A convincing case hasn't been made to nationalise water - Water UK CEO

Posted On: 
29th January 2018

Water UK’s Chief Executive writes about the achievements of the water industry since privatisation in 1989 and argues that there are serious unanswered questions about nationalisation.

Credit: 
PA Images

In the ongoing debate about private companies and their place in society, I’ve noticed that positive achievements are sometimes overlooked. 

For the water industry, there’s a strong track record over the past three decades. In England and Wales, the stark reality before privatisation in 1989 was a sector starved of funding, failing to deliver a good service to customers, and damaging the environment. These were key reasons behind why the water sector was privatised. 

Real results

Since private ownership, the facts speak clearly. Water companies have invested around £150 billion – double pre-privatisation rates and is money that would not have been available under public ownership. Companies continue to put in at least £8 billion of new investment every year.    

Leakage is down by a third since the mid-1990s, two-thirds of our beaches are now classed as excellent compared with a less than a third 25 years ago, and the UK has excellent-quality drinking water.

This has been achieved by private sector companies operating within a framework of robust, independent regulation by Ofwat, which has ensured that bills are £120 lower than they would have been if the combination of privatisation and tough independent regulation hadn’t happened. On average, bills will be 5 per cent lower in real terms in 2020 than they were in 2015.

Myths

Some commentators have criticised the sector for low productivity. In fact, water companies have made significant productivity gains since privatisation, helping offset the higher costs of privately-financed investment.  Respected consultants Frontier Economics say that productivity has increased by 64% since 1994 – better than the economy as a whole and broadly matching comparator sectors, even on the most conservative assumptions.

Another criticism is that companies are more interested in profits than in making improvements. The truth is that water companies secure capital provided by lenders and shareholders, who need water companies to make a return in order to finance the significant improvements to the industry. The £8 billion of private money currently being invested each year would not be available unless the people, businesses and pension funds who put in the money were rewarded for taking a risk with their capital.

And on companies using offshore tax havens? Another myth.  Some – not all – water companies previously set up Cayman Islands companies to help them legitimately raise money on the bond markets under rules that operated at the time, and so lower the cost to customers of financing much-needed investment. However, those Cayman Islands companies do not confer any tax advantage.  The original reasons for using Cayman Islands companies have since passed and the relevant water companies are actively considering their positions.  Some of them – Yorkshire Water, Thames Water and Anglian Water – have already announced that they will remove them from their corporate structures as soon as they can.

Unanswered questions

So, for those that favour nationalisation, major questions are unanswered.  How will the upfront costs of buying the water industry be afforded and how will the ongoing costs be sustained? What impact would there be on other spending commitments and tax rates? Investor confidence in the economy? Service standards and the environment?  And what in practical terms could nationalisation achieve that a change in the regulatory framework can’t?

A convincing case hasn’t been made to return to state ownership. Undoing everything that has been achieved at a potentially high cost to the taxpayer, the economy, and the environment is risky. The Centre for Policy Studies estimates that the cost of nationalising the water industry would be an eye-watering £86 billion. Its recent report on the cost of nationalisation points to a world where future water investment struggles to compete with health, housing or education for taxpayers’ money.

I’m not saying the water sector can be complacent. Certainly, Ofwat in the latest price review has set out very challenging expectations for continued service improvements and has published an initial view of the cost of capital which would be a record low for a regulated utility.

In the face of many challenges ahead such as infrastructure renewal, climate change, and population growth, let’s build on what’s working. Properly incentivised, customer-focused companies subject to effective regulation is the right way forward, not going backwards with state ownership.