1. Australian Water Summit Sydney March 2006 Is privatisation of water infrastructure and services the answer? Phillip Mills Director of Water Services, Water UK www.water.org.uk

2. Australian Water Summit 2006 2 Is privatisation of water infrastructure and services the answer? 1.Understanding the UK privatisation experience 2.The appropriate role of regulation 3.Asset management and risk management 4.Key issues for large scale capital projects 5.Customers 6.Challenges in the UK

3. Australian Water Summit 2006 3 Understanding the UK privatisation experience Privatisation in England and Wales – 1989 Water Authorities to Water PLCs Water only Companies continue Changes in Scotland and Northern Ireland A different approach

4. Australian Water Summit 2006 4 10 ‘privatised’ Water and Sewerage companies in England & Wales 15 Water only Companies - mainly in the south and east of England + Scottish Water + Water Service Northern Ireland Water and Sewerage Sector in UK

5. Australian Water Summit 2006 5 Understanding the UK privatisation experience Privatisation in England and Wales – 1989 Water Authorities to Water PLCs Water only Companies continue Changes in Scotland and Northern Ireland A different approach Vertically integrated companies Early issues Developing businesses Ownership changes

6. Australian Water Summit 2006 6 Understanding the UK privatisation experience - benefits Companies have control (within regulatory framework) Companies can manage own relationships Stakeholders Investors Supply Chain Significant investment Improved service – to customers and environment Privatisation has delivered in Water - but accept its not the only way

7. Australian Water Summit 2006 7 The appropriate role of regulation Key regulators - Water companies guardians of drinking water quality DRINKING WATER INSPECTORATE

8. Australian Water Summit 2006 8 The appropriate role of (economic) regulation Protecting the customer, ensuring “prices are only what they need to be”, through…. Independent regulation Comparative competition Periodic Reviews (5year) and price caps [RPI ± X] Challenging efficiency targets and incentives License conditions and ringfencing To ensure companies can finance their functions Clear and transparent regulatory regime – minimising uncertainty and regulatory risk

9. Australian Water Summit 2006 9 The appropriate role of regulation Moving forward – Future Regulation Objectives - 1.A long term strategic framework 2.More consistent and coordinated regulation 3.Regulation to deliver an appropriate risk-return balance 4.Simpler, smarter regulation 5.Enhanced accountability all round

10. Australian Water Summit 2006 10 Asset management and risk management

11. Australian Water Summit 2006 11 Asset Investment since Privatisation Privatisation Actual and projected capital investment 1981 – 2010 Source: Ofwat Capital Maintenance Quality and other improvements

12. Australian Water Summit 2006 12 Asset Investment – moving forward Total spend £16.8 billion

13. Australian Water Summit 2006 13 Asset management and risk management Asset Management Common Framework for Capital Maintenance - developed with the Regulators - forward looking risk based approach - balance between proactive and reactive maintenance as well as opex v capex solutions. - demonstrates economic levels of capital maintenance.

14. Australian Water Summit 2006 14 Asset management and risk management Asset Management 5 year AMP programme Ofwat challenges Regulatory drivers - Efficiency frontier and catch up Building long term relationships or Partnering Continuous improvement Issues? Sustainability of Supply Chain? Skills and available workforce?

15. Australian Water Summit 2006 15 Key issues for large scale capital projects AMP4 Investment Programme 2005-2010 £16.8 billion (39.8bn AUD) Funding Investigations Planning delays Changing / uncertain quality requirements

16. Australian Water Summit 2006 16 Asset management and risk management Risk Management At company strategic business level At operating level e.g. Water Safety Plans, Security measures and Contingency Planning

17. Australian Water Summit 2006 17 Other changes since Privatisation Borrowing -Debt free to £22.5bn (net debt) -Average gearing - 61% 1 -Interest charges - £1.1bn 1 Impact on charges – especially SW -Average increase in 2005 – 11.8% 2 -Average bill now £278 -Regional variation – SW bill - £400 Nb 1 for 2004/05 2 inc inflation

18. Australian Water Summit 2006 18 Customer service

19. Australian Water Summit 2006 19 Changes since Privatisation – Customer Service DG2 – Properties at risk of low pressure DG3 – Properties subject to unplanned interruption >12 hours DG5 – Properties at risk of sewer flooding incidents (twice in 10 years) DG6 – Billing contacts not responded to in 5 working days DG7 – Written complaints not responded to in 10 working days

20. Australian Water Summit 2006 20 Challenges in the UK Climate Change Demand management Access to funding Ongoing investment Affordability Competition

21. Australian Water Summit 2006 21 Is privatisation of water infrastructure and services the answer? Results…. Industry has delivered… High levels of Investment Customer Service Improvements Drinking Water Improvements Environmental Improvements cost effectively and efficiently