As regular readers of this blog will know, I have taken some interest in the activities of the English water companies in recent years.
I am, of course, not alone in doing so, but I am aware that the report that I wrote on the financial affairs of these companies in 2023 still attracts quite a lot of attention from those interested in ways in which the financial mess that these companies have created, largely as a result of their incompetent management of the water system, can be resolved.
In this context, I keep an occasional eye out for what is happening in Parliament with regard to this issue, as a consequence, I noted this House of Lords question and answer.
The question was posed by my old friend and tax justice colleague, Lord Prem Sikka. The response was provided by a former Labour MP who served for four years before being appointed to the House of Lords and who would appear from her CV to have no relevant skills in this sector or with regard to anything to do with corporate finance or economics.
As will be noted, Baroness Hayman avoided the question Prem asked by simply referring him to a report by a right-wing tank, the Social Market Foundation.
The claim made by that Foundation that it will cost £90 billion to nationalise the water industry is quite absurd. Firstly, this presumes that an asset purchase would take place, and that would be very surprising. The likelihood is that at least some of the debt obligations of these companies would have to be taken over in any such nationalisation, which would mean that the actual cost of nationalisation would be lower.
This valuation also presumes that these companies are going concerns, which is by no means the case. In particular, if the £260 billion investment programme that the House of Lords have themselves identified to be necessary to bring the water systems managed by these companies up to an acceptable standard takes place, as is very obviously necessary given the importance of water as the basis for life in the UK, then not one of the companies in question can in any meaningful sense be considered to be viable going concern.
In addition, on the basis of current acceptable levels of water charging, there is no chance whatsoever that these costs can be covered without resorting to state support and for the government to pay for a company that can only maintain its business with substantial government financial support makes no sense at all.
I should also add all these companies do, of course, need to become net-zero compliant. None would appear to have any meaningful provision for the cost of doing so included in their accounts. In that case, this further factor needs to be taken into account when undertaking an evaluation exercise for the purposes of nationalisation.
Put all these factors together, and the valuation provided by the Social Market Foundation is not just wrong; it is ludicrously inaccurate. The standard assumption that most economists make that is implicit within it, which is that the current reported state of these companies will continue into the future, is obviously wrong. The whole question of nationalisation arises precisely because that is very clearly not the case. No one would even consider nationalisation if these companies were fulfilling the task that they were expected to fulfil at the time that they were privatised, but they are not doing that. The Social Market Foundation has, therefore, undertaken its work on the basis of a wholly incorrect assumption and for the government to rely upon their work to justify the continued private ownership of these environmentally bankrupt concerns appears to me to be an act of gross negligence on their part.
I cannot be alone in having hoped that Labour might have brought a different perspective to the consideration of issues like this. Instead, it is clear that for practical purposes, they are continuing to deliver a program that is Tory in all but name.
Many people will not have appreciated this yet. They, perhaps wisely, pay less attention to what is happening in Westminster than I do. However, in due course, this realisation will sink in. When it does, this government is going to be in very deep trouble.
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Hmmm – it looks like Lord Sikka was talking to someone called Baroness Hayman of ‘B*llocks’ to me.
So much for democracy – a perfectly decent and polite gentleman asking a perfectly reasonable question and not getting an answer.
You were certainly not on your own expecting Laboured to have done something about this.
Maybe they have other priorities at the moment and they might deal with this later on in their term?
But never mind, the Party is in power – and that’s all that counts I feel. It reminds me of what I’ve seen in the public sector over 25 years – people who are really good at getting the top job, but not very good when it comes to the doing of the job itself………………
There seems to be no political will here – just a load of political willies.
You are offering reasoned argument – into a political space where only utopian beliefs exist & cognitive dissonance is a force to be reckoned with. In any case, Mrs Ullock in her response is “just following orders” as any good LINO foot soldier does – LINO’s dear leader has decided (no water nationalisation = & no discussion on details) & that its.
In the case of net zero & “None would appear to have any meaningful provision for the cost of doing so included in their accounts” in fairness they don’t need to make provision in their accounts – I’m doing a RES project with a water company – no finance needed by the water company at all. Obvs, they need to make a decision: yes lets work with RES project companies to reduce elec costs and increase RES elec (elec is a water company’s main energy cost) – but after making the decision – provided management is accomodating then things can move along at speed. Adding, local RES is vastly cheaper than anything the licensed (to make vast amounts of money) suppliers offer and the network operators (= own your own bank) carry. Indeed, the cost reductions are remarkable. Adding to the good news (or bad depending where you stand) I have found technical ways to strip out CAPEX from a given RES project (think 25%) making the elec cheaper.
