A warning: Water privatisation in England and Wales
To see what would be the consequences of
the privatisation of the Water Service we need look no further than England
and Wales. In 1989 the water and sewage systems in these two countries
were privatised. At the time it was billed as the jewel in the crown
of the Thatcher Governmet’s privatisation programme. Even in terms of the
privatisation of utilities it was unprecedented. In other countries
where the water industry had been privatised, it involved concessions or
leases under which the private contractor collects all the revenues for
a water service, carries the cost of operating and maintaining it, and
keeps the surplus as a profit. Britain is unique in having transferred
its water and sewage system completely into the private sector.(1)
(a) Privatisation of the water industry
Plans for the privatisation of the water industry in England and Wales were first advanced by the Thatcher Government in 1984, but were abandoned after a public outcry against it. However, they were resurrected soon after the 1987 General Election.(2) In 1989, the ten unitary regional water authorities (RWAs) in England and Wales were privatised. Created in 1974, the RWAs each covered a river basin area and had responsibility for water quality, water supply and sanitation throughout the area.(3) The Water Act 1988 transformed these into private companies and sold them off. These new companies became owners of the entire water system and properties of the RWAs. The Act gave them exclusive 25-year concessions for sanitation and water supply, protecting them against any possibility of competition. This created private monopolies. The Government took a number of steps to boost the profitability of these companies. It wrote off the all the debts of the water companies before privatisation, worth over £5 billion. In addition, they were given a ‘green dowry’ of £1.6 billion. The government also offered the companies for sale at a substantial discount, 22 per cent less than their market value.(4) A very generous pricing regime was established, and the companies were given special exemption from paying taxes on profits.(5) They had a virtual licence to print money, which of course has been exploited to the full. The abuses are so blatant that even the Tory supporting Daily Mail has denounced water privatisation as the “greatest act of licensed robbery in our history.”(6)
Below we examine what has happened in the
years following privatisation.
The most noticeable impact of privatisation for the public has been the dramatic increase in prices. On average, prices rose by over 50 per cent in the first 4 years. The first 9 years produced an increase of 46 per cent in real terms, adjusted for inflation.(7) Over the next five years, up to 2009, average water bills will rise by 18 per cent.(8) Such sharp rises have hit households hard with one in five being in debt to their water company.(9)
When the water bill is broken down into its components, operating profits, which have more than doubled since privatisation, account for almost the entire increase.(10) There has been a direct relationship between higher profits and increasing water bills. Pre-tax profits doubled in the first year of privatisation, and rose by 142 per cent in real terms over eight years.(11) Between 1990/91 and 1997/98 the pre-tax profits of the ten sewerage and water companies rose by 147 per cent with sewerage and water prices rising respectively by 42 and 36 per cent.(12) In 1996, customers of the ten regional water and sewerage companies paid up to £93 each towards shareholder dividends. Of North West Water's average bill of £222, £93, or 42 per cent, went towards shareholders dividends. In the South West region, customers paid an average of £77 (29%) towards dividends, and Severn Trent and Wessex Water customers paid £60 (25%) in their bills towards dividends.(13) Although a Conservative Government put this regime in place, the profiteering by the water companies has continued apace under New Labour. In October 2003, the Commons Select Committee on Environment, Food and Rural Affairs heard that, "Whilst operating profits and dividends (in the water industry) are down from the 1990s, dividends are still showing growth and the sector outperformed the Financial Times All Share Index by 58 per cent in the last two years."(14) In Britain profit margins are typically three or even four times as great as the margins of water companies in France, Spain, Sweden, or Hungary.
One method the water companies have used to increase prices and boost profits is to exaggerate the level of investment required to maintain their network. Forecasts for capital expenditure are consistently higher than actual expenditure, leaving a capital surplus that can be added to profits. Prior to privatisation the level of capital investment in the water industry had been accelerating, and rose to a peak in 1991-92. The forecasts for future investment by the water companies, which supposedly determined prices, were based on it continuing at the same rate. What actually happened was that the level of capital investment levelled off and even fell.(15) A number of companies deliberately cut their investment programmes and used the savings to maintain or increase their profits. One example of this was Southern Water submitting plans for a series of sewage treatment plants that were not installed.(16) Another example was Yorkshire Water expecting to avoid £50m expenditure on sewage treatment because the Conservative Government promised to redefine coastal waters near the city of Hull as sea, where untreated sewage could be dumped, instead of estuary, where sewage would have to have been treated.(17)
One of the motives for water companies
in accumulating capital was to enable them to expand internationally and
into other sectors. They used the capital from the water industry
to secure the loans that would finance expansion. However, most of
these ventures have been unsuccessful, and left the water companies heavily
One of the ideological claims of privatisation is that it produces competition. However, as we have shown, the water companies created in 1989 were private monopolies. Since then the water industry has become even more monopolised with an increasing concentration of ownership.
