James Heath, Chief Executive of the National Infrastructure Commission, addressed the Water Industry Forum’s annual dinner in Leeds yesterday (8 March 2023). In his remarks, he sets out the ‘triple challenge’ facing the sector and the need for a fresh approach that sets out clear goals and long term strategies for achieving them, supported by adequate funding.

James explores “how to square the circle of increasing investment with the public’s ability to pay for it”, and identifies a number of areas of potential solutions, including a more efficient approach to developing upstream sustainable infrastructure, greater water efficiency measures, and wider deployment of technology.

The full text of James’ speech is below.

I don’t come here as an expert in the water sector but as a critical friend. I don’t have all the answers but hope to pose some of the critical questions that do need to be answered – including by the people in this room – if the water sector is to have a successful future.

It strikes me that the sector must address three problems, all at the same time:
1) Too much water– with currently about 5 million properties in England at risk of flooding, including around 325,000 properties at high risk of surface water flooding;
2) Too little water– with currently a 1 in 4 chance that large numbers of households will have their water supply cut off for an extended period because of a severe drought in the next 30 years;
3) And too dirty water. While there has been progress over recent decades in improving water quality, pollution remains at an unacceptable level. There is growing public concern about the frequency of sewer discharges, while the number of serious pollution incidents caused by water and sewerage companies in 2021 was the highest since 2013.

Each of these three problems are big, complex and inter-linked, and none of them are entirely within the control of the water industry. Pressure on our water environment is driven by structural forces: climate change and population growth, as well as by human behaviour with urban creep and an open sewer approach to waste disposal. Farming practices are also a key source of water pollution.

But the water industry must bear some of the responsibility for where we are today. I know there are differing views about how far regulation has contributed – with some claiming that the controls on pollution and leakage levels, for example, have been too lax. While investment has increased since privatisation, it has not increased enough – with serious questions being asked about financial resilience, shareholder returns and the level of debt loaded onto many companies’ balance sheets.

Whatever the merits or demerits of past decisions by different parts of the system, one thing that I hope we can all agree on this evening is that short-term solutions and tinkering at the edges won’t solve the fundamental challenges facing the sector.
To address the trio of challenges – too much, too little and too dirty water – will take a new approach – the water sector will need to do different things, not just do the same things a bit better or a bit cheaper.
We need a long-term plan that is clear on what our water and wastewater needs will be over the next 30 years – and maps out how to get from here to there.

We should start by defining what good looks like. We have stretching goals in place for tackling climate change. What are the equivalents for water? The Environment Act has filled in some of the picture with legally binding targets to improve water availability and quality, but gaps remain, particularly on flood reduction – and far more of our water bodies must reach good ecological status.
Government is tackling pollution from untreated wastewater through the plan to reduce storm overflows from combined sewage networks. It is unacceptable for any company to regularly dispose of raw sewage into our rivers or bathing waters. Any discharges should be in genuinely exceptional circumstances during periods of unusually heavy rainfall, and must not cause ecological harm. But getting from here to there will require major infrastructure changes and we need to beware of unintended consequences.
Progress must be made quickly but through solutions that represent best value – it would surely be a missed opportunity if we were to tackle discharges from storm overflows by just pouring more concrete underground and investing in end-of-pipe solutions rather than deciding to treat rainwater differently.
The second thing we need is long-term, strategic planning to meet the goals we set. Ofwat’s requirement for companies to develop long-term delivery strategies is welcome. We have a mature system of water resource management planning, now extended through cross-boundary regional plans. If implemented, the latest plans should take large strides towards addressing the water supply deficit.

Planning for wastewater, however, is less advanced. Drainage and wastewater management plans are the right tool, but the drafts published in the summer don’t reveal the pivot to a widespread use of catchment and nature based solutions that many had hoped for, nor are they properly integrated with local authority planning to manage surface water.

Third is funding – solving the trio of problems I mentioned will require large-scale investment in water and wastewater infrastructure over a sustained period. Base costs plus the cumulative costs of cleaning up our water bodies as well as enhancing water supply will add up to a big number. Ofwat has indicated publicly that investment levels for PR24 are anticipated to be two to three times greater than in the current period.

How do we square this circle of increasing investment with the public’s ability to pay for it? Water bills – that have been falling in real terms over the last decade – will almost definitely have to increase in future – but shareholder returns must be limited to reflect the true level of risk. The quid pro quo for any bill increases must be discernible and speedy improvements in performance. And it is right for Ofwat to enforce a clear link between dividends and environmental performance, among other goals. If we get this wrong, the cost of living crisis may become an infrastructure crisis in water.

