Andy Burnham’s speech at Labour Party Conference last week reiterated his anger at the water industry, which he sees as “a symbol of what has gone wrong with Britain”. Alongside accountability to mayors and closed loopholes on bonuses, he promised to repeal the Water Act 1989’s prohibition on public ownership beyond 0.5 per cent of any water company, and to wield the threat of public ownership as a disciplining tool against irresponsible companies.
This means that the door is open both to public ownership but also to a resuscitation of private ownership under the stipulation of strengthened governance provisions. It is now, therefore, crucial to contest what meaningful public control will require.
The case for preserving private ownership was recently made by Will Hutton and Andy Haldane in The Guardian, arguing that a modification of the “B Corporation” model with some added strings could avoid the equal and opposite follies of the status quo and public ownership. They make some valuable points: lamenting the regulatory regime’s alternation between capture and mutual distrust, and highlighting the importance of open book accounting as one part of the remedy to this. But the hostility to public ownership on which their argument rests is ill-founded and poorly evidenced.
According to Hutton and Haldane, the erroneous belief in the virtues of public ownership needs dismissing once and for all. They devote two sentences to the task before satisfying themselves of “having done so”. In their argument, public ownership — treated as identical with “full nationalisation” — suffers from two deficiencies: “corporate discipline and expertise”.
It is unclear what corporate discipline the current privatised water companies face that public alternatives would not. Their status as essential natural monopolies combined with the price control regime insulates them from demand risk, inflation risk, interest rate risk, commodity price risk, competition risk, etc. The only markets disciplining them are the capital markets demanding returns. Where their corporate expertise stands out it is in financial engineering to outmanoeuvre their less well-resourced regulators. This intrinsic and problematic informational asymmetry is likely to persist under Hutton and Haldane’s proposals, even if mitigated by open book accounting.
To evidence these alleged public deficiencies, Hutton and Haldane cite three historical examples : none from the water sector and only one that can be considered a public service with natural monopoly elements. Two — British Steel and British Leyland, manufacturers competing in global markets — are irrelevant. The other, British Rail, hardly supports their case: in fact, insofar as rail tracks themselves are a natural monopoly akin to water infrastructure, its privatisation was so disastrous as to make water seem an unbridled success by comparison.
Railtrack crashed physically and financially within five short years of its privatisation, after its corner-cutting and shedding of all in-house engineering expertise — a McKinsey-inspired plan aptly titled “Project Destiny” — led to a succession of fatal derailments, with devastating human and economic costs. It continued to pay handsome dividends even after the Hatfield crash, and remained a plc for the entirety of its privatised existence, which sits uncomfortably with Hutton and Haldane’s contention that publicly listed water utilities have been innocent of the wider industry’s failings. It was also brought back into public ownership via special administration without great fiscal cost. British Rail, by contrast, had become one of the most efficient in Europe by 1989. Both rail fares and public subsidies have soared since privatisation.
Other privatised utilities provide similarly problematic examples, as Arthur Downing demonstrates in detail in his history of British energy. Between 1950 and 1973, total factor productivity (TFP) in British electricity and gas respectively grew 5.5 per cent and 4.7 per cent a year against 3.9 per cent and 3.0 per cent in the US. Since the early 2000s, under private ownership, TFP growth has been negative in both.
Strangely, Hutton and Haldane’s once-and-for-all dismissal makes no reference to the many examples of public ownership of water across around 90 per cent of the world today and in the UK’s past. The public corporation Scottish Water is not perfect, but invests 35 per cent more per household than its English peers do, securing much cleaner surface water than England and Wales for the lowest bills, despite serving by far the sparsest population. By exploiting cheaper public debt, it has the lowest interest bill relative to revenue of all the British water companies, which is important for such an extraordinarily capital-intensive industry with such long payback periods.
Nor does the evidence offer much support for Hutton and Haldane’s faith in the superiority of publicly listed utilities. PLCs and privately held water companies show on average similar gearing ratios and similar propensities to channel their operating cash flows either towards capex or towards payments to shareholders and creditors. Within England, the PLCs do outperform the privately held firms’ Environmental Performance Assessment star ratings on average, but this is driven largely by the outliers: Severn Trent plc and Thames Water.
Public ownership is not a monolith — different forms exist. Municipal ownership prevailed in Britain until 1947 and still does in parts of Europe. Scottish Water is a government-owned but commercially run corporation. This is very different from Northern Irish Water’s complete reliance on government grant funding.
Hutton and Haldane simultaneously claim that utilities’s financing costs are rising due to government policy uncertainty, but assume that these costs would be impervious to their proposed regime in which “profitability [is] subordinate” to their “primary, constitutional objective of delivering high-quality services”. We should take seriously the question of why B Corps tend to cluster in capital-light sectors. Previous efforts by regulators to discipline existing companies for infractions have failed either because companies are skilled at finding loopholes or because investors still have the whip hand; we have repeatedly witnessed prospective Thames Water rescuers bargaining over environmental fines.
And therein lies the rub. Insisting on privatisation subordinates “public control” to the safeguarding of investors’ returns, and thereby sharpens the trade-off between social goals and financial viability. In this context, regulation tends to fail not due to poor execution but because its mission is beset by contradictions and principal-agent problems.
The challenges facing our utilities are immense — from historic neglect to ongoing climate breakdown. Expensive investment is unavoidable, and the public will foot the bill in any scenario. Public ownership is no silver bullet. But it is a prophylactic against further financial engineering, as the Foundational Economy collective reminds us. There are instances when public control cannot be reliably exercised at arms length; where it requires ownership. Water is one of them.