Initially the ten water and sewage companies were protected from takeover for five years by the government’s ‘golden share’. However, the fourteen smaller water only companies were the subject of takeovers straight away. All of them are now owned by multinationals, mainly the three French groups Vivendi, SAUR, and Suez-Lyonnaise. Half of the water and sewerage companies have also been purchased by multinational companies. Two are now owned by US companies, one by a French company, and one by a Scottish company. The largest, Thames Water, has been purchased by a German company RWE. All but one of these takeovers has been by energy companies’ whishing to expand into water.(18)
Privatisation has also witnessed a massive
increase in the fees, salaries and bonuses the directors of the water companies
have awarded themselves. In a 7-year period the real value of the
highest paid director’s pay increased by between 50 per cent and 200 per
cent in most of them.(19)
(b) The impact of privatisation
If water privatisation has been a bonanza for business, the corollary is that it has been a disaster for users, the environment, and those employed in the industry.
The people to feel the most immediate impact of the privatisation of water industry have been the workers. They have seen their conditions steadily eroded through redundancies. Since 1900, the workforce has fallen by 8,599 or 21.5 per cent.(20)
Disconnections and Public Health
Privatisation also saw a sharp rise in the number of households being disconnected. The rate tripled in the first 5 years, with 18,636 households disconnected in 1994.(21) A consequence of this was a marked deterioration in the health of the poorest households and public health in general. In 1992 there was a rise in the number of cases of dysentery reported, in all major conurbations other than London.(22) A 1996 study by Save the Children found that on average low-income families were spending 4 per cent of their weekly budget on water. This study also detailed the health compromising measures families took to conserve water, and the correlation between water disconnections and rising dysentery rates.(23)
One of the claims of privatisation was that it would lead to more investment and improving services. However, as we shown above, the water companies, in order to boost profitability, have kept investment at a minimum level. Taken with the reduction in staff numbers this led to a deterioration of services in many areas of the water industry.
Inadequate investment has led to worsening conditions in water mains. Between 1993 and 1998 water mains categorised as being in “poor condition” increased from 9 per cent to 11 per cent. This equated to £0.78bn worth of pipes moving into this category.(24) In 1998 an academic study concluded that the underground network was “deteriorating faster than it is being renovated.”(25)
A consequence of the companies’ failure to maintain the network is that there has been no improvement in water quality. A review of the Drinking water Inspectorate (DWI) reports in 1998 concluded that there were weaknesses in companies’ performance and in the ability of the DWI to enforce standards by taking action. On five key parameters: nitrate, iron, lead, PAH and other pesticides, less than 80 per cent of zones complied. The number of ‘serious incidents’ did not decline in the first six years of privatisation.(26) In March 1997 there was a serious outbreak of cryptosporidiosis in North London, during which people were poisoned.(27)
The failings of the privatisation were
demonstrated most graphically during the drought of 1995. While a
drought puts pressure on any service, the actions of the privatised water
companies made its affects much worse. Because they had chosen to
under-invest, in order to maintain dividends, water shortages, particularly
in Yorkshire, were more acute. In a report the following year OFWAT
suggested that Yorkshire Water’s failures to ensure a reliable and continuous
supply, as well as to control leakage and flooding from sewers, was directly
related to the company’s dividend policy.(28) So acute was
the water shortage in Yorkshire the company had to hire fleets of trucks
to collect water from the reservoirs of a neighbouring authority on a daily
basis. Even at Christmas, long after the drought had ended, some
consumers in the town of Halifax still had to collect water from standpipes.
The other factor in acerbating the drought was the level of public cynicism towards water companies. As a result appeals for water conservation went unheeded. People were less willing to make sacrifices when they believed they were being exploited. This contrasted with the previous drought in Britain in 1976, when the public responded to appeals from the publicly owned water authorities for restraint, and consumption fell by about 25 per cent.(29)
Environment and pollution
The privatisation of the water industry has also had a negative affect on the environment. Water companies are responsible for 1 in 5 pollution incidents.(30) In a list published by the Environment Agency in 1998, the subsidiaries of Vivendi, Suez-Lyonnaise and Enron were ranked as the second, third and fourth worst polluters in Britain. Offenders are classified according to the fines levied by the courts. However, these fines are extremely lenient given the wealth of these companies. Wessex Water, Enron's UK water subsidiary, had to face an overall £36,500 fine in 1998. It was fined only £5,000 with £500 costs for discharging 1m gallons of raw sewage into a Dorset marina on August bank holiday!
All water companies are serial breakers
of environmental laws, and as profits, dividends and bills go up, so do
the pollution incidents. Between 1997 and 1998 all ten water companies
were been found guilty of offences by the courts. In 1998, the Environment
Agency successfully prosecuted eight out of the ten water and sewerage
companies in England and Wales for a total of 22 water pollution offences.(31)
In Britain the consequences of water privatisation have been wholly regressive.
There has been a massive transfer of wealth from labour to business through mass redundancies amongst water industry workers and increasing bills for users.
The burden of paying for water has been
shifted onto the poorest households.
The water industry is no longer run as
a public service but as a business whose sole priority is to maximise profits.
1 David Hall - “Water in Public Hands” PSIRU, June 2001
2 ”Thirsty for profit” Issue 276 of Socialist Review July/August 2003
3 Emanuele Lobina & David Hall – “UK Water privatisation – a briefing”, February 2001
4 Jenkinson, T. & Mayer, C. (1994) The Costs of Privatization in the UK and France, in Bishop, M., Kay, J. & Mayer, C. (eds.) Privatization & Economic Performance, New York, Oxford University Press, p.294
5 Colin Green - “The lessons from the privatisation of the wastewater and water industry in England and Wales”, December 2000
6 Daily Mail 11/07/94
7 OFWAT Memorandum 18 March 1998, in House of Commons Research paper 98/117 December 1998
8 “Water bills facing steep increase” BBC News Online, 02/12/04
9 “Warning over water charges” BBC News Online, 12/06/04
10 OFWAT 1999: Draft determinations - Future water and sewerage charges 2000–05
11 House of Commons Select Committee on the Environment Seventh Report 199-200: Water Prices and the Environment HC 597 14 November 2000 (HOCSCE7)
12 Colin Green - “The lessons from the privatisation of the wastewater and water industry in England and Wales”, December 2000
13 WaterWatch - Water company dividends - WaterWatch says customers paying too much for privilege of private water companies, WaterWatch August 1997
14 Eamonn McCann - “Are we drowning in sea of GoCO double speak?” Belfast Telegraph. 12/08/04
15 Jean Shaoul - Water Clean Up and Transparency: The Accountability of the Regulatory Process in the Water Industry, A Public Interest Report, Dept of Accounting and Finance, Manchester University, 1998. p.19)
16 BBC Water Week March 1998
17 Shaoul, 1998, p. 20
18 Lobina & Hall, 2001
19 House of Commons Select Committee on the Environment Seventh Report 1999-200: Water Prices and the Environment HC 597 14 November 2000 (HOCSCE7)
20 David Hall and Emanuele Lobina - Public Sector Alternatives To Water Supply And Sewerage Privatisation: Case Studies in International Journal of Water Resources Development, Vol 16, No.1, 35-55, 2000
21 “Domestic disconnections for non-payment of bills - England and Wales” from 1989/90 to 1997/98 (DisconnectionReport9899.pdf, p. 54)
22 House of Commons Official Report, 10 December 1993 ; Vol. 234, c. 395.
23 “Water tight – the impact of metering on low-income families” Save the Children, 1996
25 Shaoul, 1998, pp. 33-34
26 Ibid. p. 27
27 Lobina & Hall, 2001
28 “UK’s Ofwat says Yorkshire Water dividend policy “should not impair” business”, AFX News: 20 Jun 1996
29 Green, 2000
31 Environment Agency, 1998