Divining the profits

Consumers have been paying over the top since privatisation, argues <strong>Anna Bradley, </strong>d

Consumers have been paying over the top since privatisation, argues Anna Bradley, director of the National Consumer Council

Among the four-fifths of households in England and Wales whose water is not metered, the average bill is £255 - compared with £118 in 1989-90, when the water and sewerage industry was privatised. Bills have doubled over the period, increasing three times faster than general inflation.

Not surprisingly water customers, local campaign groups and consumer bodies are dismayed at this price hike on an essential public service. Are they justified? Ofwat, the water industry regulator, thinks so. This month it is likely to propose one-off cuts in domestic charges from next April.

Ten years ago consumers were warned to expect price rises after privatisation. As the new water regulator succinctly put it: "The time of cheap water is over." The increases were meant to do two things: meet a shortfall in the capital spent on repairing and upgrading our old sewers and mains system, and improve the infrastructure to meet coming demands for such things as higher water quality and cleaner beaches and rivers.

Many people agreed that improvements were necessary. But since the water industry was supposedly being privatised in order to gain easier access to funds, through equity and borrowings, steep hikes in water charges were not inevitable. So from the start, the National Consumer Council decided to track the financial behaviour of the new water companies, to monitor how consumers' money was used and whether the companies were trying hard enough to secure alternative funding.

Unfortunately, as a result of several low-rainfall years and new European environmental regulations, some environmental groups pressed the regulator to increase consumer prices further. This was necessary, they argued, because the industry needed more funds to invest in environmental improvements.

But there doesn't have to be a trade-off between price cuts and environmental improvements, because, in reality, the companies' corporate decision-making and financial behaviour are major factors determining how much they invest and in which capital programmes. Dialogue has developed between some environmental and consumer groups, and as a result there is now more common ground between us on this issue.

At privatisation the new companies received more than £6 billion from the public purse, mainly to write off nominal debt and launch them into the private sector with better balance sheets. Since then every domestic consumer has funded the water and sewerage companies, to help ensure they cannot go bust. (Ensuring their solvency is one of Ofwat's main tasks.)

In the first year of privatisation, domestic consumers contributed, we estimate, £1.98 billion to the ten new companies in England and Wales that provide all sewerage services for consumers and 75 per cent of the water. By 1998 that figure had increased to £4.06 billion, with more than 95 per cent of the rise coming from price hikes. So during this time, residential consumers have contributed £28 billion to the ten businesses, of which more than £10 billion came from higher charges. Capital investment over the same period has risen from £1.6 billion to more than £3 billion. We pay more so the businesses can invest more. But have we paid too much?

Ofwat, which sets the price limits, operates a partially closed regulatory system. Many of the regulator's detailed deliberations are fenced off from public scrutiny, partly because of so-called commercial confidentiality - though this seems hard to justify with monopoly businesses - and partly because it uses a financial regulatory model peculiar to itself. Ofwat's financial figures are not presented in the same way that the regulated core water and sewerage businesses present their annual regulatory accounts. Nor are these accounts directly or easily comparable to the normal annual financial accounts of the parent companies that own the regulated businesses.

So the system is far from transparent and means that few outside the water industry actually know whether the businesses have met their required increases in capital investment.

What is clear is that domestic consumers' contribution to the businesses' total income has stayed at about 70 per cent, which has directly helped to boost their aggregate turnover from £3.3 billion in 1989-90 to £5.8 billion in 1997-98. This contribution by consumers has also enabled the companies to increase their operating profits from £993 million to £2.6 billion over the past eight years, with profit margins increasing from 28 per cent to 45 per cent.

It is clear, too, that most of the profits increase has come from higher prices, rather than increased efficiency. The businesses argue that this increase is justified because a substantial amount of capital investment is funded from profits. But of the businesses' £16 billion profits over this period, £9.5 billion have been transferred out of these core businesses through "dividends" paid to the parent companies.

Some, but not all of these "dividends" eventually show up in the parent companies' dividends to shareholders. For example, last year about 40 per cent of "dividends" paid by the ten regulated water and sewerage businesses were returned, indirectly, to shareholders of the parent groups. What happened to the other 60 per cent? We have to assume it was absorbed back into the operations of the parent companies. After several years of urging by the NCC, Ofwat is now scrutinising the dividends issue, and our hope is that the next price cap will be tougher and result in the companies relying much less on income from consumers and more on alternative sources of finance.

Has this level of profit and dividend growth led the parent companies to raise money on equity markets to help fund capital expenditure in their core water and sewerage businesses? The short answer is no. Has it allowed them to borrow funds for investment more cheaply? Here the answer is probably yes. Yet although interest charges on borrowings declined to 6 per cent in 1997-98, borrowings still accounted for only a third of the businesses' capital employed. Ofwat's view was that loans could nearly double without presenting significant problems.

