Time to rein in water companies

As the threat of standpipes appearing on our street corners becomes ever greater, the water companies are laughing all the way to the bank. Over the next few weeks, the annual figures of the biggest companies are expected to reveal that they have made £2bn over the past year, a rise of 15 per cent. Worse, consumers are having to pay more for their water, an average of 8.5 per cent this year and overall bills are expected to rise by a fifth between 2005 and the end of the decade.

In other words, water privatisation is not working. The water industry was one of the last to be privatised by the Thatcher government which was wary of selling it off because water is a basic commodity that is essential to everyone. However, as the Tories became more desperate to sell off the family silver, the industry was finally sold off in 1989 and that has proved to be a mistake, just as with the railways.

As with all the privatisations, the industry was given an easy ride by the regulator which meant the companies quickly made handsome profits. The government wrote off £5bn of debts and fattened them up with a £1.6bn dowry. But instead of reinvesting their profits in the industry, the water companies ridiculously ‘diversified’ into all sorts of unrelated industries such as hotel management and television franchising in which they lost a lot of money.

Now, fortunately, most of the companies have sold off these loss making subsidiaries but much of the industry is now in the hands of big multinationals whose only aim is to please their shareholders rather than to consider the long term needs of Britain.

And of course, the big beneficiaries were the managers and directors of the newly privatised companies. With two and a half years of the sell off, the salary of the ten chairmen of the water companies had risen by 166 per cent and 33 directors had received share options worth £130,000.

As with most privatisations, Britain has gone further and faster than anywhere else in the world. Instead of keeping the assets in the public sector, as most other countries which have privatised water, the government sold off the whole industry. That has left consumers at the mercy of the private companies.

There were two main reasons put forward for the sale. The principal argument was that the government would never invest in the industry given the competing demands such as health and education. However, this problem only comes about because governments insist on playing silly games because they see any public investment as a bad thing, as governments have to borrow the money to pay for it, and any private investment as a good thing. In fact, this is a daft distinction. The cost of investing in water will ultimately only be met either by the government or the consumers. It does not really matter whether it is a public or private sector organisation that raises the funds to pay for it.

The other argument for privatisation is that the private sector is more efficient. True, there were some publicly-owned industries that were overstaffed, but the water industry was not one of them. Indeed, soon after privatisation, the numbers on the payroll, which had fallen as the publicly-owned industry became more efficient, increased by a third to 55,000. And several studies have cast doubt on the idea that private is necessarily more efficient.

Privatising the water companies was supposed to bring in private capital to make up for the lack of investment by the state. But the difficulties of regulating the industry mean that it has been too easy for the privatised companies to draw up grand schemes for investment but then not actually spend the money. The water companies have no interest in the long term as they have to maximise profits for their shareholders. There is, in fact, plenty of water in Britain but most of it is in the North. One solution may be to build some kind of pipeline but that is the sort of project which the private companies would not be able to pay for.

The same thing has happened in other privatised industries where short term interests have been allowed to overrule long term needs. The Hatfield train crash was caused by Railtrack’s failure to concentrate on its main task of maintaining the railways safely as, instead, it tried to run down the network in order to boost its bottom line. In energy, we are now seeing the prospect of shortages of gas because the energy companies have not considered their long term needs.

In a way, this is understandable. Private firms do not have the social or national remit which governments obviously must take into account, but that is why the wholesale privatisation of a basic industry like water has been so irresponsible. There is simply no accountability. Imagine if your local MP had to defend the government’s record on reducing leaks or allowing prices to rise too rapidly. Then there would be action.

The great privatisation trend of the 1980s and 1990s is now being re-examined in the light of two decades of experience which show that most of the benefits of this sell-off have not materialised.

In his major study of privatisation, The Great Divestiture, Professor Massimo Florio concludes that the benefits of privatisation were, at best, ‘modest’ and more important their effects were ‘regressive’- in other words, far from benefiting the poorest sections of society, privatisation has helped some fat cats get richer and the rest of us have had to foot the bill.

With yesterday’s news that Thames Water consumers may also soon come under restrictions on their use of water, water could become the surprise political issue of the summer. In response, ministers must now look at the situation with water and ask themselves – is this now the time to bring the water companies under control? Already Wales has shown the way. The Welsh water company Glas Cymru does not have shareholders and is owned by a group of members who have no financial interest. That means it does not have to pay out dividends to shareholders but instead reinvests any profits. Network Rail, which replaced Railtrack when it went bust, has a similar structure and ministers should look at ways of extending that structure. Given the emergency facing us this summer, it is time to rein in the water companies.

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