Public, private or a bit of both?

No one has yet found the answer to water industry control

No one has yet found the answer to water industry control

Before privatisation the water industry was largely in the public sector, and for good reasons. It is a natural monopoly, there are strong environmental considerations and the public has difficulty with the concept of such an essential service being the source of profit for private investors. After the war the idea was to have autonomous agencies with political supervision but not control. But in the event, ever more complex and contradictory rules emerged, and political interference grew. The resulting industry was not efficient, and the mechanisms for deciding on appropriate investment were too weak.

By the 1980s the investment required to meet new quality standards and a backlog of maintenance was large. Privatisation meant that these investments would not have to be met through the public purse and, importantly, it fitted the prevailing ideology of bringing private-sector incentives and efficiency improvements into a sluggish public-sector industry.

Although the problems have not gone away, the privatised industry has tackled them better. A huge investment programme has been financed, and there have been large and sustained efficiency improvements. But the public disquiet remains, particularly as increased efficiency has led to high profits. It also did not help that the benefits of the huge investment programme were largely invisible (for example, reductions in nitrates), while a series of long, hot summers placed an intolerable strain on infrastructure designed to cope with average weather and demand.

The basic issues of how to procure investment and how to drive efficiency improvements exist under both public and private regimes. The problem - economists call it "principal/ agent" - is one of differences in information and incentives between players. Companies know best about their businesses but do not have the same motivations as politicians. So regulators are needed to protect consumers from excessive prices and to ensure quality standards, investment and efficiency.

With the rise of the economic regulators of the privatised utilities has come recognition that rule-based regulation is imperfect. Rules are approximate and cannot provide the detail needed in a world where both the environment and companies' behaviour are constantly changing. This has led to increasing use of "discretion" by regulators as they seek to avoid the clumsy constraints of a pre-defined regulatory process. The difficulty is that too much discretion in turn destroys the incentives of the regulated firms and hence can negate the benefits of privatisation.

In other industries the answer often lies in using competition to protect customers and provide incentives for companies. But herein lies the other problem for water. The huge replacement costs of its pipe system make direct competition infeasible, because it is too expensive to build parallel underground water and sewerage systems. And the fact that prices to the customer are so far below the level needed to pay for these assets makes the design of a rational system of competition rules almost impossible.

The alternative - comparative competition across different regional monopolies - has also been found to be flawed. It turns out to be very difficult to compare, for example, the cost of providing water and sewerage services in Wales with that in Greater London, given their very different physical circumstances. International comparisons are even harder, because different political and regulatory systems invariably serve to hide or subsidise costs in different, and often inconsistent ways.

Thus regulation will be an enduring feature of water. But when enduring regulation is coupled with principal/agent problems, the same old problems inevitably re-emerge. Without the prospect of serious competition, a structural solution is not possible, and one is left with the regulator attempting to decide on a whole series of trade-offs: between price and investment; between intrusive regulation and preserving incentives; and between the wishes of politicians, consumers and shareholders.

What are the alternatives? Other methods of injecting private capital have their own problems, often reflections of the problems discussed above.

In France the problems of regulating and rewarding a heavily monopolistic industry were avoided by franchising out the operation of much of the system while leaving the ownership of the pipes under public control. But in such a capital-intensive and geographically specific industry, the advantages of the incumbent in the bidding process are high. Hence it is difficult to ensure that repeat franchises are genuinely competitive, and there is considerable scope for corruption.

Australia and Scotland have chosen to seek private-sector finance for investment in a public-sector industry. Yet here the same problems merely emerge in a different form. In Australia issues of cross-subsidy between irrigation systems and conurbations, and between the newly created regions within, say, Victoria, cause difficulties. In Scotland, although the authorities remain publicly owned, a new raft of monitoring is already being introduced. Private finance has so far been limited to relatively large projects; as smaller projects are attempted, so the transaction costs and difficulties in defining risks will increase.

There is no clear-cut answer to the question of whether Britain was right to privatise water. All depends on the skill with which any chosen regime is applied in practice, as the benefits and pitfalls apply, in some combination, to all of the possible regimes. On balance, the water regulator in the UK has so far done a difficult job rather well.

Over the long term, though, the difficulties will increase as prices rise to cover the replacement, expansion and improvement of the system. Historic subsidies will diminish, yet investors will continue to need a return for their growing asset base. The danger is that we will respond to this by ever more complex and contradictory rules, thus bringing privatisation into disrepute - in the same way that the public provision of utility services fell into disrepute a decade ago.

