TThis revelation should anger anyone who cares about the rivers and beaches of England. Two decades ago ministers were warned that private equity firms were buying up water companies. In a briefing prepared for Britain’s competition regulator ahead of the Southern Water takeover, the researchers expressed concern that private water companies would become “impossible” to regulate. Despite a 20-year transparency rule, the Competition and Markets Authority (CMA) did not release a briefing. His existence was revealed by this newspaper. Although its full content remains secret, its implications are clear: Ministers were warned of the devastating impact this industry could have on England’s water supply, but chose not to act.
Since then, sewage flows have polluted the rivers of England. After the privatization of water companies in 1989, the owners enriched themselves by neglecting infrastructure and discharging vast amounts of raw sewage. As investors loaded the water companies with debt, they continued to pay dividends to their shareholders, which amounted to £1.4 billion last year. The public, meanwhile, borne the costs. Water bills rose. The industry last week approved these wastewater spills and committed to investing £10bn in infrastructure, which will be paid for by increased customer bills. Ruth Kelly, former labor secretary and head of industry trade body Water UK, said more action should have been taken to deal with the spills. She remained silent on the topic of paying dividends.
Ofwat should be the main line of consumer protection. However, water companies are looping around the regulator. Its rules are based on a version of capitalism that no longer exists. When it was founded in 1989, the water suppliers in England were listed on the stock exchange, anyone who allows you to buy shares of this public resource. Today, most of them are bought up by investment funds that are not subject to the same disclosure requirements. The opacity protected their finances from scrutiny. Since 2015, water companies have been required to demonstrate their “financial stability“, and Ofwat will now prevent negligent dividend payment. But the horse has already run, and many of the firms responsible for loading these companies with debt have already left.
The regulation of water suppliers in England is based on the illusion that it is possible to promote competition in the natural monopoly market. The narrow focus on competition and pricing has resulted in Ofwat largely ignoring other important issues such as the environment and cost to taxpayers, as well as overlooking the risks associated with financial engineering. In 2007, for example, trustingly took the form that the capital structure of firms (and, as a result, their dividend payouts) “is mainly a matter of companies and markets”. Meanwhile, the CMA, which has been urged to do more to prevent private share buybacks, without powers explore these questions. Neither regulator was designed with the industry in mind, and now both have been outmaneuvered by his tricks.
Solving these problems requires changes from above. There are two main options for improving the system that has collapsed in England: give regulators the power to restrict financial engineering and keep companies that load firms with debt out of this market, or nationalize the water supply system. The government seems unwilling to do either.