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17 August 2022

How to nationalise water by stealth

Democratic regional authorities could take water companies into common ownership without full-blown nationalisation.

By Paul Mason

With hosepipes banned, the riverbeds cracked and the sea befouled by sewage it’s no wonder that even Tory leadership candidates are bashing the water companies. Private corporations have racked up £50bn in debt since privatisation, while paying out £57bn in dividends to shareholders. 

They have one of the simplest of corporate tasks: to collect water from a notoriously rainy island, and supply it in a drinkable state to households, while treating sewage in a manner that avoids pumping waste into the seas and streams. Yet they’re failing, and calls for their nationalisation can be heard way beyond the left.

In response, right-wing think tanks and lobbyists accuse supporters of nationalisation of failing to understand the economics of water. The left sees water as a market, writes Robert Colvile of the Centre for Policy Studies (one such think tank), full of badly regulated private companies, “but the reality is that the water companies are essentially contractors. They are running the water network on behalf of the state, in a fashion agreed with the state, to targets laid down by the state.”

Colvile advances two claims to support private ownership of these natural water monopolies: that only the private sector could have improved water quality and productivity in the 30-odd years since nationalisation; and that a state-owned industry would have lacked investment, because its borrowings show up as government borrowing.

The first thing to be said is: if these are the only reasons to keep water in private hands, they are weak ones. The privatisation boom of the 1980s was not unleashed for the sake of investment and water quality. It was designed to open large parts of the public service industries to profit-making finance capital, because its sources of profit elsewhere were drying up. The water companies had £5bn of debt written off, were handed a £1.6bn “green dowry” by the state, saw their profits exempted from taxation and were sold at what has been assessed as 22 per cent of their market value. The current regime of performance targets, swingeing fines for failure and capped operating profits was brought in because the initial experience of privatisation was so dire. 

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Even if we accept (for the sake of argument) that a cash-strapped state might not have invested the £160bn in water that the private sector has since privatisation, that does not justify the tens of billions of profits extracted from a natural monopoly by the pension funds, management teams and army of consultants and lawyers during the past 33 years.

The point is, going forward, the water industry needs more and faster investment than it’s achieving, and – since it is really a government-directed machine for making guaranteed profits – there is no logical reason for it to be in the private sector. The more it is regulated in the interest of consumers, the lower the profits the water industry can make, and so its cost of borrowing against future revenue streams rises. 

What’s more, as Sarah Hendry of the University of Dundee has pointed out, firms are incentivised to game the regulations: skimping on investment, manipulating the tax system, loading themselves with unsustainable debts. In Scotland, she writes, where the water company is a public corporation, even without renationalisation the incentives to do these things are removed by having the corporation and the regulator “on the same page”: viewing water as a public good, not a profit opportunity. 

In England we have a straight choice to make: a water industry run in the interests of the population – facing a painful cost-of-living increase and numerous disruptions arising from climate change – or one run in the interests of pension funds and corporate finance.

But winning the argument for renationalisation is the easy part: some 69 per cent of the public already support it, with only 19 per cent against it in a Survation poll this week. The trickier question facing supporters of nationalisation is: how, when and at what cost. One of the problems with Labour’s 2019 manifesto was its mealy-mouthed position on the latter. The party argued that, by exchanging government bonds for shares, the nationalisations would be “fiscally neutral” – ie, cost free – and that the actual price paid would be decided by parliament, not the market. Clifford Chance, the corporate law firm, anticipated a bonanza of legal work if this were to happen, because nationalisations at below fair value are illegal under international law.

If the desired outcome in water is to boost investment, reduce prices, stop the leaks and ban the dumping of untreated sewage on to our beaches and river banks, the first stages can be done through regulation and structural reform. The regulator has to set prices and profits so low that only a non-profit or mutual ownership structure makes sense. Then the government has to oversee the creation of successor companies to privateers, starting with the two biggest polluters: South West Water and Southern, whose pollution incidents ran well below their respective targets in 2020. Finally, by creating democratically elected regional water authorities to oversee a sector composed largely of mutuals or public corporations, you would achieve something close to “common ownership” by stealth.

The downside would be that pension funds, which currently make up around half of the shareholders, would have to look elsewhere for their guaranteed profits – but maybe that would force some of this capital into innovative investment, instead of rent-seeking from natural monopolies. Renationalisation of water, then, might not be the top priority of an incoming post-Tory government. But the prospect of revised regulation, green state investment and new forms of common ownership make it one of the lowest hanging fruit for a new approach to public sector reform.

[See also: The forgotten crisis: how businesses can boost biodiversity]

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