Nothing is more important than clean water, but British water companies are a disaster. 3.1 billion cubic metres of untreated sewage was released into rivers in 2020, according to Greenpeace. 20% of water is lost through leaks, according to Thames Water. Water bills in Britain are some of the most expensive in the developed world, behind only Germany and Denmark. The customer service is non-existent. Water companies will continue to get worse, and the public will suffer as a result. As reports of water companies doctoring figures on pollution begins to filter into the mainstream news, we will take a short look at the snowballing catastrophe that is our water infrastructure in Britain.
In 1989, public control of water infrastructure was handed over from ten regional water authorities to ten private companies. This was called the Water Act, and it in effect created a new form of public/private partnership called a regional monopoly. What this means is although these 10 companies were technically privately owned by investors, they would never face any competition in their regions and they would receive great deals of government subsidies. In this sense, the water companies were never really “privatised”. They never faced the pressures of the free market, they never had to really invest in water companies, they never faced competition, and it shows.
The Public/Private Frankenstein.
The difference between a public/private partnership and a fully free market company can be seen everywhere. You needn’t stray far from the topic to see; look at packaged water for example. In any shop, you have a wide variety of bottled water to choose from. Since you have a varying set of demands from a varying set of consumers, you have a varying selection to choose from. You have everything from the most economically priced water for a few dozen pennies, through premium economy for a pound, ending at the most expensive options for a few pounds. The cheapest may be simply municipally produced water like out of a tap, and the most expensive may come in more expensive packaging and contain more treated water, possibly with some added value in minerals or vitamins. This is what a free market produces; a range of products to match the desires of individuals, working for everyone’s wants and needs at all times.
Public organisations, including public/private partnerships of different types, are the opposite in most of these areas. The quality is low, and the cost is high. The train network is a great example of how public/private partnerships work, or rather, don’t. The trains are more unreliable than they should be, and they’re extremely expensive. Train networks, although technically run by private businesses, are told where to go, how to run, and what schedule to adhere to by the government. The government also builds and maintains all of the rail networks, in effect subsidising those train companies. Another example is the Covid “bounce back” loan scheme, offering up to £50k per company with extremely good loan terms. The government promised to back the loans, and thus all of the banks were effectively lending out money in partnership with their new in-house guarantors. No thorough checks were conducted, and mega billions were loaned out, resulting in the most colossal amount of fraud ever perpetrated in British history. Public/private partnerships are frankensteins, and rarely work as incentives are never properly aligned.
This is the problem with public/private partnerships. All of the incentives are aligned incorrectly; the private element of the company provides the service but takes as much out of it as they can, knowing they have no competition, and the public element is essentially an unlimited investment bankroll that subsidises profits. There are no innovations, no improvements, no free market price reductions, no choices, no opportunities for other players to enter the market with new ideas. The country loses so much to this awful system.
Good Profits, Bad Service, and the Ugly Environment.
People are broadly aware that there have been some problems with raw sewage being dumped into our lakes and rivers. It’s a news item that pops up every now and again. But very recently a scandal has begun to circulate indicating that this was significantly worse than we ever knew. In August of this year, a law firm announced that it is bringing £1bn in class actions against 6 water companies on behalf of millions of customers. They allege that the water companies have been under-reporting the amount of sewage they discharge into rivers and the sea. The underreporting ensured profits remained much higher than they should have been. It means the environmental disaster has been significantly worse than we’ve ever been aware about. This is the nature of the private/public frankenstein; corners are cut, allowances are given for damages, and yet those allowances are overstepped and underreported. Ofwat, the industry regulator, actually gives an allowance of untreated sewage dumping to the water monopolies. It means that this very cheap and accessible way to cut corners and save money will be used to the max, and more if they can get away with it.
Through leaks and inefficiency, 24% of clean water is lost through leakage according to the Environment Agency (EA). This is due, again, to underinvestment from the public/private frankenstein’s that are water companies. There is no real need to protect the resource or the revenue generated because it’s forever guaranteed with no competition. Most of the UK’s infrastructure is old and outdated, and in dire need of some free market TLC to get up to scratch. Maintenance is equally bad, contributing to the colossal quarter of wastage these companies experience. The incentives are not aligned to ensure that companies are working hard to reduce waste and improve quality. What’s worse is the fact that leaking pipes work both ways; clean water can easily become contaminated by outside pollutants in a way that we would never be able to detect for a long time. Without exposure to competition and the free market, the companies have no financial incentive to improve their maintenance or their infrastructure, and the customer suffers for it.
One shocker for most people will be the fact that Britain pays amongst the highest water bills in the whole world. Water monopolies, shielded from the pressures of market competition, have been able to raise prices and maintain inefficient practices, ultimately burdening consumers with higher water bills. By handing over control of the water supply to a small number of companies and guaranteeing their monopoly control, the government has essentially created a market structure that is resistant to competition. At an average of £410 annually, we are paying double the price that French and German markets are paying. Ofwat, a government bureaucracy, sets the prices for everything, that’s despite the mountains of international historical evidence that suggests centrally controlled price structures fundamentally do not work. Ofwat tries to balance consumer wants and needs with profitability in an opaque manner, and it results in high prices and extremely high investment returns for private investors.
