Water privatisaton 25 years on: The good the bad and the ugly

An industry that was once owned by the government is now almost exclusively owned overseas by a few private investors.

An industry that was once owned by the government is now almost exclusively owned overseas by a few private investors

30 years ago our water system was in a mess. Britain was the dirty man of Europe, rivers ran black with coal, a quarter of Britain’s beaches were affected by raw, untreated sewage. Shit to you and me.

Privatization was a radical solution. No country in the world had dreamed of putting an industry so fundamental to life and public health in the private sector.

And to some extent it worked. Although there is still clearly work to be done, our environment has made huge improvements since water privatization.

On the supply side the vast majority of the UK has pharmaceutical grade water on tap, in their home 24 hours a day.

But all of this has come at a huge cost for the water rate payer. After ten years of seeing prices fall under the private water industry’s first regulator, Sir Ian Byatt, the following years saw rapid price increases.

Water companies demanded more money, which they said was necessary for investment in the industry. The new regulator agreed, in the naughties price inflation in water outstripped food and other essentials. It was only beaten by energy costs.

By 2010, one quarter of households were living in water poverty, and water prices have continued to outstrip earnings growth since then.

The City of London was laughing all the way to the Cayman Islands. Instead of investment, private equity owners swooped in, bought up most of the industry, creamed off what they could and then borrowed even more to pay out eye-watering dividends.

There is a great irony of the British water privatization. An industry that was sold by government to the public though shares in publically tradable companies is now almost exclusively owned overseas, by a few private investors. Some of them are foreign governments.

The borrowing that has sustained high returns has lead to financially weaker companies. The interest payments on some are so large that they now make little profit and pay no tax. Most are now owned offshore, and when they come to change hands will avoid billions in capital gains tax too.

Was any of this financial engineering in order to run a decent water service? The answer is a resounding no.

In the early 2000s Nigel Annette and Chris Jones, two managers at Welsh Water pulled off one of the most extraordinary maneuvers in British corporate history.

The company that owned Welsh Water, fueled by cheap debt, had been on a spending spree. The price cut introduced by Sir Ian Byatt and Blair’s windfall tax on utilities brought the party to an abrupt end and company was on the verge of bankruptcy.

Nigel Annette and Chris Jones, two senior managers at Welsh Water set a company called Glas Cymru, borrowed £1.9bn and bought Welsh Water.

This is the kind of operation that happens all the time in the corporate world, managers buy the company, fueled by debt, load the debt onto the company, sell it on a few years later and walk away with hundreds of millions of pounds.

The Glas deal was different. Nigel and Chris had set up Glas as a not for profit. A company with no shareholders it is overseen by 70 members drawn from across Welsh public life.

Profits, instead of slipping off to the British Virgin Islands, are ploughed back into the company leading to better service. Any excess is taken off bills. Since Glas took over £150m has been given in rebates on Welsh Water bills through their “customer dividend”.

What Welsh Water effectively achieved was renationalization without government. A company set up for the benefit of the people of Wales, managed by the people Wales, but distinct and different from government.

It has demonstrated that altruism is a better for business than greed. Whilst customer satisfaction has been consistently poor in companies owned by private equity, Welsh Water is ranked amongst the most trusted brands in Wales. In 2012 the company received more thank you letters than written complaints about the service, a truly extraordinary statistic by any stretch of the imagination.

Looking back on 25 years of privatization the experiment has delivered a high quality, trusted water supply, a better environment, higher bills, asset stripping, tax avoidance and a new model of public ownership.

We need to learn the lessons of Welsh Water, and roll out a more responsible and sustainable corporate governance structure for our public infrastructure. That way, in the next 25 years we can have the good, without the bad and the ugly.

George Turner works for the Tax Justice Network

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