The privatisation of England’s water in the late eighties was an “organised rip-off,” a man who was part of the process has claimed.
Jonathan Portes was a junior Treasury official working on the water privatisation project which was responsible for making sure taxpayers and water consumers both got value for money.
But in an opinion piece for The Guardian this week, he responded to the Financial Times‘ claim back in 2017 that “water privatisation looks like little more than an organised rip-off” by claiming that, from his perspective, it definitely was.
Portes remembered how Brits were encouraged to sign up for shares in the 10 water and sewage companies across England and Wales. While polls showed that the vast majority of people were opposed to the idea, over 2.5 million people still applied for shares.
“In retrospect, we utterly failed on both counts,” he wrote, “the shares were sold well below their value so taxpayers lost out, and consumers have paid through the nose ever since.”
“Privatisation was never really about efficiency”
Portes, now professor of economics and public policy at King’s College London, continued: “But this is not just hindsight. We knew what was going on, because water privatisation was never really about efficiency.” Instead, he said it was about making sure demand for shares was high and that applicants who expected a large premium having invested in previous privatisations were not disappointed.
This meant the Treasury’s position when arguing for a higher share price or tighter regulation to restrain bills in the future was very weak, the professor said. Predicted profits fell by over a third in just three months, costing taxpayers the equivalent of £6billion in today’s economy, because the Treasury was “steamrollered” by a combination of water companies’ management, the Department of Environment, No 10, investment bankers, accountants, and PR consultants.
Portes said they hoped this was a “one-off transfer of wealth” from taxpayers and consumers to shareholders, and that shareholder returns would return to more “normal” levels as the Office of Water Regulation (Ofwat) “found its feet”.
“But as we now know, we were wrong,” he said.
“We were wrong”
Payouts in dividends to shareholders of water companies between 1991 and 2019 amounted to £57 billion – nearly half the amount spent on maintaining and improving the country’s pipes and treatment plants in the same period.
Prime Minister Margaret Thatcher achieved her short-term goal of creating sales from the policy in the eighties, but this damaged her long-term goal of creating a ‘shareholding democracy’, Portes explained, as small shareholders cashed out their huge profits. This led to companies being bought by private equity, institutional investors and large infrastructure firms overseas.
Companies were then burdened with debt, creating huge returns for stakeholders, while investors faced minimal risk. Over 70% of England’s water industry is owned by foreign firms, according to a 2018 study.
Discussing the situation now and moving, Portes argued that water companies should be forced to competitively bit for the right to operate.
He said the current model, which sees companies face public sector levels of competition and risk for private sector levels of profits and return, has “long past its sell-by date”.