Fin-ancialisation 🦈

England's water is highly financialised. How did we get here and what does it mean?

A brief history of ownership of water companies in the UK

From the late nineteenth century onwards, water services in England and Wales followed a pattern similar to most European countries. Water services were owned by a mixed bag of local authorities, with some individual authorities running water companies, some large inter-municipal operators, and a surviving handful of private water-supply only companies, which were strictly regulated by a simple cap on their profits at a maximum rate of return of 5%.

In 1974 the service was reorganised. 10 unitary regional water authorities (RWAs) were created, each covering a river basin area, each responsible for water quality, water supply and sewage treatment. These authorities were appointed by the government, not by municipalities, and so were not accountable to local government any more. The RWAs reduced the number of employees from 80,000 to 50,000 between 1974 and 1989.

The Thatcher government originally proposed water privatisation in England and Wales in 1984, but due to strong public opposition the proposals were abandoned before the issue could influence the 1987 election. Once this was won, the privatisation plan was resurrected and implemented rapidly.

Under the Water Act 1988, the newly formed water companies became owners of the entire water system and all assets of the RWAs in England and Wales. The RWAs were sold by issuing shares on the stock market. In Scotland and Northern Ireland however water remains controlled and operated by public authorities.

Privatisation did not create any competition. The companies were given monopolies in their regions for 25 years, without having to compete even once for the business. The government was desperate to mark the sale of common assets to private owners a success. It wrote off all the debts of the water companies before privatisation, worth over £5 billion pounds and gave the companies an additional ‘green dowry’ of £1.6 billion from the public purse.

The initial water pricing regime, set by the government, resulted in pre-tax profits of the ten water companies to rise by 147% between 1990/91 to 1997/98 with sewerage and water prices rising respectively by 42% and 36%. The companies were also given special exemption from paying profits taxes.

OFWAT, the financial regulator for private water companies is statutorily responsible for ensuring that the companies were profitable, a task which it performed very well, and for encouraging efficiency. As there is no competition, OFWAT compares the companies performance with each other.

The water companies were protected from takeover for 5 years by the government’s ‘golden share’. Once the 5 year period was up, many were bought off the stock market by giant multinationals, restructured, stripped and mortgaged and then resold for huge profit, a process commonly known as 'financialisation'. A process in which making profits from financial constructs, becomes more profitable than trading real products and services.

The increasing financial engineering for shareholder profits leads to more and more complex ownership structures. Here is a Guardian graphic showing the structures for English water companies:

UK Water Ownership

The result of financialisaton is best demonstrated by looking at a specific example:
Thames Water Ltd - Europe's largest Water and Sewerage company.

Thames Water

Sources and further reading:
To search for a financial term or acronym with explanation from Investopedia
Revision #24
Created 19 April 2024 13:44:58 by Ned
Updated 2 August 2024 14:54:21 by Peter Millar