England’s privatised water companies are an example of vulture capitalism

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

England’s privatised water companies are an example of vulture capitalism unleashed by neoliberal obsession with privatisation of essential services. Its poster child, Thames Water, the UK’s largest water company, wants a 40% price increase and guaranteed returns. Its investors based in China, Abu Dhabi, Canada and the Netherlands are holding the government, regulators and people to ransom by stating that unless their demands are met they won’t invest and let the business collapse. Any concession to Thames will enable other water companies and corporations to do the same. It is time to tackle vulture capitalism head-on, let Thames go bust and bring water back into public ownership.

Privatisation Folly

Water privatisation has financialised an essential commodity and capitalists jostle to see who can make the biggest profit from a monopoly. Water is unlike other businesses as revenues can’t be increased by expanding the customer base or persuading customers to consume more. A supermarket may have discretion in how often it revamps it assets, but water companies have little discretion. When a supply pipe collapses, it has to be renewed. So, the only way to increase profits is through hiking bills, dubious accounting practices, tax dodges, financial engineering and neglecting investment.

The industry was privatised in 1989 for a net price of £6.1bn, £7.5bn price minus a dowry of £1.5bn to give companies a debt free start. So far water companies have paid more than £75bn in dividends, and neglected investment. Customer bills have increased by over 350%, double the rate of inflation. Companies operate through complex opaque corporate structures and are adept at shifting profits to low/no tax jurisdiction. They pay little or no corporation tax. In 2023, sewage was dumped into rivers/seas for 3.6 million hours, compared to 1.75m hours in 2022. Some 3bn litres of water is lost every year due to leaks from a dilapidated infrastructure. No new reservoirs have been built since 1989.

Thames Water Woes

Since privatisation, Thames Water has failed to hit any of the targets for plugging leaks and making investment in infrastructure. In 2001, it was acquired by German utility company RWE for £6.1bn. In December 2006, it was sold for £8bn to Kemble Water, a private equity consortium led by Australian bank Macquarie. Under Macquarie’s control, in 2012 BT Pension Scheme, Abu Dhabi Investment Authority and the China Investment Corporation acquired a stake in the company. In 2017, Macquarie sold its stake to Ontario Municipal Employees Retirement System, the Kuwait Investment Authority and other investors, including the University Superannuation Scheme.

For the period 2006 to 2017, Macquarie operated through a labyrinth of companies, with some registered in Caymans. During 11 years of Macquarie control, Thames paid £2.8bn in dividends. Its debt ballooned from £2.4bn to £10bn, mostly from tax haven affiliates. Thames paid £3.186bn in interest to other entities in the group alone. Macquarie made returns of between 15.5% and 19% a year. For the years 2007-2016, Thames Water paid about £100,000 in corporation tax. The private equity years left their mark and the exploitation continued.

Since 2010, Thames Water has been sanctioned 99 times by the regulators for abuses and fined £179m. However, this has made little difference to its practices. Since 2020, it has dumped some 72bn litres of raw sewage into rivers and seas. Between 1990 and 2021, Thames paid dividends of some £7.2bn and continued to excel at paying little/no corporation tax. Stung by public criticism, it claimed that since 2017 it hasn’t paid any dividends. Its game of smoke and mirrors does not regard dividend payments to its sole shareholders, its parent company, as dividend because it is paid to service debt and related group costs. This is nonsense.

Page 43 of its 2023/24 audited accounts states that “During the year, we distributed £45 million (31 March 2022: £37 million) to Thames Water Utilities Holdings Limited”. Why did OFWAT permit a financially distressed company to pay dividends? Why is some of the Thames debt parked in the balance sheet of its ultimate owner Kemble Water as that reduces Thames Water leverage ratio?

Under the Companies Act 2006, a company can only pay dividends if it has sufficient distributable reserves i.e. sufficient realised profits. Thames has been manufacturing them for years. Here are two examples:

Firstly, Page 143 of the Thames accounts for the year to March 2023 state that “£215.2 million of borrowing costs were capitalised in the period (2022: £114.8 million).”  This highly imprudent accounting practice enabled Thames to inflate its investment and distributable reserves by £330m in just two years. Such a policy was used by Carillion, and that did not end happily.

Secondly, Thames has inflated its investment and distributable profits by capitalising part of its repair and maintenance expenditure. Page 134 of the 2023 accounts notes that “The Group capitalises expenditure relating to water and wastewater infrastructure where such expenditure enhances assets or increases the capacity of the network. Maintenance expenditure is taken to the income statement in the period in which it is incurred. Differentiating between enhancement and maintenance works is subjective” i.e. directors have used their discretion and it is not easily possible to independently corroborate their judgment. The amounts are not known.

The above creative accounting practices have long been used and their total since 1989 would have inflated asset value and distributable profits by billions of pounds.

The practice of borrowing money to pay dividends has resulted in a gearing/leverage ratio of about 80%. The company has sought to conceal this by wrongly describing loan from shareholders as equity. It has debts of around £18bn and over half of that is inflation-linked. Around 28% of its revenue is spent on servicing debt. With recent double-digit inflation, Thames’ debt obligation has risen and it is now struggling to make repayments. Around £1.4bn of bonds mature by the end of the year.

What Next?

Thames Water is effectively forcing customers to provide capital, whilst shareholders retain ownership and all returns. Thames is daring the government to refuse its demands because that would also persuade other water companies to cease their investment and demand concessions. No government can capitulate and retain legitimacy.

Privatisation has failed and water industry needs to be brought back into public ownership. However, acknowledging that privatisation has failed would be a bitter pill to swallow for the Conservative government. In an election year, the government will try to prolong the life of Thames Water. During his leadership campaign, Labour leader Sir Keir Starmer promised to nationalise water, but has since reversed his position. A crisis looms for both parties.

Profiteering is the root cause of the crisis, and that can’t be addressed by handing the company to another profit seeking operator. The profit element needs to be removed and surpluses need to be ploughed back into building the infrastructure. Public ownership whether through a not-for-profit, a community owned, or a mutual organisation is the best way forward.

Any mention of ending privatisation raises the usual neoliberal point about the cost though they are silent about the damage inflicted by water privatisation. As for Thames Water, OFWAT estimates that it has a regulatory capital value of £19bn. However, this is a gross exaggeration as it takes no account of financial engineering games (see above), and the fact that Thames is in deep financial distress.

Shares in Thames Water are almost worthless and major investors have significantly written-down the value of their investment. Upon bankruptcy, lenders may pick the carcass of Thames but many of its assets, such as underground pipes, sewage treatment plants and reservoirs have little or no alternative use value. Lenders will recover little from any fire-sale. The government will need to negotiate a suitable price to bring it into public ownership. The cost of acquiring water companies can be loaded on to the entity itself, as is the case with many takeovers (for example, Asda, Morrisons). In any case, the net cost of public ownership is zero as any debt issued to purchase Thames will be matched by assets in the government’s balance sheet. The government could invite people to buy bonds in water companies with the promise of a discount on bills, and thereby eliminate the cost of nationalising from its finances altogether.

Water privatisation is a giant Ponzi scheme in which today’s shareholders extract returns by exploiting customers. The impending collapse of Thames Water is an opportunity to roll-back the era of vulture capitalism, and ensure that surpluses of utilities are ploughed back into the infrastructure rather than handed to shareholders.

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