In any other year, Westminster would have given far more air time to the question of public versus private ownership, which if the opposition were to gain power would herald the biggest shake-up of the water industry in decades.
Nevertheless, the political waters have been choppy enough since shadow chancellor John McDonnell unveiled his renationalisation plans at Labour’s party conference last September, building on manifesto pledges to bring key utilities – water, energy networks and rail – back into public ownership.
Declaring that the water sector would be the first to taste the “biggest extension of economic democratic rights this country has ever seen”, far-reaching plans were revealed for a new government-owned model run by local councils, employees and customers.
Other proposals about potential future operating models, such as mutualisation, are also gaining traction in some quarters, widening the debate beyond the traditional binary proposition of private versus public ownership.
Meanwhile, in a new era of legitimacy and transparency for utilities, existing privatised models are increasingly adapting. South West Water, for example, has proposed an element of mutual shareholding as part of its wider ownership base.
This changing shape of water is buoyed by what now seems a general acceptance throughout industry that companies must garner more public support, via a greater openness and fairer sharing of rewards. It is a key driver behind our New Deal for Utilities campaign, exploring how policymakers and regulators can work with companies to help them forge a new social contract with the public.
At the launch of our campaign at the beginning of the year, a survey by Harris Interactive commissioned by Utility Week asked if renationalisation would encourage respondents to vote Labour. Thirty-four per cent replied yes, with just 11 per cent saying it would make them less likely. However, things are far from clear cut – with 55 per cent of those questioned revealing it would make no difference either way.
So, what could all this mean in practice? Might other options – including “reinvented” privatised companies with a more social focus on sharing rewards and greater transparency – be real contenders for public hearts and minds in the future? And what could the actual details of some of these models look like?
Labour’s vision
Broadening ownership and control in the economy lie very much at the heart of Labour’s proposals for the renationalisation of monopoly water and energy companies.
“It’s time to shift the balance of power in our country,” McDonnell announced to the party’s annual gathering in Liverpool in September.
A package of measures would see water reorganised under Regional Water Authorities, which would include councillors, workers, customers and those with environmental interests. Executive positions would be re-advertised and salaries “dramatically reduced”. Shareholders in existing private companies would be bought out with bonds “cost neutral” to the taxpayer, and profit margins aided by the relatively low cost of borrowing for such companies would be shared with consumers.
Denouncing as a “scandal” a “dysfunctional” industry that had paid out £18 billion in dividends, even as bills meanwhile rose 40 per cent, McDonnell said “surpluses would be reinvested in water infrastructure and staff or used to cut bills”. A “public and community” unit in the Treasury would see its public ownership programme through.
Yet the shadow chancellor was at pains to point out that this would not be a return to the nationalisation model of the past. “We don’t want to take power away from faceless directors only to centralise it all in a Whitehall office, to swap one remote manager for another,” he said, revealing the launch of “a large-scale consultation on democracy in our public services”.
Labour’s position has dismayed some commentators, who fear that it will hit investment, stoke labour disputes and result in poor service. Some Conservatives say employee ownership represents “yet another tax rise”.
Meanwhile, the director general of the Confederation of British Industry, Carolyn Fairbairn, warns the plans will mean reduced living standards. “From renationalisation to dilution of shares, Labour seems determined to impose rules that display a wilful misunderstanding of business,” she says.
Another commentator points out that cutting bills means effectively cutting revenues, and the ability to pay dividends – thereby eating away at the worth of assets. With figures showing it would cost £69 billion to buy the 32 water companies in England and Wales , they warn that renationalisation could very quickly become extremely expensive.
Public opinion will prove key. And Labour appears heartened by the public’s reception to the idea. Far from being “horrified” at the prospect of renationalisation, they say, many welcome it.
However, so far the jury looks to be out. In the previously mentioned public survey in January, we found that just under a third of respondents (32 per cent) said they felt the ownership and management of utilities should rest with national governments; although almost one-quarter (23 per cent) were unsure who would be best placed to run them; and 14 per cent thought utility companies should be owned and operated by private companies.
Mutual views
Nationalisation, however, is not the only game in town.
The idea of mutualisation is growing as a serious alternative to full privatisation. Mutual ownership is viewed by some as the best way of reversing the industry out of privatisation, which they say is insufficiently competitive and weakly regulated.
At the end of January, Utility Week reported how during a Westminster Hall debate on the future of the water industry, Labour MP Gareth Thomas called for water companies to be turned into co-operatives that would remain in the private sector and continue to be regulated by what he described as a “more effective” Ofwat.
His not-for-profit model would see:
• water suppliers’ boards appointed by trusts made up of consumers and employees;
• bonds issued to buy back shares in the companies;
• trusts underwritten by a government guarantee on loans or debt, providing internal equity reserves to borrow against for large unexpected investment needs;
• money replaced over time as trusts accumulate profits no longer required to go to shareholders;
• boards including elected employee and customer directors;
• boards responsible for audit, remuneration, company governance decisions and how profits are invested or distributed;
• companies protected against demutualisation via an asset lock.
Thomas, who is chair of the Co-operative party affiliated to Labour, also called for a “full review” of the industry’s regulation, branding Ofwat “woefully weak” with English consumers carrying “little weight against the interests of distant investors”. Specifically, he called for the regulator to reduce the cost of equity in its current price review calculations and for a cut in all English water customer bills after “30 years of being used as cash cows by the owners of water companies”.
Ofwat, he added, should also be given new powers to encourage employee and customer oversight of the water industry under the new model. Employee and consumer trusts would also have a role in the scrutiny and decision making of Ofwat and appointments to its board.
Responding, Ofwat said that through its 2019 price review it had challenged water companies to deliver “more of what matters to customers in the coming decade, by being ever more resilient, efficient and innovative in the services they provide”. “We’re confident that the sector can rise to meet this challenge,” it said.
Three not of a kind
The UK already has form when it comes to different types of water business models, with Wales, Scotland and Northern Ireland all operating their own systems.
Welsh Water
Owned, financed and managed by Glas Cymru and structured as a company limited by guarantee, Glas Cymru has no shareholders, allowing any operating surpluses to be “retained or reinvested for the benefit of customers”.
Members do not receive dividends, nor do they have any financial interest in the company, fulfilling a governance role and holding the company to account.
Under the non-shareholder business model, Welsh Water’s assets and capital investment are financed by bonds, loans and retained financial surpluses. In this way, it says, it aims to reduce Welsh Water’s asset financing costs, the water industry’s single biggest cost, by offering high-quality credit to long-term investors.
Scottish Water
Scottish Water is publicly owned, “answerable to the Scottish government and the people of Scotland”.
Its average household charge in 2018/19 is around £363 a year and during 2017/18, Scottish Water delivered £647 million of regulatory investment.
Working with its customers and stakeholders, it has agreed its process and priorities until 2021.
Serving a population of 5.14 million, its turnover in 2017/18 was £1.4 billion, with capital investment of £647 million.
Northern Ireland Water
Government-owned Northern Ireland Water is the country’s only supplier of water and wastewater services.
The company’s sole shareholder is the Department for Infrastructure, within the Northern Ireland Executive, and Northern Ireland Water supplies approximately 860,000 households and businesses. It’s 2017/2018 turnover was
£431.8 million.