At the weekend, The Observer reported that the privatised water companies in England are expected to pay out £14.7 billion worth of dividends to shareholders by 2030. This comes only days after water executives promised to invest an extra £10 billion in upgrading the water system and expected customers to pay for it through higher water bills. This is a national scandal quite frankly. It is yet another demonstration of how a privatised natural monopoly operates. The profits are passed on to wealthy senior shareholders, while the risks and costs are passed on to customers. Things cannot go on like this.
So, where do Liberal Democrats stand on the age old divide between socialist statist nationalisations and Thatcherite privatisations? Firstly, a degree of pragmatism is required. Liberals should never be ideologically wedded to either nationalisation or privatisation. Some things are better off being run by the state (such as, the NHS and the education system), while other things are better off being in the private sector (for example, telecommunications and aviation). Secondly, it is important that liberals advocate for a third option, that being mutualisation.
Mutualisation is where a business, industry or organisation is transferred into mutual ownership. This can take several forms. It could take the form of a not-for-profit business model whereby a company’s profits are reinvested for the benefit of its customers. It may also take the form of customers receiving a share of the company’s profits themselves in the form of a dividend. Alternatively, it could take the form of a traditional co-operative that is owned by its customers and/or its workers. The important thing is that mutualisation would lead to a company treating all of its customers as stakeholders; therefore, it would have a social and economic responsibility to each of its customers. Mutualisation offers a distinctive alternative for Liberal Democrats, one that is more decentralised than nationalisation and more socially just than privatisation, while potentially being more democratic and accountable than either.
So how might this work in practice? England’s water industry is the only one in the UK that is still privatised. Scotland’s and Northern Ireland’s are already nationalised. However, it is to Wales that Liberal Democrat should turn to. In Wales, Welsh Water is mutualised and its profits are reinvested into the maintenance of the Welsh water system and into lowering bills for customers. Liberal Democrats in England should call for the mutualisation of the English water companies along similar lines to Welsh Water. We should learn from the example of Welsh Water, however even mutuals (or nationalised industries for that matter) require stricter legally binding environmental regulations and should not be treated as a panacea in and of themselves. We should also explore the possibility of making water mutualisation in England even more democratically accountable to customers than Welsh Water.
Where else could Liberal Democrats advocate for increased mutualisation? One option is in relation to the banking and finance sector. The Great British building society used to offer customers an alternative to traditional banks. From the 1980s onwards, the number of building societies declined rapidly as they were demutualised (and thus privatised) under Thatcherism. Liberal Democrats should promote and encourage the establishment of new building societies to give customers and businesses greater choice. We should also promote credit unions, which also represent a mutual alternative to traditional lending.
In relation to the energy sector too, there is a role for increasing the number of mutuals. Liberal Democrats should seek to establish more locally owned green energy co-operatives, an example of which is Bristol Energy Cooperative. This could be where a community owns a renewable energy source, such as a wind turbine or solar farm. The surplus energy generated could then be sold to the National Grid with the proceeds being shared amongst the members of the community that form the co-operative.
Finally, what about the railways? Labour are committed to renationalising them. Even the Conservatives have been gradually renationalising them, not out of a sense of ideology, but as a response to the failed privatised model. Only two weeks ago, TransPennine Express became the latest rail company to be nationalised following a litany of failures. In 2014, under the Coalition, Network Rail was essentially nationalised. Most of the railway system has already been renationalised. Liberal Democrats should support the completion of the renationalisation of the railways; however, we should reject a bureaucratic statist model of nationalisation. Instead, the party should support a democratic model of public ownership, one that puts more power in the hands of ordinary rail users with the rail profits being reinvested back into the maintenance of the rail system. In this sense, this form of public ownership would be much closer to mutualisation than traditional statist nationalisation.
Following on from the scandal of sewage being dumped into rivers and onto coastlines, the Liberal Democrats must start by calling for the mutualisation of the water industry in England. No more should wealthy water shareholders be allowed to line their pockets with dividends, while the burden is passed onto ordinary consumers and the poorest in society, who are left literally having to clear up the mess of the water companies. The privatisation of water has benefited shareholders, not customers. Mutualisation is the viable Liberal Democrat alternative to nationalisation and privatisation. Under mutualisation, there would be no shareholders to pay generous dividends to and the profits would be reinvested for the benefit of customers. If you think water privatisation stinks, the feeling’s mutual!
* Paul Hindley is a PhD politics student at Lancaster University and a member of the Liberal Democrats in Blackpool.
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28 Comments
Not quite! Welsh Water is owned by Glas Cymru which is a single purpose company that was formed in 2001 to own, finance and manage Welsh Water. It is limited by guarantee and because of this has no shareholders and because it has no shareholders any financial surpluses are reinvested into Welsh Water. The company’s structure is similar to the social enterprise model. It is failing in the same way as the privatised companies. The reason for this is the size of the companies rather than privatisation itself.
