Financial Times: Labour is right, Britain’s private utility model is broken

 

On 19th May, Inside Business focussed on criticism of the UK’s privatised water sector for poor performance, high rate of leakage and failure to put in place adequate measures to help customers struggling to pay their bills.

The privatised water Industry in the UK. An ATM for investors, research published by Greenwich university’s Public Services International Research Unit in October 2018, suggests that the 40% increase in real household bills since privatisation was mainly due to continuously growing interest payments on debt – and not to growing costs and investments, as the regulator had reported.

Earlier, the Guardian noted that the chief executives of England’s privatised water companies banked £58m in pay over the last five years while customers have been faced with above-inflation rises in their water bills.

Inside Business noted that between their privatisation in 1989 and last year, English water companies ‘generated operating cash flows’ totalling £159bn in 2017-18 money, £36bn more than they spent on new pipes and infrastructure. At the end of this period they had paid £56bn in dividends and borrowed £51bn that customers will have to service and pay off over many years

It is suggested that this borrowing served only to pay financial returns to investors.

A year earlier, This is Money recorded that four water firms set up subsidiaries in the Cayman Islands, more than a decade ago, as – at that time – rules in the UK prevented them from raising cash on the bond markets. Though this is no longer the case, many have continued to use the offshore firms as interest payments made through havens often do not incur tax as they would in the UK.

The Greenwich study suggests much of this borrowing by companies served only to pay financial returns to investors: “We show that the skyrocketing debt levels are primarily the result of disproportionate dividend pay-outs”.

Britain’s existing model ought to change. Michael Pooler, in the Financial Times, sets out two ways to solve the problem of private monopoly:

“One is the solution the Labour opposition favours, which is to eliminate it by putting the companies into “not for dividend” public hands. Then you can set whatever social objectives you choose. Eliminating dividends certainly dissolves the conflicts of private ownership. The Welsh and Scottish water companies both have this model — and the latter has not suffered a notable penalty in efficiency versus the English companies, according to the regulator”.

The other is offered by economist Dieter Helm In the 2017 Cost of Energy Review commissioned by government. He suggested increased oversight of utilities, with regulators setting the desired outputs (new transmission connections, flood defences) and then opening them up to competitive tender from anyone — private or even state sources. He points out that Britain’s energy systems face a period of upheaval in order to deal with the challenge of decarbonisation and concludes that a new approach might achieve this shift more flexibly, and align returns a little better with the real risk taken.

The FT notes the involvement of ‘financial engineers’ whose main objective was draining value from these private monopolies, adding that this is what has spurred the interest in renationalisation.

Under Jeremy Corbyn, the Labour party has come out firmly for the renationalisation of rail, water, energy and the postal service. At the Labour party’s annual conference in September, the shadow chancellor, John McDonnell, promised to bring “ownership and control of the utilities and key services into the hands of people who use and work in them”.

The Greenwich analysis found that the public-owned sector in Scotland delivers the water and sewage service just as efficiently and at a lower cost to consumers and Inside Business (reluctantly?) concluded that the Labour party’s attempt to nationalise them ‘cannot be dismissed as a paleo-socialist blast from the past’.

 

 

 

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