RES? What?
Renewable Energy Sources/Systems
He says it better than I ever could:
https://www.theguardian.com/commentisfree/article/2024/aug/21/privatised-water-firms-imperiling-health-poisoning-rivers-flood-streets-rage?CMP=Share_iOSApp_Other
UK serfs had the wool pulled over their eyes by all UK politicos for 35++ years – happened again at the last election & now LINO/Tory is hoping Blackrock will sort things. Not even utopian, just deluded imbeciles, ditto all the LINO supporters that thought “things can only get better” – yeah in yer utopian dreams. The UK – it has nuclear missiles but can’t even sort out its own shit – literally.
If everybody stopped paying their water bills the government would have to nationalise the companies. Democracy in action 🙂
They can’t cut you off…
But they can wreck your credit record and many people need them
“If everybody stopped paying their water bills…”
Indeed, the Don’t Pay brigade are back and this time they’re coming for water!
https://takebackwater.uk/
Here is the paper referred to by Baroness Hayman of Ullock.
“The cost of nationalising the water industry in England”, Social Market Foundation, 05 February 2018
https://www.smf.co.uk/publications/water-nationalisation/
A link to the report is at the bottom of the page
See also:
“England’s water can be renationalised without compensation, activists say”, The Guardian, Fri 2 Dec 2022
https://www.theguardian.com/environment/2022/dec/02/water-renationalised-without-compensation-activists-shareholders-england
“Water Renationalisation to cost as little as £14.5bn”, Financial Times, Apr 2019
https://www.ft.com/content/8ee5d48a-6103-11e9-a27a-fdd51850994c
(Subscription required)
“We’ve crunched the numbers – nationalisation would be a bargain”, The Guardian, Mon 9 Dec 2019, David Hall
https://www.theguardian.com/commentisfree/2019/dec/09/numbers-public-ownership-uk-utilities-nationalisation
“Nationalising water is affordable, keeping it private might not be”, TUC, Kam Gill, 06 Feb 2018
https://www.tuc.org.uk/blogs/nationalising-water-affordable-keeping-it-private-might-not-be
Many thanks, Ian. I appreciate these posts.
So, other opinions have been offered.
I think the people we are dealing with are just intransigent. I do not think there is any reasoning with them at all. They’re market extremists. And these are the people BEHIND the politicians.
Extremism rules by making the exception. It is time perhaps that making exceptions should be applied to better ideas, rather than crap ones?
Thanks Ian.
Many thanks for the link, it appears Baroness Heyman of Bullocks is relying on a report that is over 5 years old and takes no account of the changing circumstances or depreciation in assets or funding in the water industry. Given this industry affects every single person in the country our non elected spokesperson could not even take the time or effort to review the information but has chosen to ‘Cut and Paste’ her reply from part of the right wing organisations report. Have these people no shame in exposing their own lack of ignorance or work ethics.
I agree, the powers that be, are not interested in a discussion about the best way to run an energy or water company.
Neoliberal predatory capitalism has only goal: profit at the expense of everything else, including people.
This is far from regulatory welfare capitalism which puts people first.
Minor point. It is ‘Prem, Lord Sikka’, not “Lord Prem Sikka”. He’s a life peer, not the younger son of a Duke.
To quote someone, I really could not give a damn, and I am quite sure Prem could not, either
I did say it was a minor point! Why be rude when you could have simply said, ‘Noted’. I am sure Lord Sikka knows how to use his title correctly, even if you don’t.
I pointed out that this was, in my opinion, pedantic pandering to social hierarchy. If you did not like that, I am sorry.
Whilst the whole sector might be unsustainable in its current form it is only Thames Water where implosion is imminent.
Getting this sorted out will then be the benchmark for other companies who can either of comply or throw in the towel.
Shareholders at TW are rightly expecting to lose all their investment but the issue of operating company senior and secured debt is trickier.
I think everyone expects they will bear losses but how much? The value of the assets depends on the terms of the license… a generous settlement might mean they are worth face value, a harsh one could mean they are worth far less.
My gut feel is that they should be paid out at about 75 pc. This may seem generous to some but a tougher treatment would be fraught with risks.
I have to disagree Clive
These companies are all environmentally insolvent: they cannot meet their obligations and pay their way
So, in a long term view (markets don’t take them, as we know, or there would not be so many starnded assets with massive valuations attached to them) not one of these companies is a going concern, in my opinion.
