‘Complicated and expensive’: Burnham is right about the risks of nationalisation
Track record of Welsh Water shows public ownership is not the answer to all the woes in the utilities sector
Good news for Andy Burnham: one of the original 10 water privatisations from the Thatcher-era has returned to public ownership already. Thanks to a complicated turn-of-the-century corporate saga, Welsh Water, serving 3 million people, converted to not-for-profit status in 2001. It has no shareholders. Financial surpluses go “straight back into keeping bills down and looking after your water and beautiful environment”, as the website blurb puts it.
How’s it going? After a quarter of a century without dividend-hungry shareholders to feed, has the model proved its superiority? Not exactly. Welsh Water usually has high scores on customer trust metrics but its performance on bills and spills tends to be middle of the pack.
Welsh Water recently received a £44.7m “enforcement package” – a fine by another name – from Ofwat for “serious and unacceptable breaches” in operating its sewage plants that “resulted in excessive spills to the environment”. Most companies have copped penalties in the regulator’s industry-wide investigation but, as a percentage of turnover – the regulatory yardstick of seriousness – Welsh Water’s 7.5% was at the high end. On bills, it is above the industry average at £683 a year. Severn Trent-owned Hafren Dyfrdwy, licence-holder in parts of north-east and mid-Wales, charges its households £48 less.
A sample size of one is small, obviously. But Welsh Water is a reminder that it is too simplistic to think all the sector’s woes can be cured simply by changing the ownership. Boring factors such as access to capital, operational efficiency, technical skill, management accountability and regulatory rigour also tend to matter.
Burnham knows as much, one suspects. For all the excitement generated by his calls for “stronger public control” over water and energy, he is vague on details. His only specific commitment has been to say nationalisation is “what should be done” at Thames, and even that statement is not wholly clear.
Does he mean full permanent nationalisation? Or is he talking about special administration, which is different since it could mean a return to the private sector for Thames once its creditors have taken the inevitable haircut on their debt? (The shareholders have already been wiped out).
For the non-Thames part of the industry, Burnham seems to be taking a long view. “It is about a 10-year plan of more public control, more public ownership,” he has said. “I don’t think you nationalise the whole thing necessarily straight off, because that’s complicated and probably expensive but you look at the different situations in different parts of the country.”
“Complicated and expensive” is a fair analysis. Thames could probably be nationalised reasonably cheaply because the creditors’ negotiating hand (like the market value of their bonds) is weakening under political pressure. But nationalising solvent water and energy companies is a different game. It would be hard to buy at less than fair market value unless Burnham is prepared to have a legal scrap with institutional investors who he probably wants to keep on side for other infrastructure adventures.
The two FTSE 100 water companies, United Utilities (licence holder in the north-west of England) and Severn Trent, are valued by the stock market at almost £10bn apiece, to which one must add their borrowings. The state would get assets to match its outlay, so, under one form of Treasury accounting, the transactions could be regarded as neutral on day one. But the extra gilt issuance would still be hefty. And the sums would soar if, as some thinktank outriders argue, energy transmission networks should be added to the list of targets. National Grid is worth £62bn, albeit a chunk of that figure reflects its sizeable US assets; SSE is valued at £29bn. These are large companies.
As for complications, yes, they are real. The high-voltage transmission operators are in the early stage of a £70bn five-year upgrade of the grid. Changing ownership could take 18 months and the hassles would probably ensure that the energy secretary, Ed Miliband, would miss his 2030 deadline for clean power.
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Similarly, the water companies are in vital catchup mode on overhauling tired sewage and water treatment works, one reason why Keir Starmer’s administration did not contemplate nationalisation. The state-managed experience at HS2 is the one to fear because the high-speed railway, like water companies, makes heavy use of third-party contractors to build new infrastructure. At HS2, those contractors enjoyed a picnic at the expense of taxpayers.
Meanwhile, comparisons with Burnham’s reorganisation of Manchester’s buses do not work. The city’s Bee Network is capital-lite; utilities are capital-heavy. Nor are there lessons in how train operators were brought in-house. That process was done at zero cost by waiting for the franchises (typically seven years, fixed) to expire. Water companies, by contrast, own their assets and have 25-year rolling licences.
None of which says it could not be done. If you believe only the state should provide services such as energy and water, nationalisation is obviously the only way to go. And one benefit is undeniable – the state can borrow more cheaply.
But note that Sir Jon Cunliffe’s Independent Water Commission, whose report forms the basis of the intended clean water bill flagged in the king’s speech, “compared outcomes in countries reasonably similar to England and Wales” and said its analysis “has not demonstrated any one model is universally better than another”. It thought “strong and evidence-based regulation is critical in ensuring customers and the environment are protected, regardless of ownership model”.
It is why, one suspects, the initial stage of Burnham’s 10-year plan for more “public control” may end up being a rejigged version of what Starmer’s government already intends. By way of reminder, the clean water bill’s ambition is to “shift the sector away from a system where water companies mark their own homework by putting in place stronger, active supervision and oversight through a powerful new regulator capable of integrated management of the water system”.
The stronger element that Burnham could inject is more local direction, along the lines of the devolution agenda he outlined in Monday’s speech. Indeed, Cunliffe’s water commission report contained an encouragement to do so. It had high praise for how Burnham’s Greater Manchester Combined Authority had played a role in showing “how more regional water planning can be achieved through voluntary cross-sector engagement”. The report cited a partnership between GMCA, the Environment Agency and United Utilities in pulling in extra funding, prioritising specific projects and generally injecting more local input into planning.
One of the commission’s lesser-noticed recommendations was that such partnerships should be made formal via “strategic boards” with local political leaders on them. Elected mayors should have “opportunities to influence, inform and be informed by plans for the water system in pursuit of sustainable growth”, said the report. All that would seem to tick several boxes in Burnham’s thinking on devolution and “a sense of place”.
Would it add up to “greater public control”? Obviously not if the phrase is taken to mean owning every English water company outright. Advocates of pure nationalisation would not be satisfied. Politically speaking, however, Burnham could say he has taken the current government’s bill and given it an injection of Manchesterism as a first step. The threat of harder measures in the next parliament could hang in the background. In a fiscally constrained world, where the government is struggling to fund its defence commitments, it would be the pragmatic route.
Thames could still be treated as a separate case. All options for a fix could be left on the table for the sector’s biggest calamity, and for any other companies that get into the same mess. Even the water commission acknowledged that a Welsh Water-style not-for-profit model “might present one possible exit route” for companies that fall into special administration.
But, for the water sector as a whole, one suspects Burnham’s “stronger public control” will morph into a stronger role for local authorities in planning and directing the system. As Welsh Water has shown, this is a world of tradeoffs.
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