Thames Water plc - Company Profile, Information, Business Description, History, Background Information on Thames Water plc

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History of Thames Water plc

Thames Water is the largest of the United Kingdom's privatized water industries, providing some 7 million customers with water and serving the sewerage needs of nearly 12 million in London and the Thames Valley. In the public sector for years, Thames was privatized in 1989 but remains subject to government regulation as a regional monopoly supplier of an essential utility. Since becoming privatized, the company has widened its portfolio by diversifying into specialist water and wastewater services and long-term management projects abroad.

Water suppliers to London and the surrounding area had been operating on a small scale for centuries, but not until the nineteenth century did modern water management systems come into being to meet the growing demands of the urban center. Increasing population and the phenomenal rise of industry meant that the city was no longer able to satisfy its water needs from local sources. Throughout the Victorian period and well into the twentieth century, a network of supply systems sprang up, with both private waterworks companies and local authorities constructing technologically advanced dams, reservoirs, and aqueducts to meet the ever-increasing demand.

Water projects were regulated in the sense that each required a separate act of parliamentary approval to proceed, but because each proposal was considered in isolation of the others, no attempt was made to implement a coherent, interlocking system of water supply. As early as 1869 the problems inherent in such an unplanned system were recognized, and the Royal Commission on Water Supply mooted the idea of regional planning. No action was taken, however, until much later, in 1924, when the Ministry of Health, in conjuction with the water suppliers, established Regional Water Committees to coordinate development and operation. Successive acts of Parliament solidified the central government's control of the water industry, culminating in the Water Act of 1973, which put an end to the network of individual suppliers and created 10 regional water authorities in England and Wales. The far-reaching act also encompassed river management and sewage disposal, operations which had hitherto been entirely separate from water supply. All three related operations were thus brought under common management.

Thames Water can claim a role in the water authorities' conversion to plcs through the activities and lobbying of its chairman, Roy Watts. Appointed in 1983 (and serving until his death 10 years later), Watts had already instituted streamlining measures at the water authority (including reducing the board of directors from 62 members to 15) "because I tend to think old companies get fat." Bringing his commercial background to bear, Watts cut costs to the extent that the authority was able to contain tariff increases to 3 percent--whereas the government favored an increase of 10 percent. The disagreement became public, leading to a House of Commons debate and, eventually, the government's decision to privatize all the water authorities. In 1989 Thames Water Authority became Thames Water plc.

The newly privatized water industry remained strictly subject to governmental control. The Office of Water Services (Ofwat), the industry price regulator, set a ceiling on the amount the new company could charge its customers. In addition, it was stipulated that Thames must meet--and annually prove that it has met--both the requirements of U.K. law and the standards of the European Commission regarding water quality and pollution control. These regulations place the company in a somewhat delicate position. Constrained in how much it may charge, Thames is also required by law to invest a considerable amount of capital each year into improving its infrastructure to comply with public health and environmental standards.

Such investment is urgently needed, as Thames, in common with the other former water authorities, inherited a faulty and antiquated system whose myriad inadequacies had been too long ignored. As of 1994, significant investment is necessary to upgrade or replace systems and equipment if they are to be acceptable to current water quality and environmental standards. It will take years, in the opinion of both Thames Water and independent observers, to rectify the mistakes and neglect of the past. These improvements will also take a great deal of money, and how this money is to be obtained is a source of great controversy.

Although Thames's customers' water bills are lower on average than those of any other of the former water authorities, the company reaps its share of the general public disapproval of the privatized companies' performance. To what extent this sense that consumers are not receiving value for money is justified is debatable. Certainly water bills have risen well in advance of inflation since 1989 and certainly high-ranking executives in all the water companies are commanding salaries substantially higher than those they had received while the industry remained in the public sector. (In Thames's case, the chairman's salary rose from £41,000 in 1989 to £317,400 in 1994.) On the other hand, Thames, along with the other former authorities, has had to invest huge amounts of capital to improve its legacy of a defective and outmoded infrastructure to meet increasingly stringent environmental and public health standards. Nor has Thames raised its prices to the highest limit allowed it under the rules established at privatization.

