In this article the City Editor of the FT, no less, says that Labour is right “Britain’s private utility model is broken.”
Here is a riddle that is not so difficult to unpick. Between their privatisation in 1989 and last year, English water companies were permitted by their regulator to generate operating cash flows totalling £159bn in 2017-18 money; easily more than the £123bn they spent on fixed assets such as new pipes and infrastructure. Yet at the end of this same period they had somehow built up £51bn in debt (from zero at privatisation); a staggering sum that customers will have to service and pay off over many years. How come? ….
Dividends are usually seen as a return for equity investors bearing risk, but the risk in these natural monopolies was minimal. Not only do customers have to buy the product; the regulator also has a duty not simply to set prices to protect the public but also to ensure the businesses are financeable. That in turn is why they were able to borrow so much. Indeed this created a vicious spiral that sucked in financial engineers whose main objective was draining value from these firms. Now few would argue that private owners should be able to extract such outsize returns from private monopolies.
So here we are: Natural Monopolies are just that, and should be owned by us all – not treated as nice, little – in fact enormous – earners by their owners.
The editor goes on to suggest the subcontracting principle – get these same companies to contract to undertake various aspects of water provision for a contracted time and get all of the current operators to compete. This is to get around ‘shareholder capture’ and ‘union capture’.
But this is really the Transport for London (TfL) model. Buses are run by PLCs and on the basis of the lowest quote for the TfL prescribed route (of course, outside London, there are precious few bus companies remaining under municipal ownership, able to prescribe anything) and we get a bus service (here we have to emphasise the word service)! There is still a lack of a service ethic because ownership is in the bus owners’ shareholders.
Service, I think we can conclude, lies either in very small companies – perhaps a dozen employees or less – where delivery has of its nature to be co-operative. Or it has to be based on a joint ownership company, where everyone has an implicit interest in delivery.
The trouble with the TfL model is that there is no real and obvious ownership – and it still remains unnecessarily complex (compare, for example, Network Rail).
So whilst it is admirable that the City Editor of the FT realises there is a problem I’m not sure he has entirely and properly understood what it actually is.
We currently have shareholder and banking capture on a major scale and surely ownership is the key to altering this.
Indeed Labour thinking seems, in their supportive Common Wealth think tank, to be well on the way to agreeing that ownership is of fundamental importance.
State owned ‘top down’ is all very well but mutuality is really of the essence.