In the 1970s nationalisation was seen as the answer to 100 years of underinvestment . Most borough, rural or urban district councils in Wales had a water board and in places where water demand had increased dramatically these micro councils just could not raise the capital to build mega reservoirs. By the early 90s reservoir building had been completed. Instead of returning the nationalised water boards to Councils Major’s Government privatised them. To me the answer in Wales is obvious. You only have to look at Councillor Steve Churchman’s and Councillor Elizabeth Evans’ social media to see that they are already dealing with the problems caused by a mega water board which covers North and South but not the Middle of Wales.
In England reservoir building has restarted. The first new reservoir for 30 years is being built jointly for Portsmouth Water and Southern Water in Havant at a cost of some £200 million. In places where there are major reservoir building programmes then the mega companies should be retained. If in places where it is not then they should be broken up and handed back to district councils or unitary authorities.
“the age old divide between socialist statist nationalisations”………
Sorry, Paul, that’s a very loaded phrase…….. particularly in this case and in the utilities and the railways. Historically, the Liberal Party (which I first joined way back in 1962) has in some cases supported nationalisation. Just for starters, take a look at the Sankey Report on the coal industry which reported over a hundred years ago.
Thank you for a most interesting article!
Might the shortcomings of the water and sewage industry/industries be, in part at least, caused by the recent and current fashion of having supine government input to essential infrastructures?
Might this shortcoming be indicated by the creation of ineffective and/or unhelpful supervisory bodies?
Might analyses of the performances of different types of water organisation control enable general improvement?
What is there to stop governmental performance assessment and needs prediction concerning water and sewage etc.?
If we can fund the banks’ shortcomings around 2008, what is preventing the funding to overcome water and sewage shortcomings?
How/Why does an organisation pay dividends when its practical performance is manifestly deficient?
What do shareholders do in exchange for their dividends?
I am not sure one JS Mill would agree that education should be run by the state, though he did accept the state may have to pay for it.
The idea of an ideologically driven corrupt state (sound familiar?) controlling education should give every liberal cause for concern.
Bang on target Paul! I suspect that the sector which would inspire the most resistance would be banking and finance. However there are plenty of examples in recent decades of governments mucking about with the structure of banks. Germany has some good models of local banks which are well worth looking at.
1. Welsh Water has a truly dire record on sewage spillages; probably the worst in the UK.
Seriously not an example to be followed!
2.Any model might work – private, public, mutual — if there is sufficient investment and the right regulatory framework. The last two factors are what is important, not the model of ownership. What water companies above all need is a huge new investment of capital. Mutualisation doesn’t do this.
3. Anyone with any private pension provision almost certainly has an indirect investment in water companies. Most shareholders are not wealthy fat cats! Probably some of the posters on here will have indirect holdings in water holdings. Even some of those most vocal about “greedy shareholders”. So let’s show a degree if awareness and not resort to stereotypes.
3. I happen to live very near to the spiritual home of European mutualism in Mondragon in northern Spain. Relatives and friends work in and have retired from mutuals in a range of activities: banking, white goods, machine tools, food retail.
Do not idealise mutuals! They have had and have many many issues!
I would agree that mutualisation offers a better solution than Nationalisation although the Local Authority model may struggle to cope in its present weakened condition. London Power was set-up to provide affordable energy in the Greater London Authority but has had minimal impact so far https://mylondonpower.com/about-us/.
Ofwat has formal powers to control profits. They set price controls, which control the revenue the companies can collect from their customers in bills. In setting price control they must make a judgement on what is a reasonable rate of return on the capital investors have provided. This return must be sufficient for the company to attract investors and lenders to finance the investment programmes. Typically, the returns on capital from utilities has averaged around 5% over the longer-term from a mix of debt and equity financing. Equity has achieved greater returns not least due to debt financed share buybacks but that may be coming to an end with higher interest rates on loan finance now.
I think the Community Interest Company with its asset locks and dividend caps is a potentially good solution. The legal form provides for raising both loan and share capital but the dividend cap limits dividends to 35% of profits and requires that companies be operated in the public interest and publish a statement as to how they are meeting this test.
@David Raw
Ah yes, Sankey. A fascinating (and virtually forgotten) figure, who I’ve been looking at in connection with a book I’m writing. He started out as a Conservative. I suspect he was appointed to do the enquiry into the coal industry because he was seen as a safe pair of hands. And what he learned turned him into a lifelong socialist.
Going into something with an open mind. How endearingly quaint.
@gwyn williams. Here in Greece, water is still in the hands of local councils. But of course, by en large they only provide water and not sewerage systems, with the possible exception of Athens and some bigger cities. I would like to connect to a sewerage system but have a septic tank instead, which is emptied as needed by a private contractor.
