H3O: The public ownership debate

Celebrating 30 years in a marriage traditionally means someone gets a nice pearl. Will there be such a gift for the water sector?In the last day of Utility Week’s H3O series, we examine what renationalisation could mean for the sector and why it got to this position after the gains made by privatisation.

Labour has unveiled its long-awaited manifesto with a call to “end the great privatisation rip-off”. It confirmed that the water industry is one of the “natural monopolies” the party intends to back into public hands if it wins the election.

In the last day of Utility Week’s H3O series, we examine what renationalisation could mean for the sector and why it got to this position after the gains made by privatisation.

“Going back to a nationalised system would be a disaster.”

The view from Colin Skellett at Wessex Water is a straight opinion at a time of uncertainty. Having worked at Wessex Water since its formation and been the chief executive since 1988, Skellett has seen the evolution of privatisation. He explains because of constant need for high levels of investment, the sector has worked best post-privatisation “without a doubt”.

Maintaining resilience and upgrading infrastructure across existing networks as well as investing to protect against the impacts of climate change needs cash. “The sector needs constant investment and that will never come from the public sector because it never has. There are too many other demands on the public purse.”

Public discontent

Despite concerns expressed by the companies themselves that progress and innovation would be halted if investment was pulled, there is a sense of humility shown to recognise and address underlying grievances.

A recent survey commissioned by Utility Week showed significant levels of dissatisfaction with the current ownership model. Just under a quarter of respondents said they are happy with the current ownership model while a quarter said they believe government would be better suited to provide the water and energy services. A third of respondents expressed their preference for a model in which utilities are at least part-owned by local government and profits are reinvested into communities.

Another industry veteran Chris Loughlin, chief executive at South West Water, says he’s been surprised by public reaction: “I thought when the Labour party suggested state ownership people would say “crikey, don’t you remember how bad it was?” I thought there would be age polarisation, but it didn’t come out like that.”

He believes the support taps into feelings that big businesses don’t always support local communities. South West Water and its parent company Pennon Group focused on addressing this feeling when building business plans.

Anglian’s chief executive has been with the company since 1989 and witnessed the changes privatisation brought. Peter Simpson thinks the public mood towards nationalisation is linked to failures around pollution and a perception that companies have earned high returns. “Irrespective of whether I agree or not, the perception is there and that’s stuck,” Simpson says.

“A lot of people don’t remember or understand what it was like when companies were state owned. So, when they’re presented with privatisation it’s like yeah, why not try it!” Simpson is however cautious not to disregard the underlying grievances of the public. “We’ve done lots of benchmarking against companies that are state owned and English water companies can hold their heads up. but that’s not to say you could or should ignore the concerns and what’s behind the call for re-nationalisation.”

Another way

Labour is remaining vague on details for its plans and the timescale it could happen in, but one voice shouting from every rooftop is the passionate campaign group to bring public services back into public ownership.

We Own It believes public sector services should not make a profit for private companies – this umbrella includes utilities, telecoms, rail and transport, libraries, education and health care services.

In response to the claims across the board that investment will continually be needed to maintain assets and guarantee services, the group suggests funding from bills would be sufficient to cover the costs of the sector, it is after all a profitable business. The group’s argument is that central funding simply wouldn’t be necessary.

Ellen Lees, who heads up the campaign for water, points out the improvements the sector has made under privatisation have been at the demand of industry regulators and directives from the EU. She says these gains were not done out of a sense of good will or wanting to do the right thing: “they are doing it because they are told to.”

She argues too much money from customers’ bills is spent on paying off the interest on debt accumulated by the companies. “This is all money we could save if nationalised,” Lees says.

“Companies charge customers extra money every year to pay the interest on debts that only exist to pay their shareholders. They call themselves a successful industry, but they’re only make profit because they are borrowing so much.”

Lees says Ofwat has not acted in customers’ best interests to prevent companies getting away with “a complete scam” of accumulating debts.

“We can’t really rely on Ofwat to make sure the industry works. It will respond to a serious threat – or opportunity – of nationalisation but it doesn’t act in the interest of customers in the way that a regulator should do. In the past 30 years it has failed to represent service users’ interests.”

Lees also feels public ownership would boost perceptions of fairness, a point repeated as an underlying argument for renationalisation.

“If you knew all the money you are paying to your bill was going into improving the service and not paying ridiculous amounts of interest and dividends for shareholders in far-flung places, you’d absolutely feel more satisfied with the service.

“Trust is a funny one with water. As long as water is coming out the tap, companies are doing their job and you can trust that will happen, but sometimes companies use that to inflate their own success. But if you break it down to specific questions like ‘do you trust your water company to pay appropriate tax’ then Scottish Water fared better than the English water companies.”

The position that bills would cover the level of investment needed across the sector to maintain infrastructure as well as building new assets is rejected by Southern Water’s Ian McAulay. He says: “We are doing long-lived infrastructure, multi generation infrastructure. Bills simply do not fund all the investment.”

McAulay simultaneously recognises the importance of not trying to simply silence such a view point.

“The challenge isn’t for us to dispute that but for them to provide evidence that supports that. We should have these types of debates, it’s important, but must be done with facts, evidence and science and taking the holistic picture into account as well,” he explains.

Addressing the underlying issues

Regardless of whether or not a Labour government is elected and then how or when the water sector would be brought back into public ownership, it would be folly to disregard public mood. The same arguments could continue to raise their head any time a company puts a toe wrong.

A senior industry source points out to Utility Week that customer focus should always remain: “Whoever owns the assets the important thing is addressing the issue of fairness in bills and continued investment. We need to improve customers’ perception of fairness but also to maintain the investment, there’s still a lot of investment needed to maintain what’s already there but also to improve resilience and protect the environment. Customers view those things as very important. We wouldn’t want to go back to starving the industry of investment because that isn’t what customers want.”

With the future remaining murky for now is there another way to shake the industry up, maintain current levels of innovation and ensure sufficient investment in assets and infrastructure both now and for the future?

Skellett believes customers would benefit from a different approach. He says: “If you look at the facts for what the industry needs, renationalisation is not the answer. We need real competition. We have vertically integrated monopolies and they don’t need to be. We can break those down and bring more competition in. we must keep pushing at the competitive agenda and we need to keep pushing innovation and new agendas.”