Water industry: Now they say the coffers are dry

Ordered to slash bills, the utilities are planning to cut jobs rather than dividends. Are their environmental pledges also at risk?

ast month Brian Duckworth, managing director of Severn Trent Water, received a watch to commemorate 25 years' loyal service with the company. He was joined by 200 co-workers, some of them now close friends, who all started careers at the then public utility in 1974.

Just three weeks later, many of those 200 faithful workers now face losing their jobs. There is every chance they will because Duckworth, who began life at Severn Trent Water Authority as an accountant on pounds 3,000 a year and now earns pounds 175,000, has announced plans to lay off 1,100 staff, almost one-fifth of the workforce.

The Severn workforce is not alone. Up to 10,000 jobs could be sacrificed as water companies fight to keep their profits and preserve bosses' pay in the face of pressure to cut costs for the consumer. Among those cutting jobs are Pennon, owner of South-West Water, laying off 200; Hyder, owner of Welsh Water and Swalec, axing 1,000; Anglian, 400; and Yorkshire, 500.

For 10 years, since privatisation, the companies have turned water into wine. They have been the darlings of the City, with much of the money raised by more than doubling bills given away in dividends worth more than pounds 10bn to shareholders. Now the stuff of life has turned to blood. The bosses are fighting to keep their profits, their own pay and shareholders' dividends as they bow to pressure to cut customers' bills.

What has created this change of fortunes has been the decision by Ofwat, the industry regulator, to demand price cuts for household bills of an average of pounds 30 - or 12 per cent of the annual bill. The response of the largest companies has, on the whole, been swift and remarkably violent. The price to be paid is the loss of up to a quarter of the industry's workforce in an attempt to slash operating costs.

Mr Duckworth insists: "I do like to think of Severn Trent as a big family where we share problems together. But this is a difficult time. There are likely to be many people I know who are faced with losing their jobs over the next two to three years."

Next year Midlands householders will see their water bills drop from an average of pounds 231 to pounds 193, a saving of 14 per cent. That represents a loss of revenue to Severn Trent of pounds 120m.

But on Friday Michael Meacher, the environment minister, said there was no justification for the job losses given the strength of the water companies' balance sheets.

Adam Scorer of the Consumers' Association said: "The price cuts are justified because water is the second most profitable sector on the stock exchange. Dividends have risen 50 per cent since 1994-95. But the water price to consumers has gone up constantly. There have been no cuts. There is no question that a clawback for consumers is justified. We have been offered nothing from the companies, which are low-risk, high-profit monopolies, to show us that price cuts necessitate job cuts. There is nothing to say these cuts cannot be funded out of dividend payments."

Pete Bowler, of Water Watch, points to the unfolding of the week's events as proof of the failure of privatisation. "Fat-cat directors are putting their bonuses ahead of running a public utility for the benefit of the communities they serve," he said. "Privatisation was entirely unnecessary."

Over the past decade Water Watch has logged a series of incidents of water pipe leakages and potential environmental disasters, which, it claims, lays bare the myth that privatisation has led to a massive improvement in services. It claims that water companies which have reduced staff since privatisation often no longer have workers on site to monitor water treatment plants around the clock.

The privatised companies, however, contend that enormous investment programmes have seen improvements in the quality of tap water and an easing of environmental problems. Even Ofwat concurs. Already pounds 30bn of profits have been ploughed back into the industry as investment since 1990, and Ofwat is demanding another pounds 15bn investment in the next five years.

The question now is whether the privatised companies deliver on those environmental promises at a time when it is cutting staff to the bone. Next year a draft Bill imposing restrictions on water extraction from rivers, and new responsibilities for the conservation of water, will put further pressure on the utilities.

Duckworth, who is chairman of Water UK, the umbrella organisation which represents water companies' interests, says: "The last thing a business wants to do is make decisions about cost reductions when they have an impact on customer services or the environment. We will work hard to make sure the environment is not put at risk."

The environmental impact of the cuts is a prime concern for Unison, which represents some 25,000 of the 40,000 workers in the industry. The union is now calling on Ofwat to ensure the water companies undertake a risk- assessment before laying off workers in vital areas.

"Some time down the line something will happen at one of those sewage works, or there will be a major flood," claims Alex Thomson, Unison's head of water. "At some stage something will give and there will be a serious health risk. And if these jobs go, can they [the water companies] guarantee there will be no risk to people from the water supply?"

But Ofwat's demand for reductions next year has provoked Unison's fury. It is demanding urgent talks with Michael Meacher, and a political storm is brewing over the timetable for the bill reductions, as well as the water companies' determination to shed jobs rather than reduce dividends. The row will add to the problems of John Prescott, whose Department of the Environment is in overall charge of the industry.

"We think the way the price cuts are being structured is wrong," said Mr Thomson. "The one-off price cut, followed by a gradual increase, was always going to mean that companies would just obliterate jobs. People are looking for stability rather than just having another pounds 30 in their pocket. [In July] we went to Michael Meacher and Ofwat to say we are concerned about jobs. We warned them the price review would lead to huge job losses."

But Ofwat is determined to bring in the price reductions. Pete Bowler, at Water Watch, says: "Certainly for the first eight years of privatisation, Ian Byatt [the regulator] had his balaclava on back-to-front - the wool was over his eyes."

Ofwat supporters believe Mr Byatt has finally seen the light. An Ofwat spokesman says: "Over the past five years prices have risen and yet 5,000 jobs have been shed. And now they say we have to shed jobs because prices are coming down. It doesn't make any sense."