I would not claim it’s a perfect system, but it is cheap. Investment does happen. Last year for example a new main was laid to Stoupa and the service has improved.
Sewerage is a much bigger problem in the UK with a population at least six times the size of Greece and most of the Greek population (80%) live in greater Athens.
I think local authorities could run water and sewerage in the UK and with increased borrowing power and possibly some government subsidy could finance the new treatment plants needed. The private water companies will never do this, beholden as they are to shareholders. I think that there will still need to be a national water pipeline to move water to where it’s needed and this could possibly be provided by a national and state owned water distribution company. Profits from the sale of water and collection of sewerage would be ploughed back into the industry.
I have no faith in regulation. OFWAT has been spineless and supine and people have no confidence in its role.
@ Neil Hickman “I suspect he was appointed to do the enquiry into the coal industry because he was seen as a safe pair of hands”.
Maybe, Neil, or maybe LLG (as was his wont) was kicking the coal issue into the post war long grass – after nationalisation in the War in February, 1917 – both to keep his Tory Coalition partners happy and the miners quiet for a while. It’s not a coincidence that LLG’s go-between in the sale of honours, Sir William Sutherland, Coalition Lib MP for Argyllshire (Bronco Bill) was a very rich coal owner in South Yorkshire.
Sankey deserves a biography – he was a hero to my Granddad (a Durham miner) who endured a terrible time on Black Friday (1921) and 1926. What’s your book ? I’ll look out for it.
I do think it’s possible that: i) the system in Wales is not well understood and poorly described by journalists living in England, ii) the system in Wales isn’t performing well, iii) the system in Wales shouldn’t be idealised and iv) despite this, the system in Wales is worth considering as the way forward across the UK.
Andrew Sissons, Deputy Director for Sustainable Future @nesta_uk, on 20/05/23 suggests the starting point is understanding what is going wrong with three policy failures outlined:
1. Inadequately funded regulation
2. Overestimating the cost of capital
3. Prioritising low bills over investment
I would only suggest that this minimises role water companies have played who have prioritised dividends over investment.
While the mutual idea is better than the way the private firms have been/are run, the big problem is the incredible sums of money needed to put things right.
Recent estimates to fix the issues of storm overflows and replace combined sewers in Wales would cost somewhere between £23bn and £54bn.
There are about 1.4million households to fund all that.
I’m no accountant, but Welsh Water Dwr Cymru’s 2021-21 annual report shows revenue £793.161m; operating costs £729.459m. And at the bottom: loss for the year £153.173m.
@ David Raw
“Despotism Renewed? Lord Hewart Unburied “ a reappraisal of Gordon Hewart, Liberal MP, Attorney General, and, I conclude, a much better Lord Chief Justice than most people allow.
And a forgotten figure. As is Thomas Horridge, who was elected to Parliament spectacularly unseating the Tory Leader of the Opposition.
Currently ploughing through bibliography and index and resolving never to do anything so foolish again. I’ll let people know when it comes out.
Cassie, I agree entirely.
We’ve had several discussions on here about water. Most comment has focused on which form of ownership the posters prefer and why. Unfortunately, nearly all cherry pick examples to suit their case. And ignore all countervailing evidence.
My conclusion is that most posters care more about their ideological positions on ownership than actually improving water.
None of the water companies in the UK are doing a good job, irrespective of whether they are state-run, privatised or mutual.
The reason is a lack of investment. The quantities required are enormous to modernise infrastructure, as you point out.
Consumers throughout the UK are paying well BELOW the real cost of water, if you include in that the massive cost of maintaining and upgrading infrastructure, which you should.
Cassie,
the welsh water loss of £153m for 2021-22 was after interest costs of £295 million i.e 30% of total costs. This is the cost of capital or funding investment. A significant element of Welsh water’s debt is linked to RPI inflation and interest costs have been rising as a result.
Funding for investment can come from debt or equity and will incur interest costs or dividend costs as a result. Those costs have to be recovered from charges to users of the service.
Most media coverage is focused on dividends and infers that if no dividends were paid these profits could be reinvested instead. The problem with that for utilities is these are low growth stocks. Profits are regulated so investors/pension funds require dividends as a return to invest in utilities. Regulation of profits and pricing is required as these are monopolies that do not have the level of competition required to rely on market forces to drive efficiency and competitive pricing.
Both dividends and interest are the cost of servicing investment. Under Nationalisation all the investment funding has to come from government and utilities compete with other priorities for investment. Historically, that has resulted in under-investment.
The community service company is a form of organisation that allows for share capital (as well as debt finance) to be raised, but places a cap on the level of dividends that can be paid. For that reason it is a middle ground between state ownership and privately held companies.
Ultimately, the cost of providing water services (including the cost of capital) will be borne by users whether directly through pricing or indirectly through taxation.