Nick Morris is chief executive of London Economics and a visiting professor at the City University Business School

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

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Sunjeev Sahota’s The Year of the Runaways: a subtle study of “economic migration”

Sahota’s Man Booker-shortlisted novel goes to places we would all rather not think about.

This summer’s crisis has reinforced the ­distinction that is often made between refugees, who deserve sanctuary because they are fleeing from conflict, and “economic migrants”, those coming to Europe in pursuit of “the good life”, who must be repelled at any cost. The entire bureaucratic and punitive capacity of our immigration system is pitted against these ne’er-do-wells and their impudent aspirations.

Sunjeev Sahota’s fine second novel, The Year of the Runaways, now shortlisted for the Man Booker Prize, takes a closer look at “economic migration”. Why do people – many of them educated, from loving families in peaceful communities – leave their old lives behind and come to Britain? Are they fleeing desperate circumstances or are they on the make? When they arrive here, do they find what they were looking for? Should we welcome them, or try to persuade them to stay at home? The book illuminates all of these questions while, much to its credit, offering no simple answers.

Sahota interweaves the stories of three people whose reasons for emigrating are as individual as they are. Both Avtar and Randeep are from Indian Sikh families that might be characterised as lower-middle-class. Avtar’s father has his own small business – a shawl shop – and Randeep’s father works for the government. Both boys are educated and Avtar, in particular, is smart and motivated. But with employment hard to come by and no social security net to fall back on, it doesn’t take much to make leaving the country seem like the only option. Avtar loses his job, his father’s business is failing and he has high hopes of earning enough to marry Lakhpreet, his girlfriend-on-the-sly. Randeep’s family’s finances fall apart after his father has a psychological breakdown; their only hope of maintaining a respectable lifestyle is for their eldest son to take his chances abroad.

For Tochi, the situation is very different. He is what used to be called an “untouchable” and, although people now use euphemisms (“scheduled”, or chamaar), the taboo remains as strong as ever. He comes to Britain not so much for financial reasons – although he is the poorest of the lot – but to escape the prejudice that killed his father, mother and pregnant sister.

Tying these disparate stories together is the book’s most intriguing character, Narinder, a British Sikh woman who comes to believe that it is her spiritual calling to rescue a desperate Indian by “visa marriage”. Narinder’s progress, from the very limited horizons for an obedient young woman to a greater sense of herself as an active participant in her destiny, reminded me of Nazneen, the protagonist in Monica Ali’s Brick Lane. But Narinder is a more thoughtful character and here the Hollywood-style journey of personal liberation is tempered by a recognition of the powerful bonds of tradition and family.

Once in Britain, Avtar, Randeep and Tochi enter a world of gangmasters, slum accommodation and zero job security, with an ever-present fear of “raids” by immigration officers. They work in fried chicken shops, down sewers, on building sites and cleaning nightclubs. Health care is off-limits for fear of immigration checks. Food is basic and the only charity comes from the gurdwara, or Sikh temple, which provides help in emergencies.

Avtar and Randeep struggle to send money back home while living in poverty and squalor that their families could barely imagine (at one point, Randeep notes with understandable bitterness that his mother has used his hard-earned contributions to buy herself a string of pearls). In the meantime, their desperation leads them to increasingly morally repellent behaviour, from selfishness to stealing and worse. Even if they do eventually find a measure of economic stability in Britain, they have done so at the cost of their better selves.

It has been pointed out that the novels on the Man Booker shortlist this year are even more depressing than usual and The Year of the Runaways certainly won’t have raised the laugh count. At times I had to put it down for a while, overwhelmed by tragedy after tragedy. It was the quality of Sahota’s prose and perceptions that brought me back. He is a wonderfully subtle writer who makes what he leaves unsaid as important as the words on the page. A wise and compassionate observer of humanity, he has gone to some dark places – places we would all rather not think about – to bring us this book. Whether we are prepared to extend a measure of his wisdom and compassion to real immigrants, in the real world, is another question.

“The Year of the Runaways” by Sunjeev Sahota is published by Picador (480pp, £14.99)

Alice O'Keeffe is an award-winning journalist and former arts editor of the New Statesman. She now works as a freelance writer and looks after two young children. You can find her on Twitter as @AliceOKeeffe.

This article first appeared in the 08 October 2015 issue of the New Statesman, Putin vs Isis