The businesses could have increased their borrowings by £6 billion or more without adverse affect on either the cost of loans or shareholder confidence in the parent companies. Such high profits growth and generous payments to shareholders could also have allowed them to raise serious extra money on the equity markets. Instead they have relied much more on the rapidly rising flow of money from captive consumers.

Consumers have therefore contributed much more than their fair share since 1989-90. The exact amount probably starts at £6 billion and could well be a lot higher: an estimated total overpayment of £300 a household over the decade of privatisation. That is why the NCC will be supporting Ofwat if, on 27 July, it proposes a one-off price cut. In any event, we will oppose any proposals for higher prices after next April.

We are also repeating our call for a change in the way the regulatory process works. It has to become more transparent, fair and accountable. This is an urgent priority because five of the ten big businesses are part of multi-utility groups or have otherwise been taken over. Southern Water, for instance, is part of a group owned by Scottish Power, which also owns the regional public electricity supply company Manweb and has other businesses within the corporation.

It is already difficult to track how the consumer contribution to the regulated businesses is used; it is doubly difficult to discern how the income from water and sewerage customers is treated in groups that run other utility and non-utility businesses. There has to be a serious chance that the large corporations, including US- and French-based conglomerates that now own some of these major water utilities, could outmanoeuvre both Ofwat and consumers and keep prices higher than necessary.

Affordable and efficient water and sewerage services should be a basic human right. They are also crucial for public health. So when those who provide this essential service are in effect monopolies, their actions should be subject to public scrutiny, with effective redress and representation mechanisms for those who pay for and use the service.

Consumers are, in our view, getting a bad deal while shareholders are receiving excessive returns. Companies clearly prefer to use secure and rising revenues from consumers, rather than working harder to secure low-cost funding from elsewhere. The consequent increases in water bills have undoubtedly created problems for millions of low-income households. High utility prices can only make the problems worse for those who are already suffering economic hardship.

This article first appeared in the 26 July 1999 issue of the New Statesman, I took tea with Pinochet

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Cake or Death: why The Great British Bake Off is the best thing on television

Those who are complaining that the show has “caved in to political correctness” have missed the point.

The Cake is a Lie. That’s what viewers of the Great British Bake Off, now in its fifth season, are complaining about in the run-up to this week’s final. Out of thousands of amateur bakers who applied, three have made it through the gruelling rounds of Mary Berry’s disapproving pucker and faced down blue-eyed Cake Fascist Paul Hollywood’s demands without a single underbaked layer or soggy bottom in sight - and two of them aren’t white. The subsequent crypto-racist whining from PC-gone-madattrons in the press - one paper suggested that perhaps poor Flora, who was sent home last week, should have baked a "chocolate mosque" - runs against the whole spirit of Bake Off.

The charge is that the competition is not merit-based, and the entire basis for this complaint seems to be that two out of the finalists are of Asian origin - which makes total sense, because everyone knows that white people are better than everyone else at everything, including baking, so obviously it’s political correctness gone mad. The fact that last week Nadiya Hussain, a homemaker from Luton who happens to wear a hijab, baked an entire fucking peacock out of chocolate biscuits had nothing to do with it.

For those of you who mysteriously have better things to do with your time than watch 12 British people prat about in a tent, let me tell you why all of this matters. The best way to explain what's so great about The Great British Bake Off is to compare it to how they do these things across the pond. In America, they have a show called Cupcake Wars, which I gamely tuned into last year whilst living abroad and missing my fix of Sue Perkins getting overexcited about Tart Week. 

Big mistake. Cupcake Wars is nothing at all like Bake Off. Cupcake Wars is a post-Fordian nightmare of overproduction and backstabbing filmed under pounding lights to a sugary version of the Jaws soundtrack. Contestants mutter and scheme over giant vats of violent orange frosting about how they're going to destroy the competition, and they all need the prize money because without it their small cupcake businesses might fold and their children will probably be fed to Donald Trump. Every week a different celebrity guest picks one winner to produce a thousand cupcakes - a thousand cupcakes! - for some fancy party or other, and it’s all just excessive and cutthroat and cruel. Cupcake Wars is Cake Or Death.

Bake Off is quite different. Bake Off is not about the money, or even really about the winning. Bake Off is a magical world of bunting and scones and dapper lesbian comedians making ridiculous puns about buns and gentle, worried people getting in a flap about pastry. There are very few hysterics. Legend has it that if anybody has a real breakdown in the middle of a signature bake, presenters Mel Giedroyc and Sue Perkins stand next to them repeating brand names and swear-words so the cameramen can’t use the footage, and don’t you dare disabuse me of that fact, because I want it to be true. The prize money, in a desperately British way, is almost never mentioned, nobody tries to sabotage anyone else’s puff pastry, and at the end whoever has to leave gives a brave little interview about how it’s a shame but they tried their best and they were just happy to be there and they’re definitely going to do some more baking almost as soon as they get home. 

