Thames Water Utilities Limited, the UK’s largest water and wastewater services company, headquartered in Reading and serving 15 million customers across London and the Thames Valley (almost a quarter of the UK’s population), has run into a spot of financial bother, prompting the resignation with immediate effect on 27 June 2023 of Sarah Bentley, CEO since September 2020, and her replacement by two interim co-chief executives. According to media reports, Thames Water may have run up debts of over £14 billion and is seeking a shareholder bailout and “further equity funding”, failing which it may have to revert to temporary public ownership under a special administration regime. Thames Water is a typical example of a mammoth private British utility, enjoying monopoly status, whose majority non-British shareholders include a Canadian pension fund (Ontario Municipal Employees Retirement System) and sovereign wealth funds in China (China Investment Corporation) and Abu Dhabi (Infinity Investment subsidiary of Abu Dhabi Investment Authority), alongside the Universities Superannuation Scheme, which operates on home ground.
Even as the fate of Thames Water hangs in the balance, privatisation- in the context of the sale of publicly-owned enterprises to the private sector-has once again hit the headlines. Privatisation has been driven by the assumptions that the private sector uses resources more efficiently and manages finances more responsibly, as compared with the public sector. Proponents of privatisation also believe that wider share ownership creates a property-owning democracy, in which stakeholders (consumers, workers) hold equity (shares) in private sector enterprises and can add their voices to the way these organisations are run. Furthermore, the government reduces its costs by divesting responsibilities to a canny private sector, although some might argue that it actually loses revenues which can only encourage further taxation. The public sector, on the other hand, has been considered inefficient, overmanned, and bureaucratic, reliant on subsidies, and providing little incentive for workers and managers to embrace innovative practices and adopt new technology.
Privatisation under Margaret Thatcher began as ideological exercise, without much supporting economic theory. There was a paucity of past experience to be drawn upon, mass privatisation having started in Chile in 1974 after General Pinochet assumed power, under the influence of neoliberal economists trained at the University of Chicago. Drivers for change in Britain included stagflation, inefficient manufacturing sector, and restrictive trade union practices. The Hayekian ideal of small government was accompanied by an overwhelming desire to curb the powers of union bosses.
Thatcher’s mass privatisation programme reversed an earlier trend of corporate mergers and nationalisation of entire sectors of the economy, following the transition from a free-market economy into a centrally planned economy during the Second World War, when both demand and supply were controlled as part of the war effort. As part of a policy to distance the government from public sector provision of goods and services, state assets were sold off to private bidders during the 1980s and early 1990s.
Once privatisation commenced, there was to be no slowing down. North Sea oil was the first significant state-owned industry to be privatised, between 1982 and 1987. Then followed British Telecom (1984), British Gas (1986), British Airways (1987), British Airports Authority (1987), Rolls Royce (1987), British Leyland (1988), British Steel (1988), ten Regional Water Authorities (1989), and twelve Regional Electricity Area Boards (1990). Her successor, John Major, then sold off British Rail between 1994 and 1997. In some cases, natural monopolies were sold off before a truly competitive environment could be set up.
Privatisation in Britain has not lived up to its promise. Regulatory failures and information deficits have distorted the markets. Many privatised utilities have been taken over by foreign investors, creating remote and opaque ownership structures. Faceless public sector bureaucrats have been replaced by equally faceless, but better-paid, corporate executives and managers. Competitive pricing has not automatically followed, as monopolies and oligopolies dominate the market, and utility bills have risen at times faster than the rate of inflation. Shareholder capitalism has failed to develop, as individual shareholders are largely outnumbered by corporate investors.
Many of the presumed benefits of privatisation have not materialised in the case of Thames Water. The company’s performance issues go far beyond financial mismanagement to include such matters as consumer care, water leaks, sewage pollution of waterways and beaches, and an under-investment in Britain’s ageing pipeline infrastructure, all of which must be set against lavish shareholder dividends and inflated executive salaries and bonuses. Ofwat’s oversight of the performance and finances of Thames Water has fallen short of expectations. The financial resilience of other water companies has also been compromised, and will undoubtedly feature in the news over the coming weeks. As the facts emerge, the British public can once again reflect on the merits of a model of privatisation which has placed an essential public good in the hands of monopoly providers with opaque management and operating structures and hope for the return of public ownership to at least some key sectors of the economy.
Ashis Banerjee