Can fines change culture?

 In Blog

The UK water company Southern Water has accepted a fine of £126M from the water regulator Ofwat for deliberately misreporting its sewage treatment and waste water discharges. The Environment Agency is pursuing a criminal investigation into suspected permit breaches. Is this a surprise to the wider public or is this just part of the fabric of modern life now?

It certainly should concern Southern Water customers who traditionally pay a proportionately high price for their water compared to Thames Water customers. This is because Southern Water waste is discharged into the Channel where stringent European regulations apply, in contrast to Thames Water which discharges into the UK river system where less rigorous water quality standards apply.  Customers of Southern Water accept a premium to ensure their waste water is clean enough to discharge into the English channel, but it turns out it isn’t, and hasn’t been for years.

To discover that the premium they have been paying over the years was based on falsified data leaves many consumers more than just a little unhappy. Have they any redress? Let’s look at who actually owns Southern Water. This quote from the website www.weownit.org.uk‘Southern Water is privately owned (through a series of holding companies) by the single-purpose company Greensands Holding Limited. Greensands is in turn owned by a series of investment and infrastructure funds, including UBS Asset Management (UK), JP Morgan Asset Management (US), Whitehelm Capital (Australia) and Hermes Infrastructure Funds (UK).

While we are now told that management has been replaced at Southern Water, with instructions to address issues of water treatment quality and reporting methods, it remains a private company designed to deliver a return for its shareholders. Customers, who are geographically captive, will continue to get a service that returns a profit, but not necessarily one they deserve. Even if the Environment Agency manages to prove criminal activity, the ownership structure won’t change.

Who can remember the VW emissions scandal from a few years back? Exhaust gas emissions from VW diesel engines were tested in unreal factory conditions to ensure that they fell within the limits set by the US air quality regulator.  Only when the engines were tested by the US regulator and found lacking was it discovered that the factory test results were wholly unrepresentative of real use emissions. Senior management admitted to collusion in order to gain access to the lucrative US market, but this has consequently cost the company millions, and diesel is still a dirty fuel in the US.

Both air and water quality are things that we should hold precious for future generations. Neither should be taken for granted, especially given the rise in Environment Activism and growing awareness among millennial of inter-generational equity – the legacy they inherit. Since the 2008 financial crash there has been a lot of regulation to improve corporate culture and reduce risk, yet the basic incentive systems remain in place. As long as businesses like Southern Water or Volkswagen are motivated by  sales, profit and shareholder return they will focus on gaming the regulations for commercial gain. Fines don’t change culture they just become operating costs.