Drowning in Dividends: The Failed Privatisation of Britain’s Water Industry

This article by Terry Conway examines how the privatisation of the water industry under Margaret Thatcher has led to excessive profits and dividends for shareholders, chronic underinvestment in infrastructure, rampant sewage dumping, and a problematic revolving door between regulators and the companies they oversee.

 

The state of the water industry has been a matter of increasing concern in British politics over recent years as more and more stories surfaced about the excessive dumping of sewage into rivers and seas.   In many local areas especially on the coast or where rivers are significant local attraction, this despoliation has become the focus of strident local organising, which has gained support from people who have traditionally voted for the ruling Conservative Party.

The sewerage system carries rainwater, and wastewater from toilets, along the same pipes to the water treatment works. When there is too much rainfall, water companies are allowed to discharge overflow from these pipes into the waterways. This should happen rarely, but data – and experience – show this is happening more and more.

There are a number of different factors involved. Climate change is resulting in more dramatic weather patterns – periods of drought which lead to the ground becoming baked dry followed by heavy thunderstorms which the land is not able to absorb – and which therefore lead to flooding and to more discharges.  While these phenomena have not resulted in the same level of deaths and loss of crops, homes and other resources as in Africa and Asia, they are never the less still significant.   And in Britain, this is compounded by the increasing proportion of land which is concreted over – and to the use of artificial rather than natural grass.

Another reason is the growth of intensive farming – in particular factory farming of livestock; particularly poultry and pigs where slurry run off is a huge factor in contaminating rivers and of the dairy industry. George Monbiot argues here and here that farming is the top cause of river pollution in the UK, a greater threat even than sewage pollution.

These two areas pose challenges which I don’t have the scope to further explore in this piece, which  will rather focus on the impact of the privatisation of the water and sewage system – and how this has intersected with other erosions of public services, such as the cuts to the Environment Agency.

Thatcher’s privatisation drive

Privatisation in general was a key theme of Margaret Thatcher’s four Conservative governments in control of the Westminster parliament between 1979 -1990, particularly after 1983 when the ideological argument about the discipline of the market took increasing priority over the wish to make a profit for the government from the sell offs.  The idea was that privatisation would make the large utilities more efficient and productive, and thus make British capitalism competitive relative to its continental rivals.

The fact that the nationalised industries were suffering from under investment and were not subject to genuine democratic control aided their ability to drive through these policies with all too little opposition. To be fair so too did the fact that the key battles against Thatcherism for the left and the labour movement were the Miners’ strike of 1984-85 and then the campaign against the introduction of the poll tax – brought in in Scotland in 1989 and then in England and Wales from 1990.

There were campaigns to defend the NHS from privatisation – as well as cuts – and around the selloff of council housing, while protests around manufacturing sectors such as British Steel focused more on job losses – in the context of a major period of deindustrialisation and attacks on trade unions – than on the question of ownership.  Within this picture of a panoply of attacks the least concentration of all was on the utilities British Gas (1986), electricity (1990) and water (1989)

Water privatisation

Despite the fact that water is unarguably a natural monopoly, Thatcher’s Tories did not hesitate to sell it off for a meagre £6.1 billion. At the same time Ofwat was created, supposedly to regulate the companies’ behaviour – though the extent to which it has even tried to do that will become an important thread in this tale.  “Regulation was flawed from the outset in that it provided no checks to financial engineering and excessive borrowing,” said Dieter Helm, professor of economics at Oxford university.

Since then the water companies have extracted £72 billion in dividends for their share holders –  money which should have gone into the infrastructure to ensure sewage treatment works can process what we feed them without affecting our rivers and seas.

The industry has adopted the classic private equity business model with its key elements of high prices, low investment and financial engineering to extract high returns. Instead of shareholders making long-term investment through equity, this business model uses debt because interest payments qualify for tax relief—effectively a public subsidy. This reduces the cost of capital and increases returns to shareholders but also increases vulnerability to interest rate hikes. 

report by Richard Murphy, Professor of accounting practice at Sheffield University, has calculated that the nine water and sewerage companies in England and Wales benefited from a 35% profit margin before financing costs between 2002 to 2022, paying out £24.8bn of profits in dividends.

Almost 400,000 sewage dumping incidents were recorded in England and Wales in 2022, adding up to 3.3 million hours of pollution pouring into the country’s waterways. Interactive maps with figures for the whole country can be found here.

In the meantime, the Environment Agency found that 90% of sewage monitors at seasides are broken. In many locations, they’re not installed at all. Over summer 2022, dozens of beaches were closed to swimmers due to the high levels of toxic waste. And there may have been many more that went untested.

And less dramatically some 2.4 billion litres of water are lost every day to leaks due to poor infrastructure, while water charges to households have increased by 40 percent in real terms since privatisation. Meanwhile despite the population growing by nearly 10 million, no new reservoirs have been built.

Revolving door

Two thirds of England’s water companies employ key executives who previously worked for Ofwat, the watchdog that is supposed to regulate them.

‘An analysis by the Observer has found 27 former Ofwat directors, managers and consultants working in the industry they helped to regulate, with about half in senior posts.

Six of the nine water and sewerage companies in England have hired directors of corporate strategy or heads of regulation who previously worked at Ofwat, including former director of strategy Andrew Beaver, now at Northumbrian Water, and former director of strategy and planning Iain McGuffog, now at South West Water. The findings have raised fresh concerns over a revolving door between the regulator and the industry.’

The focus on this deeply problematic relationship has ramped up further in the last couple of weeks amid concerns that Thames Water, the biggest of the companies which supplies 15 million households is at risk of collapse from about £14bn of debts. Thames loses around 630 million litres of water a day in leaks and routinely dumps tons of raw sewage in rivers. Since 2010, it has been sanctioned 92 times for failures and has been fined £163 million. Over the last three years, the salary of its recently resigned chief executive doubled. 

On July 11, Thames Water’s current joint Chief Executive Cathryn Ross, who was previously head of  Ofwat between 2013 – 2018, refused to apologise in front of a committee of MPs for her behaviour at the regulator, where she allowed the firm to rack up £14billion of debt while failing to curb dividends to share holders.

Public anger at all this is growing. There is more demand now for renationalisation than there was opposition to the original privatisation. But despite the depth of the crisis of the current Tory government under Rishi Sunak, it’s unlikely to be a concession he is prepared to make.

While Britain does not have to hold a General election until 2025, the expectation is that it is almost certain to take place in 2024 either in the spring or summer – and that barring dramtic political about turns this will result in the election of a Labour government.  When the current leader of the Labour Party Keir Starmer was elected to that position in 2020 he stood on a platform of 10 pledges – of which water renationalisation was one. Like the overwhelming majority of those other positions, he has already reneged on it in a rush to demonstrate what a safe pair of hands he is for British capital.

There are rumours that Starmer is contemplating backing some form of ‘social purpose’ company – keeping water in private hands but supposedly imposing more social responsibility. The question will be whether it is possible to mount a campaign for genuine renationalisation – under greater public accountability than before.

Source: Amandla


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