From the TUC

Does the water industry need a dose of responsible capitalism?

25 Apr 2013, by Guest in Economics

The last few weeks have seen much discussion of the policy successes and failures of the 1980s. A particularly unpopular one with the public was the privatisation of major utilities. By 61% to 26% the public think these would be better run by the state. Our most recent report finds that there are certainly questions to be asked about one of these utilities – the water industry.

We’ll take just four of these issues now, starting with the ownership structure of water companies. The privatisation of the water industry in England and Wales in 1989 can be seen as part of a broader ‘popular capitalism.’ One of the architects, John Redwood, described this as “shares for everyone, property ownership for the many.” Our research suggests it would be a stretch to say this of the water industry today. Whilst it was the norm in 1989 for the ultimate owners of water companies to be publicly listed on the stock exchange, today the majority are owned by private equity consortia, frequently with opaque ownership structures.

The second issue, perhaps a more pertinent one for households, is that of cost. Water bills have been shooting up since privatisation. As the graph shows, water bills in nominal terms have nearly trebled whilst inflation has only doubled. Even with stagnating living standards in recent years, water bills have continued to increase above both inflation and earnings. Water bills have been cut before, in the early 2000s. Former Director General of Ofwat, Sir Ian Byatt, suggests now might be an appropriate time to do so again.

water bills graph

The traditional justification for rising bills is to fund investment, and the water industry is certainly a large investor, with around 40% of turnover being spent on investment according to Ofwat figures. But this figure has tended to decrease as a share of turnover since the late 1990s, perhaps reflecting that the historical under-investment in the industry has been addressed to a great extent. At any rate, more thought should be given to the cost effectiveness of this investment.

There are two more issues that are interlinked – growing debt and high levels of dividends. The water industry has become increasingly indebted since the late 1990s, with net debt as a percentage of the industry’s assets climbing from around 30% to 70% by 2010-11. This has also been a source of finance for investment, but large levels of dividend payments also appear to have contributed to growing debt levels. On several occasions over the last 15 years, dividend payments have exceeded the pre-tax profits from which they are paid.

This growing debt may prove to be a cause for concern. Thames Water has recently come under some criticism for having to establish a separate company, supported by the government’s investment guarantee, in order to be able to fund a large project (the Thames ‘super sewer’) as it was too indebted to do so itself without losing its credit rating. Moreover, large amounts of debt reduce the amount of tax water companies are liable for, as debt is treated more favourably than equity under tax law.

The water industry is in need of greater scrutiny. There are questions about whether the current methods of holding the industry to account are sufficient, especially given that it is not subject to consumer pressure or competition in a meaningful way. Both David Cameron and Ed Miliband have espoused their support for ‘responsible capitalism.’ If the concept is to be meaningfully applied anywhere, there are few industries more suitable than water.

GUEST POST: Adam Tinson is a research analyst at the New Policy Institute. Adam has previously worked for the Centre for Cities and Citizens Advice Northern Ireland, as well as for a member of the Northern Irish Assembly. His research background includes various aspects of social and economic policy.