For failing water utilities, nationalisation is not a dirty word
It is easier to fund maintenance and infrastructure upgrades when freed from the temptation to pay big dividends
Labour leader hopeful Andy Burnham wants “stronger public control” of utilities. He has yet to share much detail about what this would look like. But while the idea of nationalising companies conjures up images of disastrous capital misallocation, in rare cases, it might be the least bad option. Water is a prime example.
The battle to keep England hydrated has become a case study in the failure of for-profit control of essential services. Privatisation of the country’s water boards, beginning in the late 1980s, has resulted in debt-ridden entities and deteriorating quality — to the extent, in the case of Thames Water, of pumping effluent into rivers.
Thames Water’s miserable predicament is not an inevitable result of privatisation — there can be merits in harnessing the experience and entrepreneurship of the private sector. Southern Water also discharged sewage but its backers, led by Macquarie Asset Management, have since recapitalised the group, enabling it to carry out turnaround plans.
The problem comes when concomitant oversight is missing. Water watchdog Ofwat failed to call time on practices that prioritised dividends over investment, and was one of four regulators overseeing the sector. Hence the government is abolishing it and putting a single regulator in charge. Energy regulator Ofgem has often been a step behind too, allowing poorly financed suppliers to enter the market and failing to anticipate lengthy volatility in energy prices.
For now, Thames Water creditors remain locked in talks with the regulator and government to fend off renationalisation, forking out hefty fees to lawyers in the process. In this scenario, nationalisation looks to be the better option.
And it’s hardly a radical proposal. Most of the world keeps water work in some form of public control, be it at national, state or municipal level: England is the rarity, up there with Chile where water was privatised under dictator Augusto Pinochet. As such, England has plenty of templates to choose from — including across the border in Scotland where the average bill is about £100 cheaper.
A smart starting point, only slightly further afield, comes from the Netherlands. Responsibility lies at both national level, for major bodies of water, and at district level. Funding requirements are met by the public sector NWB Banks, or water bank.
It is easier to fund maintenance and infrastructure upgrades when freed from the temptation to pay big dividends. The water bank exudes stability: its capital ratios are twice those of commercial European counterparts and, as a government entity, it can raise funds cheaply while offering investors a pick-up over sovereign debt. There are no intermediaries, no labyrinthian corporate structures and no defaulting bonds. Water boards, and the councillors who take responsibility within their municipalities, ensure accountability.
Hybrid models can and do work — in Manchester’s transport system, for example, privately run buses and trams follow publicly set routes and fares. The Bee Network, as it is known, has been delivered on time and budget. By the same token, both purely public and entirely private utilities have racked up failures. There’s no guarantee that nationalisation would fix what ails England’s water sector — but it couldn’t be much worse.