The sale of the UK water industry in 1989 is more controversial of all Margaret Thatcher’s privatisations. Critics they claim it was little more than a rip-off: Privatized companies have failed to eliminate losses, have been allowed to dump large quantities of untreated wastewater into our waterways, and have used ingenious financial engineering to boost shareholder profits. Indeed, a study published in 2018 he argued that cash flow from customers could have financed any investments undertaken, while loans simply went to reward shareholders.
Was it all a terrible mistake? Whether it was or not, what should be done now?
It is easy to argue that the answer to the first question must be “yes”. Water is not only a local monopoly, it is also a vital necessity. This means that the suppliers have enormous market power and are not subject to competition. This in turn makes strict regulation essential. But regulators are always likely to be duped, if not caught, by the profit-driven businesses they are trying to curb. Furthermore, given the nature of the business, the related risks are primarily borne by the customers rather than the shareholders. If companies fail to deliver, the former cannot go elsewhere. They can only complain and, if more investment is the answer, pay. Beyond all this, water is an industry with profound externalities, particularly those for the environment and health.
For all these reasons, it has long been assumed that for-profit businesses are bound to be troublesome in this industry: conflicts of interest are too big to handle. Yet there is a counter-argument which, in the case of the United Kingdom, seemed decisive. It is that her Majesty’s Treasury in particular, and government more generally, is a hopeless steward of such vital assets. He obsessed over the liabilities side of his balance sheet and constantly ignored the assets. Hence, the water industry was chronically starved of investment. In this highly secondary world, privatization, it was argued, would lead to more investment and better performance in the industry.
Michael Roberts, former managing director of Water UK, a few years ago he said that “since privatisation, an investment of nearly £160bn has seen strong and steady improvement, providing customers with world-class drinking water. Losses have decreased by a third since the mid-1990s, with two-thirds of beaches rated as excellent, down from less than a third 25 years ago.” This is not entirely wrong.
However, over time the improvements in performance have diminished and the scandals that we see have emerged. There was a failure to monitor what the water utilities were doing, especially the discharge of wastewater, and a corresponding failure to be choosy enough about the investments needed. Furthermore, Ofwat’s powers were inadequate: there was no way he could enforce license changes, freeze dividends or control salaries. Now at least he can.
So what is to be done? It would be possible to renationalise companies. I remain, however, skeptical of the government’s ability to manage the sector better (although Scottish Water is a public company accountable to the Scottish Parliament). A second option is to keep the companies independent, but change the ownership structure from shareholder-owned companies. One such alternative is Welsh water, which is financed solely by debts and charges. This model was controversial when it was created in 2001. Yet it has been a successful business with a good record of changing customer charges. But its superiority over other dimensions is less clear-cut.
If firms remain independent, the key action must come from the mandate and actions of regulators. It is clear that the current situation is unsustainable. There will have to be a lot more investment. Which in turn must ultimately be financed by charges (with strict controls on deviations from salaries and dividends). Crucial here will be the closest possible cooperation between environmental and financial regulators. Higher standards must be set, monitored and enforced, with harsh penalties for those who fail to meet them. Licenses must be lost if necessary.
Last but not least, there is a debate about whether the picture should be transformed. of Oxford Dieter Helm is particularly radical. It advocates “a water system that requires fewer resources for drinking water supplies, in which sewage systems are used only to manage wastewater, in which wastewater is not discharged into rivers, and in which agriculture and defenses against floods take into account the broader natural capital”. The answer, he insists, is integrated regulation of river basins.
Sometimes the best thing to do is step back and ask how radically something needs to change. This is now the case in the water industry. Let’s do like this.
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