Water sector regulator Ofwat has launched a new consultation about public value in the water sector with the publication of a wide-ranging discussion paper and a separate independently commissioned report.

The discussion paper provides an overview on Ofwat’s latest thinking on public value and reflections on what this may mean for the sector and Ofwat’s role going forward.

The regulator describes its own approach to public value as anchored in the concept of public value defined by Harvard Professor Mark Moore with three key aspects:

• delivering services
• achieving social outcomes
• maintaining trust and legitimacy

Introducing the paper, Ofwat says:

“Whilst public value is inherent in the core services water and wastewater companies deliver, we consider, and companies recognise, that they need to continue to challenge themselves to consider how they can create more public value, by delivering their core services differently.”

The paper says this has already led to a step change in activity in recent years - examples include:

• Growing focus on environmental and social impact through some of the key processes that drive company investment
• Work by the Regulators’ Alliance for Progressing Infrastructure Development (RAPID), which involves Ofwat, the Environment Agency and the Drinking Water Inspectorate
• Reform to the Water Industry National Environment Programme (WINEP) enabling companies to take more and broader catchment management and nature based solutions to deliver multiple environmental and social outcomes
• Public Interest Commitment with specific 2030 commitments which all English water companies have signed up to

The regulator says the paper is not a formal consultation – however, it is seeking stakeholders’ views on the content of the discussion paper generally and on three areas in particular:

Scope and Ambition

• What factors – outside regulation – impact on water companies’ ability to deliver ‘optimal’ public value outcomes when delivering their core services? What are the constraints to meeting ambitions in this area?
• What are the risks in the pursuit of greater public value; and what could companies, and/or Ofwat, do to mitigate these risks?
• In pursuit of better public value outcomes, to what extent should companies focus on an enabling culture that drives public value holistically; versus a more discrete, targeted approach?

Incentives and barriers

• How does the regulatory framework contribute to, or limit, companies’ ability to deliver better public value outcomes?
• What role, if any, should the price review play in encouraging or incentivising companies’ delivery of public value?

Understanding impact

• What are the markers of progress on public value, both in the context of enabling culture and outcomes?
• What role, if any, should Ofwat have in monitoring progress? How else can we, customers and other stakeholders be assured that genuine and meaningful progress continues to be made?

Other

Is there anything else Ofwat should be considering in order to meet our objectives on public value?

Independent report says "water companies can no longer wait for the government to drive lasting change"

At the start of 2020 Ofwat also commissioned a report from Purpose Union and the Impact Institute in order to gain a different, external perspective on how purpose and public value is reported in the water sector. The report, published alongside the regulator’s discussion paper, has informed Ofwat’s thinking to provide a wider perspective on social purpose and public value.

The report says:

“The role that business plays in their local communities has been brought to the fore during the current COVID-19 crisis, in which the water sector has a critical role to play. One of the most remarkable developments in the last couple of years has been the declining confidence in governments alone to address the biggest challenges facing society.”

“Our view is that water companies can no longer wait for the government to drive lasting change. Instead, they must be willing to act, even if the government lacks the means or interest to do so.....the COVID-19 pandemic will intensify the debates around public health, local resilience, vulnerability and affordability and when it is appropriate to pay dividends."

“The water sector, given its proximity to these issues, might be able to use this unprecedented crisis to lead the conversation of how best to ensure that the communities that they serve emerge healthier, more financially secure and more united in the medium and long term.”

Ofwat said the desktop research report provided key learnings and perspective early in 2020, pointing out that some content is no longer current and should be viewed in this context.

Ofwat “actively promoting its ambition for the sector on public value .. and encouraging companies to take ownership”

Ofwat says it has been actively promoting its ambition for the sector on public value in a number of ways and encouraging companies to take ownership. The paper states:

“For example in the context of our innovation competitions, a key theme is testing new ways of conducting core activities to deliver public value. We have also highlighted that public value can play a role in water markets such as the markets for developer services and business retail: this is consistent with our vision for the business retail market, in which market forces are harnessed to create value for society.”

However, the regulator emphasises that in terms of outcomes it has been careful “not to define public value tightly, nor to suggest or direct specific public value outcomes which water companies should focus on at this stage.”

“We are not necessarily best placed to identify the untapped public value that might be derived from delivering core services differently, especially given the premise that companies’ customers, community and stakeholders should inform the public value choices and decisions companies make.”

“We remain open to considering whether, in time, there should be a more direct role for Ofwat through the regulatory framework”

Ofwat makes particular reference to a range of enablers already being used by the water companies to further embed a culture with public value thinking at its core, broadly grouped under the following headings:

• governance and leadership;
• decision-making tools and frameworks;
• customer, community and stakeholder engagement; and
• reporting tools and frameworks.

Ofwat says it is keen to explore whether any of the enabling elements above is considered more fundamental than others and intends to consider further whether there are “elements that could or should meaningfully apply to all companies in a standardised way.”

“We have a range of tools at our disposal which could reinforce or supplement the current approach” the paper says, which includes “considering if and how we can best encourage companies to better deliver public value through the price review process.”

“We are also considering, from a regulatory perspective, how we can be assured that progress continues to be made, and we remain open to considering whether, in time, there should be a more direct role for Ofwat through the regulatory framework.”

Ofwat’s concluding commentary says:

“As we take the discussion forward more generally, we consider a useful way to look at public value is along the two dimensions of 1) the enablers and the enabling culture that support or embed public value in an organisation, and 2) the outcomes that make a tangible difference to customers, communities, and the environment.”

Closing date to submit comments on the discussion paper is 9 February 2021.

Click here to download Ofwat’s A discussion paper on public value in the water sector

Click here to download the Purpose Union and the Impact Institute report: Public value in the water sector