I think you view is, therefore, massively over-optimistic
Insolvency or otherwise depends on what the regulators allow to them to charge.
No, there is a market over-ride here. The scale of required increases are utterly implausible and we cannot live without water. So, whatever regulators say will ultimately not matter. This is political. We’ll have to disagree.
I confess I have lost the thread on where we are in the TW drama. By March, 2024 it had burned through £600m in cash in 12 months (FT); and there are assumptions the regulator will have to approve hefty price increases (no matter what). This is seriously bad news, especially for all those expecting significant winter energy price rises, and pensioners relying on a WFA they will not receive. How long is this going to drag on? The last information I picked up was that the problem requires settled by June next year, latest.
With Reeves at the helm of the Treasury, i can’t see nationalisation – followed by swingeing price rises to avoid the deficit increasing, being an attractive political option. I dread to think what other torture for consumers may go through her mind as an alternative ……….. and I am not clear what Clive’s scenario would imply for consumers; or whom, or what we are trying to rescue or serve here as the prime priority?
Thanks for the small, imperfect, but comforting mercy of Scottish Water, that somehow slipped the clutch of the rentiers; not even our dim Scottish Conservative politicians would – I hazard – suggest privatising it now, and hope to keep their seat. Surely?
I wouldn’t have faith in that
It is political, certainly.
Are you suggesting that prices stay low and that the investment needed is paid from general government expenditure and never recovered from water users?
That would certainly be challenged in the courts.
Do you really think that anyone would win – at the price of leaving people without water, because I am quite certa8n they would not
Worry, but the coming crisis is going to demand some very rapid dismantling of corporate protection, very soon
The days when they think they can litigate against society will fave to end, or society will
Would you care to give a specific reason for having no faith at all?
Because in some cases you gave to give up hope to survive
Clive,
I am puzzled by your line of reasoning. We do not recover investment in the NHS from “consumers”. This is water, a quite fundamental human necessity; I do not mean that water should be entirely free* but even setting this aside, are you proposing that the interests of the investor prevail over the consumer; even in a monopoly? And the Courts will support that interpretation?
Are you arguing that the Government is obliged first invest resources to save the water industry, that has put itself in this predicament at whatever cost will rescue it; over leaving the investors with their just and hard-earned deserts; and invest in a public infrastructure to provide a safe and healthy water supply and sewage disposal service that works; at a price determined principally by what people can afford? The Regulators have failed on any measure (British Regulators typically fail), and require to be replaced by Regulators who understand the purpose of Regulation; primarily to provide the service consumers are entitled to expect, at an affordable price, and that should be at the forefront of the Regulations.
All of which, of course is nothing like the service we have; which essentially – is my point.
* Even the hospitality industry rarely charges for tap water (although in London – who would drink it? In Scotland, you can in spite of Richard’s gloom; not based on faith but typically on the great Victorian engineering feat bringing water from Loch Katrine to Glasgow, by gravity feed for 24 miles at 1mph. I think we can say that is fully written off; which reminds me, exactly what was the monopoly private investment actually spent on, since much of the English water infrastructure is Victorian, in poor condition and the companies were paying huge dividends to themselves?).
Clive
Please could you elaborate on the risks of tougher treatment than 75% return?
You also state that insolvency depends on what regulators allow them to charge. What effect does the ability of customers to pay have, do you think?
For years I have been paying Northumbrian Water to safely dispose of sewage. They have not done so. Can I and all the other bill payers sue them for breach of contract? If not, why not? Especially if it is suggested that the water companies may take a challenge to the courts?
It is an excellent question
I took have been thinking this is a massive fraud against tens of millions of customers, no different than waste disposal scammers fly-tipping. Maybe good law society could look at it, bring a test case.
First, privatisation was wrong; second, it should come back in to public ownership.
The issue is how to achieve it? It’s tempting to treat this as a morality tale and punish water companies harshly but I am more interested in getting ownership.
The privatisation ‘deal’ was that water companies deliver water/sewage at a price agreed with the regulator…. with the price/service agreement periodically reviewed to reflect changing circumstances. So, whether the assets have value depends on what the regulator decides; if they demand massively better quality at today’s prices then they are not worth much. However, whoever runs water there needs to be large investment that needs to be paid for by water users or general government subsidy. If the regulator imposes tough conditions that result in water companies ‘handing back the keys’ and the new owners (us) then pile in money and raise prices (or subsidies) the water companies will use. That would be messy and they might win.
