Competition models must be tailored to service area to deliver benefits

Competition models should be tailored to different parts of the water value chain to deliver the most benefit, according to a report by Vivid Economics for DEFRA and published last week.

The report found competition can reduce bills, improve environmental outcomes, and reduce service risks and has the most potential to promote resilience and affordability in four service areas: water resources, where competition can unlock resilience investment in new resource capacity and the interconnection of regional networks; major new schemes, where competition for finance can reduce the cost of capital; catchment services such as water quality and flood risk reduction, where participation by a wider range of providers could deliver improved outcomes at lower cost; and bioresources, where more open forms of competition in the market can draw in innovation.

Vivid reported the following findings.

• Competition for the market in water resources, underpinned by independent central procurement, could enhance both resilience and affordability through investment in water resource capacity and interconnection. This could unlock the large-scale new entry needed by 2030 to meet the challenges of climate change and population growth.

• Direct procurement can improve the affordability of major schemes through reduced financing costs, particularly if there is a sufficient deal pipeline to attract institutional investors. Licences have the advantage of retaining the confidence of investors, while allowing regulators flexibility to adapt to changing circumstances over long asset lives.

• There is consensus that models of competition could reduce the cost of ecological improvements and flood risk management in catchments, but there is an evidential gap on the most effective model for this. There are also conflicting views as to whether water companies should adopt a coordinating function in catchments or merely participate in markets for catchment services.

• A more liberalised form of competition could support innovation and cost reduction in bioresources. Competition would be most effective in delivering an affordable service where regulation supported the integration of bioresources into the wider organic waste sector. This would facilitate the entry of existing players and reduce the risk of local market power in isolated areas.

Vivid Economics also pointed out that each model of competition would need to be underpinned by economic regulation, in some cases to direct or oversee competitive procurement, in others to prevent discrimination by the incumbent companies against entrants.