Fin-ancialisation 🦈

Water is highly financialised.

How did we get here? 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:

Read more about transparency and accountability problems with the financialisation of water.

Thames Water

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

• 1974 - The Thames Water Authority was formed as the largest regional water authority in the UK.
• 1989 - Thatcher's privatisation handed all water system and assets of the region to Thames Water Ltd, free of debt and a 'green dowry' gift of more than £100 million.
• 2001 - RWE, a German energy giant bought Thames Water off the stock market and burdens the company with a £3.4 billion 'mortgage' debt.
• 2006 - Macquarie Group, an Australian global financial services group buys Thames Water for £8 billion.
• In the next eleven years Macquarie Group adds another £7.1 billion 'mortgage' debt to the company while paying themselves £2.8 billion in dividends. Over this time Macquarie sells off Thames Water in chunks to the highest bidder.
• 2017 - Macquarie successfully sold all Thames Water shares at healthy profit for themselves. Two thirds of Thames water is now owned by pension funds in different parts of the world.
• Over the last 35 years in private ownership Thames Water has paid out over £7 billion in dividends to shareholders and accumulated a debt of over £15 billion. Every month Thames Water customers pay approx. 20% of their water bill just to pay the interest on this debt.
• 2024 - Thames Water is now in existential crisis and may soon collapse under its burden of debt.
• The company has asked to be allowed to rise bills by 50% and begged OFWAT to be lenient with future fines for illegal behaviour.
• Thames water demonstrates how privatisation turned water, the essence of life, into cash machines for globally capitalised cooperations.
• Thames Water's ruin is but one example of the terrible consequences of the financialisaton of water while underinvesting in real and badly needed infrastructure.
• The resulting broken sewage systems are intolerable for all life in our land and coastal waters.
• We must correct this mess now. Different models and ways of funding are available. It’s time for the people to have their say.

For an informative potted history of Thames Water as a case study in financialisation CronxWatch have their say and is worth a listen to gain an insight into how financialisation of this essential utility works!

Sources and Further Learning:

• How Privatisation has failed: "Despite its deliberate limitations, the Cunliffe Review still manages isolated admissions of privatisation’s failure, noting how “high levels of debt relative to equity have impaired resilience” – a polite understatement for decades of corporate looting disguised as financial innovation."
• Academic Research: 1989-2001 UK water privatisation.
• Wikipedia on Water privatisation in England and Wales.
• Parliamentlive.tv: Industry and Regulators Committee.
• 'The Guardian' links:
  • Thames Water Apologises to MPs for Confusion over 500m loan.
• How Privatisation Drained Thames Waters Coffers.
• Thames Water's Second Largest Investor Slashes Value of its Stake.
• Thames Water Nationalised Ofwat MPs Customers.