1963-2013 - 50 years of Research for Social Change

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Back | Programme Area: Markets, Business and Regulation (2000 - 2009) | Event: Social Policy, Regulation and Private Sector Involvement in Water Supply


Social Policy, Regulation and Private Sector Involvement in Water Supply


Social Policy, Regulation and Private Sector Water Supply : the Case of Great Britain


Introduction
This case study analyses issues of access to and affordability of, water services in Great Britain (i.e. England, Wales and Scotland) with particular reference to low income households.

Modalities
In England and Wales the water and sewerage industry was fully privatised in 1989. An independent economic regulator - Ofwat - was established, with responsibilities including the protection of customer interests, the licensing of operators and the regulation of prices through the fixing of price caps for service provision. Funding for investment is raised by companies through private capital markets, whilst a modest degree of product market competition is allowed in law.

In Scotland the industry is owned by the public sector (central government) and, since July 2005, has been regulated by an independent economic regulatory body - the Water Industry Commission for Scotland. Public funding for investment dominates.

Methodology
The study outlines and discusses the broad social context, reporting measures of poverty and inequality for Great Britain as a whole. This is followed by a discussion of the understanding and meaning of the terms ‘access’ and ‘affordability’ in Great Britain, before a description and critical analysis of the range of financial support mechanisms available to assist low-income households in accessing and paying for water and sewerage services. Experience in England and Wales (private sector ownership and management) is contrasted with that of Scotland (public sector ownership and management).

Two approaches are taken to the empirical analysis of domestic affordability. The first is a calibration exercise in which the affordability of water and sewerage services is analysed by households according to income decile and household composition. The second uses econometric techniques to model the effects of a range of household characteristics on affordability.

Data for both calibration and econometric analyses are drawn from the Family Resources Survey (1997 - 1998 and 2002 - 2003) and the Family Expenditure Survey (1988 and 1991). A binomial logit, with a semi-logarithmic functional form, models water and sewerage expenditure as a budget share. The dependent (binary) variable captures a water affordability threshold, defined in terms of the ratio of water and sewerage expenditure as a percentage of gross household income.

Findings
The econometric results for Scotland, England and Wales confirm the position of income and property value as the main drivers of water and sewerage affordability in Great Britain. This much is unremarkable in a context in which unmeasured household charges are levied according to property value. More interestingly there is a marked regional effect in England and Wales and some evidence of the impact of benefit payments through household composition variables. This effect is, however, diluted by the presence of other related variables.

The study highlights the degree to which there is a common understanding of the issues of domestic water and sewerage access and affordability across Great Britain. Despite marked differences in ownership - public in Scotland, private in England and Wales - there is little evidence to suggest that currently low income or other vulnerable households are treated more or less favourably in a systematic way in any one particular jurisdiction. It notes the importance of the role of the United Kingdom’s unified tax and benefits system as a means of underpinning affordability - imperfect though the support may be. It is argued that the extent and sophistication of the regulatory mechanisms devised by Government, but administered independently, have effectively curbed the ability of both private and public sector operators to downplay the social policy objectives laid upon them in statute. Underpinning all, there remains a shared understanding at national and local level of basic water and sewerage services as an essential prerequisite for participation in civic society.

Policy Implications
First, in the short run the gap between the Income Support allowance for water and sewerage and the actual level of charges should be closed, with the effects of regional variation being taken into account. Second, experience from England and Wales suggests that with careful management and monitoring levels of domestic debt and non-payment may be reduced to the benefit of customers and supplier alike. Third, the policy of selective domestic metering should be pursued with more vigour across the country.