Ofwat’s public value principles
Ofwat publish their six principles for public value, covering the social and environmental value and a guide for water company activity.
Ofwat has published (March 2022) a paper setting out its final public value principles, following its earlier papers from December 2020 and July 2021 on the subject.
Ofwat’s research found considerable enthusiasm and ambition amongst water companies to deliver more social and environmental value, but a need for a principles-based framework to guide water company activity.
The paper sets out six principles for public value, with accompanying explanatory notes. We set out below each principle and a snapshot of Ofwat’s guidance.
"Companies should seek to create further social and environmental value in the course of delivering their core services, beyond the minimum required to meet statutory obligations. Social and environmental value may be created both in direct service provision and through the supply chain."
Ofwat recognises that a significant amount of social and environmental value is already created by water companies in the normal course of carrying out their statutory responsibilities. However, companies should seek to go beyond the delivery of their minimum statutory obligations and consider how they can deliver more social and environmental value by doing things differently, whilst remaining fully compliant with all their legal and regulatory obligations.
"Social and environmental benefits should be measurable, lasting and important to customers and communities. Mechanisms used to guide activity and drive decision-making should support this, for example through setting and using company purpose, wide external engagement and explicit consideration of non-financial benefits."
Companies should be able to explain their social and environmental impacts, both positive and negative, to customers and other stakeholders, which in turn helps in building and maintaining trust and legitimacy.
Companies should therefore set out measurable social and environmental outcomes, so that progress can be followed and understood, regardless of whether these feature in any regulatory framework. The delivery of public value outcomes should flow from companies' community and stakeholder conversations.
"Companies should be open with information and insights on operational performance and impacts (both good and bad). This will support stakeholder engagement, facilitate collaboration and help identify opportunities for delivering additional social and environmental value."
In Ofwat’s view, sharing insights and learning from the approach to public value and outcomes, and from operational performance more generally, is more likely to engender trust in companies. However, Ofwat does not see sufficient benefit in mandating a particular approach at this time, noting that its current reporting requirements, e.g. against outcomes and performance commitments, already suit this space well at this stage.
"Delivery of social and environmental value outcomes should not come at greater cost to customers without customer support."
Customer support is a key driver of legitimacy and trust in the sector. It is important that schemes deliver value for money and where additional expenditure is involved, that customers support it.
"Companies should consider where and how they can collaborate with others to optimise solutions and maximise benefits, seeking to align stakeholder interests where possible, and leveraging a fair share of third-party contributions where needed. Companies’ public value activities should not displace other organisations who are better placed to act."
Water companies’ services do not exist in isolation, but within a number of interdependent systems connecting the environment, communities, businesses of various sorts, and other types of infrastructure. Ofwat believes that partnerships and collaboration will be vital to delivering greater public value and is clear that water companies should convene and/or drive those partnerships. Nevertheless, water customers should only be expected to fund schemes that are consistent with the proper carrying out of a company’s functions, with each partner paying its fair and efficient share of the costs. This cost allocation should take into account the relative benefits of the solution to water companies and third parties, and the incremental costs compared to a solution the water company would implement to address only its requirements.
Many of the potential means of delivering public value may sit outside water companies’ core skills, and in those areas other organisations may have greater skills and capability. Ofwat does not intend water companies to deliver greater social and environmental value where other organisations have greater capability and/or a duty to act.
"Companies should take account of their capability, performance and circumstances in considering the scope for delivering greater social and environmental value."
Ofwat encourages water companies to be mindful of their ability, and the ability of their partners, to deliver (including in the context of third-sector and voluntary organisations) and not do more than is feasible. Whilst Ofwat does not discourage companies from being ambitious, welcoming experimentation and innovation, this should occur only so long as risks are managed appropriately.
This principle also serves as a reminder that delivery of social and environmental value as part of companies' core services should not detract from delivery of the core services on which customers rely, neither should it be a distraction from addressing underperformance or compliance in another part of the company's core activities.
Ofwat sees alignment between best value and its public value principles. It is Ofwat’s expectation that companies should continue to place an appropriate emphasis on social and environmental factors to show that their PR24 business plans represent overall ‘best value’, rather than just least cost. Ofwat’s PR24 methodology, when published, will set out its expectations around the delivery of best value through the price control.
However, Ofwat does not expect companies to be limited to the price control to deliver greater social and environmental value. It states that the primary mover in delivering more social and environmental value is action by water companies to incorporate public value thinking into their routine ways of doing things.
Ofwat concludes that it recognises that this will take a thoughtful and committed approach over the long-term, together with a willingness to experiment and innovate.
For further information on Ofwat's paper or to find out how we can assist you, contact our specialist water sector lawyers.