Speaking of profits, this leads onto a key problem; money is fungible. That means, for example, if you were given £100 to buy only beer, it means you can take the £100 you were going to use to buy beer and go buy vodka instead. For context, the government is investing £65bn in water infrastructure in an attempt to improve water quality, reduce environmental damage, and upgrade the infrastructure. This is taxpayer money that is being used to subsidise what water companies should really be spending money on. Your money, taxed out of your salaries, inheritances, and spending, essentially is being used to subsidise private companies that make huge returns on investment. Money that would have been spent on infrastructure is instead going to be returned to investors in new dividend payments and absurd salaries.
That leads onto the profitability of water companies for investors. To start, investing money into any of the 10 water companies is an extremely lucrative proposition. Dividend yields average 4.5%, higher than the average of the highest performing businesses on the FTSE 100. Dividend yields are payments made to investors out of profits. The amount of profit generated from the entire revenue of a water business is on average 10.9% per year, which again beats the strongest performing businesses in the world which operate typically at 7.2%. Anglian Water has been the most profitable, on average operating with 20% profit margins. In plain English terms, it means the water companies are extremely lucrative, even compared to other lucrative businesses. This may suggest that there is likely to be too much money being made, especially when you consider how bad the environmental damage is, how inefficient the system is, and how high the bills are. The kicker; the executive suite of each water company also earns absurd quantities of money. In 2022, on average, a pay packet for a director of one of these monopolies was £810,000. This includes hundreds of thousands in bonuses, though for what performance, it’s not clear. In a vacuum, high salaries aren’t necessarily a bad thing; water infrastructure is highly complex and demands extremely talented leaders that manage colossal responsibilities. However, with the context that these are a) monopolies, b) backed by huge government investment, c) extremely low quality and d) catastrophically damaging to the environment, then in this instance, it’s shameful to see these directors earn so much money.
Chile: The Privatised Water Market Success.
Chile is an extremely interesting example of a free market, fully privatised water infrastructure success. It is one of the most efficient and successful in the world, and has come out of left field in a continent that seems to constantly obsess over socialism and state controlled business. Ditching the state controlled model in the early 1990s has led to incredible results, and is a testament to what happens when businesses are free to compete and provide in a free market.
Moving to privatisation spurred a surge in efficiency and innovation, leading to improved service, reduced costs, and a more responsible approach to consumer needs. Water treatment plants have undergone modernisation far ahead of even a lot of the developed world, and water distribution networks have been expanded. Alongside this, water quality has improved, with new treatment methods that are less wasteful and more efficient. The benefits are not only there for Chileans in general, but sets the country up as a shining beacon for all other nations to learn from. Should privatisation occur in other countries like Britain for example (real privatisation), there likely would be some knowledge and expertise coming out of Chile to help kick-start our recovery from the public/private frankenstein model.
Instead of heavy handed, government involved, bureaucratic nightmares controlling water markets, Chile strikes a careful balance between regulation and market forces. The water companies operate mostly in autonomy, and the government maintains a few mechanisms such as an ombudsman and some environmental regulations. It should be noted there is also a maximum price cap, but considering the bills are around ¢60 per cubic metre, and the cap was $1.40 per cubic metre, it essentially doesn’t really do anything. It may be an issue in one area, as most of the north of the country is the hostile wasteland that is the Atacama Desert, an area where it would be very expensive to pump water to. Besides this, for the near majority of the population that don’t live in the Atacama Desert, water is extremely cheap and extremely high quality.
The end results are more people have more access to higher quality and more reliable water at a cheaper price. Welcome to the free market. Waste will break you, and innovation will make you.
What have we learned?
The public/private frankenstein is an ugly machine. It robs us of so much that we cannot see right now. With its government enforced monopoly, we lose so much. What innovations have we missed out on because of state control? How much wealth is pointlessly lost overpaying for expensive water? How much waste could we prevent with better maintenance? How many pollutants can we remove from the water supply if the water suppliers were incentivised to provide a high quality service? What new ways of working do we lose through this semi-socialist state controlled water system?
Water should be open to the free market. People should be allowed to make choices. And where people are allowed to make choices, typically, the free market has provided immeasurable benefits. With incentives aligned to providing better quality at lower prices, we could have so much more. We could have more choice, more availability, less waste, smaller and more reasonable investor profits, more innovations, smaller prices, fewer pollutants, just to name a few things. Do you want your water triple mega filtered special? There’s a supplier for it. Could there be demand for water that is blessed? You got it. Would some particularly bourgeois consumers get all of their water from mountains in Fiji? Sure, and they’ll pay for it. Would most people go with one or two top providers that are extremely competitive on price and quality? Absolutely.
The cherry on top; would you be willing to continue using a water provider that dumped raw sewage into your rivers? I certainly wouldn’t, and the profit incentive would ensure that the water suppliers invest money in the right ways to prevent it from happening.