Wherever one chooses to assign blame, it is perhaps inevitable that a monopoly supplier of an essential utility will be viewed with some suspicion. Thames Water attempts to counteract this negative image by producing a flurry of informational material for better public understanding and by initiating an active program of market research to determine just what its market will bear. The company undertook such a study in 1992, explaining to customers that it faced two kinds of financial obligations, mandatory and discretionary. Mandatory spending, by far the lion's share, included all the improvements to its systems and equipment that Thames must finance if the company is to satisfy the requirements of the European Commission. Thames outlined three possible scenarios for the future balancing of water purity and environmental concerns with water rates customers will be obliged to pay by the year 2000. If Thames Water meets the minimum requirements demanded of it now, and no more, the average consumer bill (£162 in 1994) will be £200 in 2000. If Thames were to take what the company terms the "pure and green" route, meaning doing all within its power to ensure the purest possible water quality and the most environmentally healthy treatment of wastewater, the average bill will be £440 per year. If Thames takes a middle ground, the bill is likely to be around £315 per year. Thames's market research found that, overwhelmingly, customers preferred the lowest cost option. Similarly, with regard to discretionary spending, which Thames defined as desirable but not essential spending to accelerate solutions to such problems as interruption to water supply, poor supply pressure, flooding from sewers, and odors from sewage works, customers were willing to pay more only to prevent sewers from actually flooding. The provision of water services, Thames's report concluded, is "taken for granted" and "customers find it hard to imagine what money is actually being spent on."

In July of 1994, five years after privatization, Ofwat imposed new and more stringent controls on the water companies' profits, limiting price increases to an average of 1 percent above inflation for the 10-year period 1995-2005. It is likely that the water companies will have to borrow or drastically cut their operating expenses in order to finance environmental improvements.

Like the other privatized water companies, Thames Water has attempted to escape the government's regulations by diversifying into non-core activities where it may operate in a freer market. Thames has been active internationally since well before privatization, largely in consultancy and training roles, but since 1989 the company has widened its scope to include projects in water process engineering and specialist treatment products. The company's international portfolio includes projects in the privatization of existing utility organizations, the management and operation of water and wastewater utilities, process design and construction, the management of water distribution systems, project financing, demand forecasting and conceptual designs, and feasibility studies.

In 1989 Thames acquired Portals Water Treatment (now PWT Worldwide), a leading water process contractor through which Thames designs and constructs water and wastewater treatment plants. The subsidiary has undertaken projects in Pakistan, Hong Kong, Nigeria, Japan, Singapore, Australia, India, the United Kingdom, and the United States. Discussions initiated in 1990 resulted in a significant 1993 agreement whereby a consortium led by Thames will design and build a water treatment plant at Izmit, Turkey. The subsidiary Thames Water International, the technical and managerial services arm of the Thames group, will then operate the finished project for a period of 15 years before relinquishing it to the management of local authorities. Also in 1993 Thames acquired the environmental engineering business of Simon Engineering, which allows the company additional scope for wastewater treatment projects. The German Utag was acquired in 1992 for its expertise in consulting, contracting, and the construction of environmental products.

Despite such an ambitious international portfolio, Thames has had little success in its non-core activities: indeed the Evening Standard stated bluntly in 1994: "The company seems accident prone overseas.... After five years abroad, Thames has yet to make a penny profit outside Britain," and in the same year the Financial Times, alluding to Thames's overseas activities, called it the "worst performing water company since privatization." Thames Water defends its record, citing the monumental costs of restructuring its foreign acquisitions and unwise contracts entered into by its subsidiaries prior to their acquisition by Thames. The company insists that its overseas strategies must be taken in a long-term context, and that its unprofitable foreign ventures will be breaking even by 1994-95 and bringing in profits thereafter.

Thames has a better record in its primary function as a U.K. utility. The company's brightest star is the London Water Ring Main, needed to alleviate pressure on the city's antiquated pipe system, which was in danger of leaking or even bursting. Eighty kilometers long (longer than the Channel Tunnel) and 40 meters deep (deeper than most London Underground lines), the £250 million project was built to supply half of London's drinking water. Thames completed the project in 1994, to budget and two years ahead of schedule.

