Case studies

Water Solutions

Case 13: Retaking Public Control of a Large Water Utility: Yorkshire Water and Welsh Water

Introduction

In June 2000, Yorkshire Water (a private company created in 1989 at the time of the privatization of the English and Welsh water supply industry) unveiled plans to mutualize its business through creating a non-profit “community mutual.” Consumers would own the assets, and the operation and maintenance of the water supply system would remain the responsibility of a new private management company. Customers, promised Yorkshire Water press releases, would benefit from mutualization. New, cheaper financing could be found that would permit increased investment or reductions in bills. The conflict between the shareholder and customer interest would be eliminated, claimed the company. ********* The news made headlines: “Has privatization gone full circle?” The query began to seem less farfetched in the months that followed after plans were unveiled plans to mutualize the water business. One English water company made a formal proposal to mutualize (reorganize so that the majority of common stock is owned by customers or employees); others advertised their assets for sale, and still others proposed a radical refinancing of their core businesses, withdrawing from equity markets on which the public water companies had been floated just over a decade before. Water pump. Photo credit: UnculturedProposals to return water supply infrastructure to public control through the “mutual” model have attracted a great deal of interest, given the influential British model of water supply privatization, and the rapid growth of privatization and private sector participation in water supply around the world in the past decade. Some analyses have depicted the restructuring proposals as a “retreat” from privatization, and as a re-assertion of the Commons, or the community, over the “commodity” property relation. In fact, many of these proposals – like that of Yorkshire Water - were thinly veiled attempts by the private water companies to sell their unprofitable assets back to customers – at a loss. One of the main reasons that private companies had begun to falter were tighter regulations applied by the Labour government after its election in 1997. Because the assets being sold to the customers were unprofitable, they were rejected by the industry’s economic regulator, Ofwat. Concerned by the growth in water poverty and high prices while share prices, dividends and CEO remunerations were soaring, Ofwat announced a reduction in the prices companies were allowed to charge to consumers. After a decade of outperforming the stock market, water company share prices abruptly fell, by roughly 50 per cent. One proposal that did meet with the approval of the economic regulator was the conversion of Welsh Water into a not-for-profit company, owned by its members and limited by guarantee (a conventional form for charities in Britain). With four million customers, Welsh Water (now Glas Cymru) is one of the biggest water suppliers in the world, and it provides a significant example of how a not-for-profit model might work on a large scale. Some important facts about the Welsh Water/Glas Cymru example illustrate this:
  • It was formed through the sale of securities to a new company to solicit investment, rather than through the “mutualization” method.
  • It is wholly financed by debt, which is a cheaper source of finance than equity. This significantly lowered consumers’ bills, and created a surplus that could be invested in the network and in environmental protection, used to build financial reserves or returned to customers.
  • The governance structure is designed to encourage participation: the members of Glas Cymru, who have no financial interest in the company and do not receive dividends, represent a cross-section of the Welsh community.
  • The assets were sold at a reasonable price back to the public.
  • The new company had broad-based democratic support approval of the Welsh Assembly.
A final lesson to draw from this case is the failure of a key justification for the British model of water supply privatization. Supporters of privatization argue that sourcing investment from equity, although more expensive than government debt, creates pressure on managers to make efficiency gains that offset the increased cost of capital. By the late 1990s, most of the privatized British water supply companies had moved away from equity finance, arguing that debt finance was significantly cheaper. This brought into question one of the key justifications for privatization: that equity markets, because of the scrutiny to which they subject managers, are preferred sources of finance. If debt finance is preferable, then the possibility of government- or community-owned water supply utilities logically becomes the preferred option. The British model of water privatization – in the mode originally envisioned by the Thatcher government – has failed on its own terms.

Questions

  • What are the most effective ways to strategize and act to “reclaim” public water utilities that have been privatized?
  • What kinds of relationships should be created or nurtured with political parties and authorities towards these goals?

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