Taking ownership is the goal; those that deserve punishment (Macquarie) have long run off with the money. Wipe out equity holders but lenders will need some compensation.
I think I agree with your conclusion: it’s the scale that matters
Two points from your gallant argument.
1) “It’s tempting to treat this as a morality tale and punish water companies”. It is not a matter of punishment, but of all investors living with the real consequences of private sector market failure; worse, failure of a private monopoly. That is what the private enterprise sector is supposed to promise. You live or die by your own efforts and failure. Period.
2) Softening the impact on the water companies of abject failure implies that the solution you are suggesting seems to be TBTF, yet again. Save the framework that allowed this to happen. Yet again. Banks. Water. Anything big enough. Neoliberalism’s playbook is built out of public subsidy. But the small business and ordinary people are not included in this generosity. Ever. The small business fails and goes to the wall. Water fails, and the consumer, already ripped-off, and badly served has to pay for the monopoly failure in huge price rises in the cost of a necessity. As for the lenders of debt; they are also culpable. They were not compelled to invest. They too operate in a neoliberal theoretical financial market. they are supposed to live and die by their private judgement. Clearly they are so incompetent they cannot even choose wisely in a heavily subsidised, government sponsored monopoly utility. Neoliberalism on this basis is pick-and-mix socialism; subsidy solely for the worst businessmen, just because they are TBTF and happen to be running a system that needs open access to the government overdraft.
Can you please explain how your solution will ever stop this happening on a both a catastrophic and regular basis? Perhaps it is time to construct a system that actually works without falling over, and pretending it hasn’t.
It is not a haircut failed monopoly water companies need, but the requirement to take bath; followed by delousing.
The reality is that we have paid far too little for water for far too long. Yes, water companies have taken excessive dividends but even if all these had not been paid out and had been invested we would still have inadequate water/sewage systems.
We (via our appointed) regulator have connived to keep bills low at the expense of investment so should bear some blame.
But – and let’s be clear about this – did anyone think there was a major backlog of investment on privatisation? If not, why were prices then adequate, but they are not now? What has changed?
One newspaper gave national comparisons to England & Wales, which averages £448 (iNews, March, 2024). Scotland is around the same.
Australia is £448. same as UK. France, £419. Spain (Madrid) £216. Italy, £379. Netherlands £280. The outliers from this are Norway, (Oslo) £603. US, £692.
Thanks
Well made point on the planned level of privatised water investment, Richard. Where is that fancy IPO that was going to fix the water supply, and the big Government sell? Shall we recover the speeches they made? Water as infrastructure is unseen, therefore it is a little hard to criticise the user for not being ‘on top of this’. Electors tend to suppose that is what Parliament is for, and local authorities; oh, and all these very clever private sector operators who were going to sort out water, railways, energy.
This was the legacy of Thatcherism; the private sector will fix it all. The only fault, I concede is that people voted for Thatcher, and all the chickens; well fossilised fowl actually , are coming home to roost, in spades. Where did all that infrastructure we desperately needed over the last forty years go? It certainly wasn’t spent on infrastructure. We have forty years of inertia to recover. No wonder we are deep in a hole. And we are supposed to continue propping up with public money the system and the people (they just circulate round the system and will no doubt reappear), who dug the hole we are in.
Water (and other) privatisation has been a disaster but, we, the voting public, must bear some responsibility.
I am not interested in looking back…. rather how do we achieve public ownership asap given where we are.
So, I hear your anger/frustration – I share it. I am just looking for a practical way through.
Clive
I don’t understand why your practical way through primarily involves those who have made stupid and irresponsible investments (including loans) expecting a huge payout, should not face the result of their decisions but should, instead, be bailed out by the government. To me, quite frankly, that stinks of the classic privatise the profit, socialise the cost.
I agree we need to find a viable solution; but I raise the past only because I am not inclined to see it repeated.
Unfortunately your proposition looks to me a little too suspiciously close to another easy bail-out for the culprits; and then we are on the same old rinse and repeat cycle, again. The whole point of the free enterprise, private initiative part of capitalism is that there are supposed to be authentic risks as well as rewards, to maintain the integrity of the system. This appears not to be the case with Britain’s private, Government sponsored monopolies.
The problem we have here is that the equity risks are smaller than the debt exposure for the investors of capital, especially in a higher interest rate environment. There is something fundamentally wrong about a system that depends on an implicit blanket Treasury guarantee of the debt. We need fundamental reform, not the endless conservation of dysfunctional national ruins. The question remains; in substantive terms what will change?