To square this circle, the sector must work out how to deliver major changes in a more efficient and effective way. To give a few examples:

In some areas, the vast majority of the volume in treatment works is rainwater, not sewage. We need to accelerate the move to upstream solutions to manage water flows, where viable. All the policy and guidance documents say the right things on the use of sustainable drainage solutions. And I’m sure no one here would disagree that we need to manage water more holistically, in a place-based way with an emphasis on blue/green infrastructure. There is a lot of good practice from many of the companies in this room. The challenge is to move from pilot projects reliant on one-off funding to a fundamentally different approach.

This will require long-term pipelines of work to build the supply chains and skills capacity that are needed. Plans like Thames Water’s to spongify large parts of London will only happen through a phased, long-term programme dependent on new partnerships and funding models.

My second example concerns water consumption. As a society, we are using – and wasting – way too much water. We’re all familiar with the UK’s average consumption of 140 litres per person per day – much higher than in many other European countries. And we are spending a large amount on water treatment as a result.

Why do we use drinking-quality water to hosepipe our gardens and wash our cars rather than storing and recycling rainwater to perform these tasks?

This is an extravagant way to treat a finite natural resource.

It comes down to incentives. Many of us can access unlimited supplies of drinking water and do not know how much water we are using – because we are not metered and do not pay by volume.

Here again, we need a different approach – pricing that more closely reflects consumption and places greater efficiency requirements on buildings and appliances. We have made some progress with metering, there have been steps forward in other areas, but we’re not going far enough, fast enough to reduce demand.

The Commission has called for water use to be universally smart metered. We know this works – the average consumption for metered customers is over 20% less than those without meters. Volume-related charges could also encourage people to store and recycle grey water for non-essential tasks.

My final example is what I call the ‘technology puzzle’. As outside observer, the water industry looks remarkably analogue, with a reactive approach to asset management. This is despite us knowing that digitising water and wastewater networks could improve services and lead to efficiency gains. So why are smart solutions not more widely deployed across the sector? Is it culture, leadership and skills that are getting in the way? Is there a problem with incentives and regulation? We need to identify and remove the barriers.

I was talking to United Utilities recently about their new network management programme – this is an impressive example of how to harness big data analytics and smart sensor networks to predict and prevent problems in real time. There are other examples out there as well. So, the future is here – it now needs to be distributed evenly across the whole country.

These are just a few examples of the need for different, more creative approaches to the challenges the sector faces. I’m conscious that my dinner may be withheld if I don’t conclude by giving some sense of how the Commission can help.

We have developed long-term policy frameworks for both drought resilience and surface water flooding.

Last summer highlighted the risks we face on water availability. Building a system that is resilient to drought will require simultaneous action on both supply and demand.

I’ve already mentioned the need to reduce water consumption. And cutting leakage to meet the target of a 50% reduction from 2017/18 levels by 2050, is also essential.

The third part of the solution is infrastructure to increase water supply. We haven’t built any new public water reservoirs since privatisation, and we can’t move water around the country effectively enough to cope with water stress.

The Commission has called for at least £20bn of investment in new infrastructure over the next 30 years to fix this situation. It has been encouraging to see collaboration between companies on regional water resource plans, as well as milestones like the engineering contracts being awarded for the Havant Thicket reservoir a few weeks ago. We must fund and accelerate the delivery of more schemes like this. The most important thing government can do to is to publish the final National Policy Statement for water resources infrastructure. At the Commission, we’ve been asked to advise on what further reforms could be made to speed up the consenting process. We are talking to water companies about this work and if anyone here would like to engage, let me know afterwards.

Surface water flooding has, for too long, been the Cinderella sector in flooding, despite it posing a significant and growing risk. The fragmented nature of approaches to alleviating the risk, the lack of targets for doing so and the absence of joint plans at a local level – all point to where action is urgently required.

As I mentioned earlier, we have to do more to limit the amount of rainwater that gets into sewers. The government’s announcement of its intention to implement Schedule 3 of the Flood and Water Management Act in England is a very good start.

We’ve also recommended a framework of targets for reducing surface water flooding, and better mapping down to a local level. A clearer picture of the risk is essential to help local authorities, water companies and, where relevant, internal drainage boards to develop costed and targeted joint plans to deal with the issue.

Given the scale of the challenge, significant new infrastructure will be required. Water and sewerage companies should be encouraged to deliver above ground solutions, with regulation creating a level playing field with below ground solutions.

In both these areas – drought resilience and surface water flooding – what’s required is a genuine commitment to change and the staying power to deliver it – from government, regulators and industry.

I hope you think I’ve posed the right questions this evening – even if I haven’t provided all the answers. Too much, too little and too dirty water are undoubtedly big and complex challenges. But they are challenges that must be addressed if the water industry is to retain public confidence and support the environment and sustainable growth.