A report in the Financial Times newspaper has suggested that consumers are now paying £2.3 billion per annum than would have been the case if the water companies had remained in public ownership.

The article cites research undertaken by the University of Greenwich which it says has calculated the cost of privatisation to each household as over £100 a year and shows that the cost of maintaining and improving water and sewerage infrastructure In England has been paid for almost entirely by an increase in debt.

The researchers have suggested that the ownership and operation of water and sewerage services in England could be restructured as a local, democratic, publicly owned system. New public bodies should be created for each of the water regions, to take over the system and operate water and sewerage services using the existing workforce.

The new regional water authorities would be required to form an association to conduct annual public peer review of operations and efficiency, following the Netherlands model of ‘sunshine regulation’, a system which is at least as effective as, and much cheaper than, Ofwat, the researchers say.

Cost of maintaining and improving infrastructure for last 28 years has has been met by borrowing and not financed by investors

The researchers have concluded that the interest payments on the debt are higher than what would be paid by the public sector, which can borrow more cheaply. Companies which were debt-free at privatisation in 1989 have now accumulated over £40 billion in debt, which now finances over three-quarters of the companies’ assets. 

According to the researchers, the cost of maintaining and improving infrastructure for the last 28 years has has been met by borrowing and not been financed by investors. With most of the profit allocated to dividends, the companies have been borrowing ever-increasing amounts in order to pay for the actual physical investment. 

The study has suggested that the nine English regional water and sewerage companies have invested no significant new shareholder equity but extracted nearly all of their post-tax profit as dividends, the Financial Times says.

The researchers estimate that public ownership would save at least £2.3 billion per year from eliminating the payment of dividends (saving £1.8 billion per year) and reducing the cost of interest payments (a saving of at least £500 million.)

According to the analysis of their financial reports, post-tax profits came to £18.8 billion in the 10 years to 2016, while owners of the nine companies, including sovereign wealth funds and overseas investors, paid out £18.1 billion in dividends. Despite the profitability of the sector, the water companies  also pay little tax.

The study says that three companies – Anglian, Severn Trent, and Yorkshire – have paid out more in dividends than their total pre-tax profits over the past ten years and that this is not economically sustainable.

Problems include narrow regulation by Ofwat with system of price controls that fails to deal with all methods of value extraction by shareholders

The study says that the problems of the English system are:

• upward pressure on pricing due to payments of dividends and debt interest;
• narrow regulation by Ofwat, with a system of price controls that fails to deal with all of the methods of value extraction by shareholders;
• poor performance, for example, in terms of leakage and sewage-flooding, for which companies continue to be fined millions of pounds in 2016 and 2017;
• lack of accountability or public control, with complex corporate structures, a dense web of intercompany loans and opaque offshore ownerships in some cases;
• rising inequality as many struggle to pay water bills which feed into dividend payments to some of the world’s richest.

Ofwat has not proved a great obstacle to the companies

The researchers also conclude that Ofwat has not proved a great obstacle to the  water companies, referring to the House of Commons Public Accounts Committee, which stated in 2016 that:

“Ofwat, like other economic regulators, has repeatedly overestimated the cost of finance in successive price reviews. … As a result, water companies made windfall gains of at least £1.2 billion between 2010 and 2015 from bills being higher than necessary”. 

The study suggests that the functions of Ofwat should be brought back under democratic political control by returning them to the ministry, or an agency directly accountable to the minister, "thus ending the present system whereby the regulator acts autonomously, without political accountability."

The new regional water authorities would be required to form an association to conduct annual public peer review of operations and efficiency, following the Netherlands model of ‘sunshine regulation’, a system which is at least as effective as, and much cheaper than, Ofwat, the researchers say.

The newspaper quotes co-author of the study, Dr Kate Bayliss, a research associate at the School of Oriental and African Studies at the University of London as saying:

“This is an expensive way to finance infrastructure. It means that little extra money, in real terms, has come from shareholders while investment has largely been financed by commercial borrowing.”

Water UK - report is flawed and “does not do justice to the achievements of water industry since privatisation”

The Financial Times says Michael Roberts, chief executive of Water UK, the organisation which represents all the UK water companies at both national and international level, has described the report as flawed and that it “does not do justice to the achievements of the water industry since privatisation.”

Commenting last month on the publication of the Labour Party Manifesto which has called for the UK’s “dysfunctional water system” to be replaced with a network of regional -owned water companies, Michael Roberts said:

“The Labour Party manifesto does not do justice to the water industry's record following privatisation.”

"Since 1990, the water industry has invested over £130 billion in better services. The quality of bathing and drinking water is up, and customer satisfaction with water and sewerage services is over 90%. Access to private capital and other sources of funding, repaid through dividends and interest payments, has been key to that record of success.”

"Working closely with their customers and overseen by independent regulators, water companies are currently delivering a five-year programme which by 2020 will see a further £44 billion invested in improvements and a 5% real-terms average drop in prices. All water companies have schemes in place to help those struggling with their bills."