Burst pipe-dreams: Why privatisation hasn’t improved the supply of our water

Last year Thames Water was hit with a £20m fine for polluting the waterways of Oxfordshire and Buckinghamshire with a billion and a half litres of raw sewage between 2012 and 2014.

The judge cited a “failure to report incidents” and a “history of non-compliance” by the company. Equipment was unmaintained. Warnings from employees went unheeded by management.

Thames’s conduct was branded “disgraceful”, justifying the largest financial penalty for pollution in UK corporate history.

While all that was going on Thames’s boss, the aptly named Martin Baggs, received a 60 per cent pay rise, taking his total annual remuneration to above £2m.

Now Thames (along with three other private water companies) has let down its customers again, leaving them high and uncomfortably dry after pipes burst in last week’s big freeze. And, once again, it’s apparently corporate incompetence at work rather than just bad luck.

“Water companies have been warned time and again that they need to be better at planning ahead to deal with these sorts of situations,” fumed Rachel Fletcher, the head of the regulator, Ofwat, today.

So presumably, if history is a guide, Thames’s current chief executive can look forward to a bumper payday.

Owning a water company isn’t a licence to print money. But the cash does flow extraordinarily freely in this sector. In the financial year ending in 2017, according to data collected by Ofwat, the private water companies raked in total revenues from households and businesses of £11.7bn. Their profits before tax were just under £2bn.

That equates to a profit margin of 17 per cent, which is extraordinarily elevated for a natural-monopoly public utility.

Such plump margins enabled the water companies to pay out £1.4bn of dividends, in total, to their shareholders. Between 2007 and 2016 total dividends summed to £18bn.

The industry points to higher levels of investment by water companies since the 1980s as evidence that privatisation has worked in the public interest. But much of that capital spending was mandated under European Union environmental regulation. It would have happened anyway, even if the regional water companies had never been sold off by the Thatcher government back in 1989.

And that £18bn in dividends in the decade to 2016, incidentally, was roughly equal to their total profits over that period. Investment for the future pretty clearly ranks behind shareholder returns for these companies.

A broad survey of the state of the privatised water industry reveals a scene almost as unpleasant as those befouled Oxford waterways.

We see tax avoidance through the creation of complex webs of offshore holding companies. We see firms loading up on debt to benefit from lower interest rates. We see the gains from lower borrowing costs not being adequately shared with customers, who have seen bills rising well above the rate of inflation over the past 30 years. We see remuneration for executives beyond the dreams of any equivalently senior public sector employee.

Even the quondam Thaterchite Environment Secretary, Michael Gove, now accepts most of this charge sheet. And we can reasonably supplement it with proven managerial incompetence and regulatory ineffectiveness.

There are reasons to be sceptical of Labour’s argument that water nationalisation would lead us to a promised land of good customer service and efficiency. Pipes would still burst under national ownership. Public servants are perfectly capable of bungling.

Yet it would also be a land without financial engineering, grotesque cash extraction, endemic tax avoidance, and stratospheric managerial pay. That’s worth something.

Improve and tighten regulation instead, say some. But what should the new framework be? Where in the world is privatised water working satisfactorily for consumers?

There is, in fact, a global trend of re-municipalisation of privatised water provision, driven by many of the same problems of unwarranted private value extraction and managerial incompetence as we have seen here.

Given the failures of the past 30 years, the onus is surely on the defenders of the status quo to justify it; to explain why in Britain water, and the financial rewards from its supply, should continue to flow uphill.