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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”.

2 comments to Water rip-off

  • A Thorpe

    There are two main issues here. The first is how to deal with the Thames Water bankruptcy. Rees-Mogg had the answer when he discussed it recently and I agree with him. The company must go bankrupt and the shareholders must get nothing. The assets are still there and they can be bought by other companies. We must stop bailing out private companies but the problem is they now operate with the knowledge that they will be bailed out. The banks take risks with our money that is unacceptable. Going back in time the taxpayers funded other private industries and nationalised industries only to see them fail. The government is apparently thinking of selling more NatWest shares but at a fraction of the price they paid. I saw a good description of this a while ago, it is privatisation of profit and socialisation of losses. When has any government declared this to be their policy in any manifesto? The governments are the problem and they are controlled by business, not us.

    The second part under your regulator section is more difficult. I saw a view recently which was not discussed in detail but it said that companies are no longer making enough profit compared to the past. Companies, especially our service industries, have in invest to meet increasing demand and update ageing equipment and that needs money. The power industry is slowly destroying itself because of government climate policies and the water industries don’t seem to be investing in new reservoirs. I have some sympathy over leaks because most seem to be small and difficult to find and which expensive to repair. Then of course people complain when the roads are closed for repairs. Rees-Mogg also said many of the problems the water companies have go back to the nationalised companies failing to invest and I can believe that.

    There is a fundamental issue in my view that comes from the nationalisation after the war and the welfare state. Many people still do not have a water meter. The welfare state distorts all our economic decisions. There is now a proposal to tax frequent fliers to limit climate damages. A ridiculous idea since it doesn’t seem to reduce flights. But this is tied to the state support that many people have. They are living off the efforts of other people. We should end welfare and support ourselves. Because of welfare people prioritise holidays and entertainment over health and it distorts the wage structure because it does not relate to enabling families to provide the basic requirements of life. This is why the country is in chaos and it importantly increases the government control over us.

  • JStuart Worthington

    A Thorpe,

    So eloquently put, thank you.

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