Less than a week in to his government and Keir Starmer is already facing an ideological battle within the Labour party – over the nationalisation, or non-nationalisation, of the water industry. News that Thames Water has been put in special measures at the same time that Ofwat has given permission for other water companies to increase bills by an average of £94 over the next five years is going to rekindle the beliefs of many in his party that public utilities do not belong in the private sector.
Starmer is not helped by the fact that when he won the Labour leadership in 2020 it was on the promise of renationalising water and energy companies. His leadership has looked as if it was bought on a false prospectus ever since he changed his mind on the matter in 2022. His excuse, repeated many times since, was that he didn’t think that buying out private shareholders was the best use of public money when there are so many other demands on the public purse.
Get on with the job and you can carry on making profits. But fail, and you will be toast
I am no socialist but it is hard not to sympathise with those who say that privatisation of the water industry has been a disaster. The whole point of privatising any public service is surely threefold: to bring extra investment into the industry, to transfer financial risk from the taxpayer to private capital and to improve the experience for consumers, on both price and service, by creating a competitive environment in place of grudging service by a state monolith.
In the case of the water industry none of these objectives has been realised. There is no competition for domestic consumers – our water supply has simply been taken out of the hands of a public monolith and put into the hands of private monoliths. Investment, compared with the decades prior to nationalisation, has dried up. Construction of new reservoirs has all but ceased. There has been little effort to avert sewage spills by separating foul and storm drainage. Pipes are still leaky. Thames Water did go as far as investing in one innovation to save us from water shortages – a desalination plant in East London – but then refused to use it during the drought two years ago. As for financial risk, we are about to find out where that really lies. Is it going to be Thames Water’s owners and bondholders who pay the price for its dismal performance – or are the public, either in the form of taxpayers or the company’s captive customers?
Private enterprise works wonders when there is competition to keep everyone on their toes. The trouble with the water industry – and to some extent other public utilities too – is that the incentive structure is too weak. Water companies know we have no choice but to use their service, and so find it cheaper to fob us off with hosepipe bans rather than supply adequate water. They can’t offer us the choice to pay for more expensive water from desalination plants during a drought because the prices they can charge us are fixed by Ofwat.
Water companies do in theory have incentives to avoid polluting waterways in the form of threatened fines from Ofwat, but the fines are too feeble – with the result water companies find it cheaper simply to pay the fines rather than invest. As for financial risk, water companies know that the government can’t let them fail and so they can splash out on large dividends for their owners, knowing that if they get into trouble they will have to be bailed out in some way.
Starmer is right that buying out private shareholders is not the best use of public money, but surely there is something that Tony Blair would call a ‘third way’. It would also happen to appeal to believers in capitalism, too. That would be to up the fines for pollution to levels which are a proper disincentive, but otherwise leave water companies alone so long as they are solvent. But they must make it absolutely clear that if they get into financial trouble there will be no bailout – rather they will be allowed to go bust. In order to allow this there needs to be a proper mechanism for a government agency to take over water and sewerage services at short notice. Taxpayers should pay for the assets in such a situation, but at firesale prices, as would happen with any other business that goes bust.
Get on with the job and you can carry on making profits. But fail, and you will be toast – your shareholders and bondholders will be wiped out and the government will seize your pipes and sewers at a price that is favourable to taxpayers. That ought to be Starmer’s message to our monopolistic water industry.
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