Bake Off is the theatre of the humdrum, where fussy, nervous people get to be heroes, making macarons as the seas rise and the planet boils and the leaders of the world don't care that they've left the oven on. I’m always a little bit frightened by people who can bake, because I can’t even make a muffin out of a packet, although one danger of watching too much Bake Off is that you become convinced you ought to give it another try, and I apologise to my housemates for making them eat my savoury vegan chilli-chocolate cookies (don’t ask). They say that if you can bake a cake, you can make a bomb, and by that logic I should definitely be kept away from the explosives when the zombie revolution comes- but the Bake Off contestants are probably the sort of people who will be Britain’s last line of defence, quietly constructing landmines and apologising that the stitching on the flag of insurrection isn’t quite perfect. People with this specific and terrifying personality type are that are precisely the reason Britain once had an empire, as well as the reason we’re now rather embarrassed about it. 

For now, though, Bake Off is a gentle human drama about all the best bits of Britishness- and diversity is part of that. In fact, this isn’t even the first time that two out of three finalists have not been white - that was two years ago. But something seems to have changed in British society at large, such that the same scenario is now more enraging to the kind of people who get their jollies from spoiling everything lovely and gentle in this world with casual bigotry - they know who they are, and may their Victoria sponges never rise and all their flatbreads turn out disappointingly chewy.

Britain is getting harder and meaner, and even Bake Off is not immune. In the first season, it was more than enough to bake a half decent brioche. This season an affable fireman got sent home because the grass on his miniature edible Victorian tennis court was not the right shade of green, and I’m not even joking. In one of the challenges the bakers had to produce an arcane french dessert that looked like the turds of a robot angel, and most of them actually managed it. The music is getting more dramatic, the close-up shots of flaky chocolate pastry and oozing pie-lids more reminiscent of 1970s pornography. It’s all a bit much.

The human drama, though, is as perfectly baked as ever. Lovely Flora, the baby of the bunch who missed out on a spot in the final because her chocolate carousel centrepiece was slightly wonky, was actually one of my favourites because she's so deliciously millennial, with her pussy-bow collars and obsessive, Type-A attention to detail. Paul the Prison Officer was a delight, mainly because he looked so much like Paul Hollywood- cue six weeks of two enormous men called Paul having bro-offs over bread, nodding and trading gruff, dudely handshakes over the specific crunchiness of biscotti. One week, Prison Officer Paul produced a giant dough sculpture of a lion's head and Judge Paul gave him a special prize and then they probably went off into a gingerbread sweat lodge together and it was the manliest moment ever in Bake Off history.

This is what Bake Off is about, and that’s why the people who are complaining that something other than merit might have been involved in selecting the finalists have missed the point entirely. The point of Bake Off is not to determine the best amateur baker in the land. That's just the excuse for Bake Off. Even the gentlest TV show needs a vague narrative structure, and otherwise there'd be no tension when someone's blancmange collapses in a heap of eggy foam and broken dreams. But in the end, when all's said and done, it's just cake. If your ornamental biscuit windmill has a soggy bottom, well, nobody died, and you can probably still eat the pieces on your way home to have a cup of tea and a little cry. 

That's the point of Bake Off. None of it really matters, and yet it consistently made me smile during a long, weary summer of geopolitical doomwrangling when absolutely everything else on television was unremitting misery. I hope Nadiya wins, because she’s an adorable dork and I love her and she gets so worried about everything and I want nothing remotely distressing to happen to her, ever; I expect Tamal Ray, the gay doctor whose meat pie had me drooling, is the best baker overall, but I can’t be objective there, because I keep getting distracted by his lovely smile. Ian Cumming, the last white person in the tent (apart from both of the presenters and both of the judges) is a little bit dull, which is a problem, because of all the delicious treats produced on the show, Ian's are the ones I would probably eat the most. I want his tarragon cheesecake in my face immediately. I would just rather have a conversation with Nadiya while I'm doing it.

But at the end of the day, it doesn’t matter. It doesn’t matter! And that’s the utter, unremitting joy of Bake Off. It’s possibly the last show on earth where in the end, it doesn’t matter who wins, as long as everyone gave it their best shot and had a laugh over a disastrous scrambled-egg chocolate tart or two, because ultimately, it’s just cake. And that’s marvellous. Now let’s all have a nice fat slice of perspective and calm down.


Now listen to a discussion of the Bake Off on the NS pop culture podcast:

Laurie Penny is a contributing editor to the New Statesman. She is the author of five books, most recently Unspeakable Things.