC and the Competition Appeal Tribunal, CAT. These appointed public bodies arbitrate issues of economic regulation and competition. The next layer down in green shows the three main regulators for the England and Whale's water sector. These again are public bodies, with some independence from government, that have defined duties and responsibilities and regulate specific areas. From the left we have the economic regulator we've already mentioned, Ofwat. Then the drinking water quality regulator, the Drinking Water Inspectorate or DWI. Then on the right we have the environmental regulator, the Environment Agency or EA. The EA monitors environmental quality standards related to the water industry. And has the power to levy fines for any exceedances of agreed environmental standards. All three of these regulatory organizations in green have some role in the periodic dissemination of the water prices for the sector. But we'll come to this in our next session on regulating the water sector. Having these regulators does incur a cost, Ofwat is financed by license fees recovered from the water companies. But this is a part of the cost structure then of the water companies, so is eventually paid for by water customers. The environment agency is formally required to recover the cost of it's main regulatory activities from the organization it regulates. It also receives government grants for certain activities that has paid for by taxation. And again, if the EA recovers it costs from leveling fine to some water companies, water customers eventually meet the cost of these fines. Next, we have in light blue the private water firms. The water and sewerage companies, the WSCs and the water only companies, WOKs. These private firms have motives and shareholders needs to satisfy. The regulators prescribes certain water and sewerage service output that the private water companies must deliver. The water prices they can charge are controlled, and they must meet goals concerning infrastructure investment, infrastructure condition, and environmental standards. Below the companies here, in orange, we have the Consumer Council for Water or CCWater. This is an independent statutory representative body for all household and business water companies in England and Wales. CCWater aims to make sure, and I’m quoting here, that customer interests are at the heart of decision making in the water industry. CCWater also provides free information on water and sewage service issues to consumers. It can also take up household and non domestic costumer complaints that have not been resolved directly with the customers water company. In other words then there are a lot of stake holders involved here. And remember this is just a summary overview, drawn by a professional in the water sector who is himself only trying to point out the key features. Views and outcomes will depend on whom you ask, and which prospectives or prospectives you include or exclude here over a specific period of time. I'm not aware of any comprehensive or stakeholder evaluation that you'd need to get an overall picture of outcomes here for the full 1989 to 2016 time period. My own research is focused on many of the stakeholders here such as the UK government, the EU, the water companies, and the regulators. And I have given the evidence to inquiries and have a public blog about my findings that customers can in theory access. But have looked at at comes primarily only form the point of view of how easy it is to develop technical and social innovations in the sector. This might be say to address challenges like climate change, and to keep up with ever increasing consumer and other stakeholder expectations for a higher quality environment. In the absence of impartial comprehensive whole sector evaluations. It seems the sector's economic regulator, Ofwat over time has kind of abrogated to itself a role of developing in consultation with other bodies key performance indicators for the sector. We'll take a look at Ofwat indicators in a moment. As an aside though, it's interesting to consider, why has Ofwat taken on this role? Formally, Ofwat has a specific set of main duties. For instance, it's meant to protect consumer interests including, and I'm quoting here, by promoting affective competition wherever appropriate. It has to ensure water companies can finance their functions. By securing reasonable returns on their capital, and it has to secure the long term resilience of water companies, water supply, and wastewater systems to meet long term needs. It also has some secondary duties such as quoting, to contribute to the achievement of sustainable development, and to have regard to the principles of best regulatory practice. But it seems to me that Ofwat has taken an interesting leadership role here. This could be because other stakeholders have not stepped forward to do this. After all there is no longer a single National Water Policy Body in the UK after the National Water Council was abolished in 1983. It could be because Ofwat has already issued guidance to the water companies on approaches to cost benefit analysis. So it's become skilled at this issue or perhaps, it's simply because of the particular people who've choose to work at Ofwat over the years. It's also probably why Ofwat is frequently the target of criticisms about the sectors performance. This happens even when the specific details being criticized, fall outside of Ofwats prescribed dream it. Let's return to the issue of good news outcomes from the England and Wales water privatization case. Taking Ofwat's performance indicators, the good news headlines are as follows. Reduce leakage, increased capital investment, improved condition of the company's pipe networks, improved water and environmental quality and improved customer service. So that's more investment, better networks, quality standards and customer service. All this is good news, right? And it addresses some of the main concerns about the privatization of water industry here. Like the poor condition of networks, under investment that couldn't achieve incoming new environmental quality standards. And some poor service to customer measures, like low water supply pressure. The blue flags noted here is quality standard for beaches for factors such as water quality, that was originally proposed to the European commissioner in 1987. It's now a global quality trademark owned and operated by the non profit NGO, Foundation for Environmental Education. On leakage, it is worth noting here that the presentation of results for this performance indicator is somewhat incomplete. Leakage did fall from its 1994-1995 peak. But then reported leakage increased significantly immediately after privatization from around 1989 to 1993. It only then started to fall after increased public and regulatory attention on the matter. The main good news headline here seems to be that 110 billion pounds of capital has been invested after privatization in 1989 up to 2015. This is a truly significant achievement. Raising capital to invest in water supply in sanitation pipe networks is very challenging worldwide as we have seen. In our part one MOOC, we showed the historical capital spent here in constant 2011 prices for 1921 to 2015. It definitely seems like a good news water privatization outcome that the cost of finance in the sector is low. Clearly, the revenue stream from the water companies seems secure to investors, and is not perceived to be a significant source of risk. Investors are confident that the water companies will be allowed to make sufficient revenues to repay bondholders. This shows investor confidence also in the sector's advanced regulatory arrangements, which we'll come to in our final session of this MOOC. In our next video, we'll look at the bad news outcomes from the England and Wales water privatization. Thanks for watching this video.
