However, while a step in the right direction, it is more of a sticking plaster than a cure for a system which benefits billionaire investors despite burst pipes and customer dissatisfaction. In Harrow many of my constituents are all too aware of Thames Water’s record. New leadership has seen a marked change, as they suspend pay-outs to shareholders in an attempt to clean up their image. However, the behaviour of the former owners provides a perfect case study of the failures of privatisation and the inability of regulators to rein in the very worst of corporate excess.
In the ten years to 2016 Thames Water’s shareholders paid themselves £1.6bn in dividends, ran up a pension deficit of £260 million, loaded Thames Water with £10 billion of debt and regularly paid zero corporation tax.
Research by the Open University suggests that the owners took more in dividends from Thames Water than it actually earned from its income from its consumers over the last decade. Dividends, debt and the pension deficit weren’t the only things to increase in this period – customer bills and the number of complaints went up too.
In 2017 Thames Water was ranked 23rd out of 23 water companies for customer satisfaction according to the Consumer Council for Water. And according to their own performance report for 2017/18 Thames are failing to meet basic targets in 17 out of 41 key areas.
Thames Water and their former owners are not unique – the problem isn’t just with irresponsible private owners making profit at the expense of the infrastructure we all rely on. It’s our privatised structure which allows it to happen.
Margaret Thatcher’s decision 30 years ago to privatise our water industry has created a system which is expensive, unaccountable and unfair. No other country has completely privatised their water and sewage services. There is little competition and regulation has been deeply flawed. The consumer voice has carried little weight when up against the interests of distant investors and not surprisingly water bills have rocketed as a result.
Proponents of privatisation point to the state of the industry pre-privatisation and the levels of investment from private companies over the last thirty years. While there is no denying that water quality has improved in the last thirty years, there is no form of public ownership which prevents investment – the lack of investment pre-1989 was not a consequence of public ownership but of political decision. Investment post-privatisation has been as a result of state intervention in the ‘market’ through the new regulator, Ofwat, and thanks to rising standards in EU regulations.
And private owners’ capital contribution to maintaining and upgrading infrastructure comes with a massive price tag – since privatisation, billions of pounds have been paid in dividends to shareholders and investors, while consumer bills have continued to rise. Balance sheets for most private water companies are disproportionately in the red relative to investment, despite beginning life in the black with all debt wiped from the books at the point of privatisation.
All of the investment in tackling leaks and improving water supply could have been covered using the resources garnered by customer bills, suggesting that the debt on water companies’ books is at least in part delivering tax and dividend benefits for shareholders rather than new investment to help tackle leaks and improve services.
Cleaning up Thames Water’s issues, and addressing the systemic problems of low consumer trust, rising bills, poor corporate behaviour and large profits leaving the system, takes more than new leadership and stronger regulation. As chair of the Co-operative Party, I believe that who owns an organisation dictates in whose interests it runs – so to achieve a sector that operates in the interest of the public, only a shift to democratic public ownership will deliver the shift in priorities needed. Democratic public ownership is necessary to make the water industry fit for the environmental, investment and financial challenges it faces.
There is a misconception that public ownership means buying assets back and running them from an office in Whitehall. In reality, public ownership can take many forms. Looking to Wales, for example, there is a model to build on.
Welsh Water, as a company limited by guarantee rather than shares, has no shareholders. In 2000, Glas Cymru, its current not-for-profit owner, was created as a “people’s bid” to take over Welsh Water, based on a belief that water is a public commodity, not a private enterprise. Their not-for-profit structure and member panel has given them the strongest credit rating in the industry, cheaper financing costs and reducing customer bills.
A democratic, publicly owned water industry would be organised regionally, along existing water basin boundaries companies use now. Instead of being owned by distant shareholders, private companies and overseas governments, it would be owned by its customers and employees.
This already happens in New Zealand where energy grids are majority owned by consumer trusts, and until recently in the UK too with Portsmouth Water owned by an employee trust until last year. These new trusts would be democratic and run along mutual lines – with every customer and every employee an equal member with a say and a vote on board membership, remuneration and how profits are invested and redistributed. Decisions would be fair and transparent, governance would see the board truly held to account.
To get to this point, first Ofwat’s powers should be increased so that the cost of equity can be reduced in calculations to no more than a debt return, while introducing a ‘fair treatment of fair investor’ principle so that those responsible long-term investors and lenders whose long-term interests align with those of the sector have the right incentives to continue to participate. Ofwat should work with HMRC to tighten the rules on tax arrangements for companies wishing to invest in public utilities, to end the use of offshore tax havens to register subsidiaries and parent companies.
As the less patient, less scrupulous investors move their money elsewhere, the consumer and employee trusts can use bond issues to buy their stakes in the water companies instead, underwritten with government guarantees. This can be accompanied by new legislation formalising the trusts as owners or guarantors, and enshrining the not-for-profit principles in the licence conditions for water companies, with protections from reprivatisation or takeover.
Bringing the water industry into democratic public ownership has long been the ambition of the Co-operative Party – and the public increasingly agree. 83% favour public ownership of the UK’s water . The water industry needs reform – but if the reform is to be meaningful, a change in ownership to put consumers and employees in the driving seat is essential.