The money we can raise from bills, along with how much we are allowed to invest in our service, is decided every five years through our economic regulator Ofwat's price-setting process and set out in our Final Determination. Any regulated wholesale revenue raised over and above the agreed amount is returned to customers through something called the revenue correction mechanism.
Any profits, and returns to investors, that we make in excess of those derived from allowed pricing come from:
Efficiencies are either reinvested to improve service for customers or shared 50:50 with customers at the start of the next AMP, helping to keep bills down. In addition, our focus on sustainable savings that can be maintained over the long term will help reduce our cost base in 2020–2025.
Our focus on innovation and our ground-breaking approach to our capital delivery alliances have already delivered significant efficiencies in the first two years of this AMP. In line with the approach taken in previous AMPs, and reflecting what customers are telling us during the ongoing customer engagement process, the Board has decided to invest an additional £100 million over the rest of the AMP to:
Any rewards from ODIs come as a direct result of delivering an improved performance or service levels, all of which are beneficial to customers, the environment or both.
Our capital delivery alliances have been tasked with finding further efficiency savings, going beyond those delivered in AMP5, while our search for sustainable efficiencies throughout the business has also seen us hold our operating costs broadly at last year's level.
Keeping bills low while maintaining investment in the things our customers value most was a key aim of our Business Plan. We know people have been feeling the pinch in recent years and that whatever we invest is ultimately underpinned by customers' bills. So it is important to show how that money is being spent and how it is delivering value. We are proud of our record on efficiency and delivering value to customers. When the industry was privatised in 1989, Anglian Water had one of the highest average bills in the industry. By 2020, our average bill will be lower than the industry average. For 2017/18, bills will be £420 on average, or £1.15 a day, of which just 5p is net profit.
Profits are essential to attract private investment, as customers' bills alone could only fund a fraction of what we invest each year. We have to provide investors with a reasonable return on their investment. We also believe excellent performance should be reflected in higher profits.
However, profits can rise or fall due to factors not directly related to excellent performance – for instance, the level of interest rates, the rate of inflation, or unexpected new legal obligations. When inflation outturns at a significantly lower rate than assumed at a determination, this can adversely affect the Company's finances as it is under recovering its costs. Conversely, when inflation outturns at a higher rate it can benefit companies, and this may be perceived as unfair. We look to manage this inflation risk to minimise the impact for both the Company and customers, and the link to inflation is a key driver of the relatively low costs of capital from which customers benefit.
Private investment also effectively spreads the cost of extending and improving our assets over their operational life. In this way, tomorrow's customers pay for tomorrow's use of the asset rather than today's customer having to pay for the building of an asset.
Anglian Water takes its responsibilities as a good corporate citizen very seriously. We make significant contributions to the Exchequer each year, through a wide range of taxes collected and paid. Our effective rate of corporation tax is less than the statutory rate due to HM Revenue & Customs (HMRC), primarily because of incentives available for capital investment, and due to the interest we pay to fund that investment. We have one of the largest levels of private investment in the region, worth more than £2 billion over five years. This is central to underpinning economic recovery and growth of the regional economy.
The Government actively encourages infrastructure investment and grants us capital allowances, which defer some of our corporation tax liabilities until a later period. Our customers directly benefit from the deferral as it helps to keep bills lower.
Anglian Water is committed to complying with tax laws in a responsible manner and to having open and constructive relationships with tax authorities. We support the principle behind multilateral moves towards greater transparency that increase understanding of tax systems and build public trust. Further details of our tax strategy can be found on our website.
Further, from a tax perspective, HMRC views Anglian Water as a low-risk company, based on its ongoing review and assessment of our tax procedures. The Company's total tax contribution for the year extends significantly beyond the payment for corporation tax.
Total tax paid or collected in the year to 31 March 2017 amounted to £210 million (2016: £203 million), of which £57 million was collected on behalf of the authorities for value added tax (£22 million) and employee payroll taxes (£35 million).
The most significant taxes involved, together with their profit impact, were: