Water rip-off

Thursday-Friday blog

There seems to be a lot of excitement in the media about water companies at the moment. One issue is the huge amounts of effluent they pour into our rivers and seas while paying their chief executives millions in salaries and bonuses. And then we have Thames Water effectively blackmailing the government by claiming they will go bankrupt unless they can raise water bills by 40%, pay lower fines for breaches and keep paying out dividends as part of efforts to avert a taxpayer bailout. While many of our fearless journalists have leapt on the story, I for one have not been surprised.

Here’s what has been happening to our water industry since privatisation in 1989:

• When the water companies were privatised most had little to no debt
• Most water companies were bought by foreign water companies, financial manipulators and foreign pension funds
• Given that water companies have captive customers and a guaranteed income stream every year, the new owners were able to borrow vast amounts of money to pay themselves huge dividends knowing that they could service the ever-increasing debt costs from their guaranteed income and from constantly increasing the prices we have to pay
• Most water companies now have debts of 60% to 80% of their value meaning they have enormous interest bills to pay each year leaving little to no money to be invested in improving Britain’s crumbling water network
• Some water company owners even set up companies in offshore tax havens and then used these offshore companies to lend their water companies billions at exhorbitant rates of interest. This allowed the owners to ‘double dip’ – they gave themselves huge dividends from the money they borrowed from their offshore companies and made vast taxfree sums from the extortionate interest they paid to their own offshore companies
• The whole sorry episode has been a massive rip-off of British customers while the useless excuse of a regulator, Ofwat, has done the square root of zero to control this multi-billion-pound fleecing of the British public.

And in case, you’re wondering why I’m even commenting on this, the reason is that I warned of the utter chaos in the water industry 16 years ago in my 2008 book SQUANDERED: How Gordon Brown is wasting over one trillion pounds of our money.

Here’s just a small part of what I wrote at the time in a chapter titled ‘Regulators without regulation’:

• Some of the water companies regularly make profits of 30% to 40% on their UK operations while the same companies only make profits of 5% to 10% in other countries, especially in their home territories
• Ofwat also claims: “We monitor the level of water that leaks from each company’s network and take action where leakage is unsatisfactory”. About a quarter of the water that is purified for our use is lost due to leakage – 894 million litres a day – equivalent to each household having another 3 full baths a day or flushing the toilet unnecessarily 30 times a day. Thames Water loses a third of its supply through leakage
• Thames Water announced another £30 million a year extra investment (to reduce leakage). This extra investment represented just 2% of Thames Water’s turnover. At the same time, Thames Water was allowed to raise its prices by 21% and a month later it announced it was going to improve profits even more by sacking a quarter of its 6,000 employees, which would give annual savings of about £45 million. One could have suspected that giving the boot to one in four of its staff might actually slow down the rate at which Thames Water could repair its leaking pipes. However, Ofwat doesn’t seem to have noticed this possibility. Anyway, Thames Water’s owners, RWE, hardly seemed to care – in that year the chairman earned £6.3 million in salary and bonuses and he could wash his hands of Thames and its leaky pipes as he was selling off the company for over £1 billion more than he paid for it
• Unfortunately for Ofwat, their performance was so utterly dismal that even the normally supine National Audit Office (NAO) could not help wondering what on earth, if anything, the water regulator had been up to for the previous 18 or so years. Following an unusually critical NAO report, Ofwat bosses had to appear before the Public Accounts Committee (PAC) in mid-2007 to justify their existence. When asked why they had not acted against Thames Water earlier, Ofwat’s chairman replied: “We have contemplated an enforcement order in every year since Thames first started failing”. This prompted the response from a member of the PAC: “We are not interested in contemplation, we are interested in action”.