All water companies should be banned from paying dividends to shareholders and bonuses to managers until they have fixed their leaks and stopped pumping sewage into our waterways.
I think Paddy’s last speech as Leader was about mutualisation being the future. Worth looking up…
As several people have said the peformance of Welsh Water is pretty poor. And today OFWAT have announced an investigation into them https://www.ofwat.gov.uk/ofwat-launches-investigation-into-welsh-water-leakage-performance/
Chris Moore 25th May ’23 – 12:47pm:
My conclusion is that most posters care more about their ideological positions on ownership than actually improving water.
Indeed. They also seem unaware how much the industry has improved since privatisation: 65% more productive, bills flat in real terms, leaks reduced by 40%, and huge improvements in water quality.
None of the water companies in the UK are doing a good job,…
On the contrary, the evidence shows that they are generally doing a good job given the dated infrastructure they inherited and the 20% rise in population since privatisation. Sewage discharges only became a political football after the advent of cheap telemetry enabled the monitoring of Combined Sewage Overflows (CSOs) to rise from 5% to near 100% with real time data being published online. The actual quality of our coastal bathing waters has improved greatly as explained in Tweet 17 of Steve Loftus’ highly informative UK Waters Megathread:
https://twitter.com/LoftusSteve/status/1659637780769546260
The reason is a lack of investment.
With 100,000km of combined sewers in the UK where rain and waste water go down the same pipe any realistic level of investment is going to be inadequate. Total investment has been substantially increased after privatisation as shown by the bar chart in Tweet 19:
https://twitter.com/LoftusSteve/status/1659637783466483725
One of the reasons for Welsh Water’s poor performance is the number of chicken farms in the Wye catchment area, giving off much chicken poo.
Jeff,
The problem with Water Authority/Company stats referred to in those tweets is the massive increase in outsourcing of contracts, which are in turn sub-contracted and sub-sub-contracted. Hence expenditure on works has increased by much more than the actual cost of those works with so many middle men taking their extra cut.
There is a big difference between spending and investment.
It’s not quite as simple as Mr Loftus imples.
Mutualisation may be the answer but there are many questions to be considered into why it is failing to deliver in Wales. I don’t have the answer it not a field I have studied in depth but if we accept that the issues are as bad both sides of the border then one thing you then need to consider is the management structures in place in Dwr Cymru and look at the possibility of failures there.
We might also want to ask the question is clean and waste water run by the same company the best business model or should they be separated in some way?
David Evans 25th May ’23 – 7:12pm:
The problem with Water Authority/Company stats referred to in those tweets is the massive increase in outsourcing of contracts, which are in turn sub-contracted and sub-sub-contracted.
Water companies are motivated by maximising profits within the constraints imposed by Ofwat. They have increasingly stringent targets to meet for reducing water leakage and sewage discharges. They will only outsource activities where it is cost effective to do so. Even when the industry was in public ownership construction and replacement of infrastructure was contracted out. For example, in the 1980s pre-privatisation many of my local sewers were replaced – all done by private contractors.
We should remember dividends (from shareholdings) are just one way of extracting money from a business. Given the nature of utilities – highly predictable revenue stream, investments in the forms of bonds and fixed interest loans would seem to be appropriate way for pension funds (aka sovereign fund) to invest.
Given the state of the infrastructure and the issues needing to be addressed, we can do something to help, specifically curtail all new housing development – since it is only adding to the overloading of the infrastructure…
@Roland
“Curtail all housing development”
How are you going to solve the housing crisis?
@ Nonconformistradical – Good question!
From the decades of house building, we could conclude building houses hasn’t solved the housing crisis, so why continue to flog a dead horse?
But my point was that the problems we are seeing in the utilities isn’t just down to the utility companies, things are more interconnected than politicians would like to portray them.
If you want unconstrained and unsustainable levels population growth then there is a price; of which sewage discharges are just one small part of. I suggest you should ask your question of those who advocate unsustainable
Levels of population growth in the pursuit of ever increasing GDP and economic growth. To my mind the politicians took a wrong turn in the 1990s and we are now having to live with the consequences, fixing it isn’t going to be easy and will require actions that some will find unpalatable…
@ Chris Moore
”We’ve had several discussions on here about water. Most comment has focused on which form of ownership the posters prefer and why.”
I think it is important we discuss ownership models, because we do need to breakout of the institutionalised thinking (*), preferred by the Tories, that only one form of for profit business is good. Which overlooks just how powerful other models are, for example in the care sector, the typical third sector enterprise can deliver care at less than 50% the cost the NHS and social services can deliver the same service, whilst carrying significantly more delivery risk.
(*) we perhaps should be treating the private for profit is the only way to run an enterprise, other business models bad mindset, in the same way we currently talk about institutional racism…