Other significant successes for Thames include its 1993 completion of a five-year modernization program at the 140-year-old Hampton water treatment works, and a £400 million investment to install advanced water treatment (AWT) facilities at its plants to filter out pesticides. The company also points to its success in containing leakage. At privatization the company was losing 25 percent of its water through leaks; this loss had been reduced, as of 1993, through a technologically sophisticated system of leakage detection and solution, to 17 percent, obviating the need to build new reservoirs. Such improvements--and others involving better water clarification systems, safer sewage plants with improved odor control, and more efficient sludge management systems--point to the company's active research and development team.

Scope for improvement remains, however; in 1992-93 the company was successfully prosecuted four times by the National Rivers Authority for improper treatment and disposal of sewage. Much work remains to be done on Thames's nearly 400 sewage treatment works, virtually all of which were in an inadequate condition at privatization.

Thames Water is required by the government Code of Practice on Conservation, Access and Recreation to report regularly on the company's sensitivity to these issues. Some 20 percent of Thames-owned land is in designated Areas of Outstanding Natural Beauty. Furthermore, as the Thames region encompasses a high proportion of densely populated urban centers, the need for conservation and recreational areas is particularly acute. In compliance, Thames liaises with dozens of conservation, environmental, and community groups and is involved in numerous projects to protect the region's natural and man-made heritage and to improve recreational access to its land.

Privatization almost always results in staff cuts and more rigorous cost controls, and the privatization of Thames was no exception. Personnel numbers have been reduced by some 6.6 percent since 1989 and the company has cut operating costs where possible--replacing, for instance, the authority's 25 small laboratories dotted throughout the region with two large central ones in London and Reading. In addition, the company sought to improve its level of customer service, building a new centralized customer service center in Swindon. The status of a privatized but still closely regulated utility is in many respects a problematic one. Like the other water companies, Thames has seen its share of controversy as it tries to strike the balance between the public duty of a monopoly utility and the profit motive of the private sector. It has also (at least to date) seen its share of disappointment in its diversifications abroad. Perhaps it is as well to keep in mind one simple statistic so often taken for granted by supporters and detractors alike--over 99 percent of the water Thames supplies to its millions of customers meets all the stringent requirements of both the United Kingdom and the European Commission.

Principal Subsidiaries: PCI Membrane Systems Ltd.; PWT Worldwide Ltd.; Simon-Hartley Ltd.; Simon Waste Solutions Inc. (U.S.A.); Thames Water Environmental Services Ltd.; Thames Water International Services Holdings Ltd.; Thames Water Utilities Ltd.

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Further Reference

"Dangerous Waters," Evening Standard, June 15, 1994.Kay, Helen, "Thames Water Makes Waves," Management Today, July 1991, pp. 34--39."Keep Taking the Waters," The Times, June 16, 1994."The Lex Column: Thames Water," Financial Times, June 16, 1994.Mortished, Carl, "Water Bills Will Be Capped for 10 Years," The Times, July 29, 1994, p. 1.Murray, Ian, "Ofwat Plans to Cut Flow of Profits to Water Industry," The Times, July 12, 1994, p. 7.Norman, Margot, "Muddying the Waters," The Times, July 12, 1994, p. 16."Of Wealth and Water," Economist, October 6, 1990, pp. 39--40.Porter, Elizabeth, Water Management in England and Wales, Cambridge Geographical Studies, no. 10, Cambridge University Press, 1978.Taking Care of the Future: Thames Water Market Plan, London: Thames Water plc, 1993."Technology: Stopping the Flood," Financial Times, March 4, 1994."Thames Drops to Pounds 242m after Costs," Daily Telegraph, June 16, 1994."Thames Looks for Growth with 'Dirty Water' Industry," Yorkshire Post, January 13, 1993."Thames Water Shares Take a Dive," Independent, June 16, 1994."Thames Water to Lead Dollars 700m Turkish Project," Financial Times, February 4, 1993."Water Profits under Pressure," The Times, July 7, 1994, p. 26.Wilsher, Peter, "British Water Makes Waves Overseas," Management Today, October, 1993, pp. 86--90.

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