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What is the point of private water companies?
Excerpt: I regard myself as being quite in tune with the ideas of liberal economics - free markets and so on. I think most of the privatisations of formerly nationally-owned industries were good, and that we're all better off for that having taken place. But the UK water market leaves me scratching my head in confusion.
I regard myself as being quite in tune with the ideas of liberal economics - free markets and so on. I think most of the privatisations of formerly nationally-owned industries were good, and that we're all better off for that having taken place. But the UK water market leaves me scratching my head in confusion.
Today's revelation that Thames Water has missed its targets for fixing leaks - for the third successive year - whilst simultaneously increasing profits by 31%, is deeply worrying. I'm not offended by the idea of people making large amounts of money where their customers have rewarded them with their custom, but Thames Water is a monopoly.
As with many such companies, a portion of their profits will go to shareholders as a dividend. But, again, it must be said that this is a far from optimal situation; shareholders receive dividends as a reward for their willingness to accept risk, but what risk is there in a business that involves the monopoly sale of a vital resource? This isn't like shareholders investing in a risky startup technology business, an innovative drugs company or a restructuring manufacturer - this is investing in a monopoly where the only risk is that the regulator might begin regulating a little more harshly.
I'm going out on a limb and assuming that a competetive water market is impossible - the infrastructure can't support it and the costs of creating competing infrastructures would be too high. I'm willing to be corrected if anyone knows otherwise, but I suspect my assumptions will hold. In that case, the government needs to look much more seriously at how the regulatory system works. It's unacceptable that water companies are continuing to fail in meeting their targets and, if the regulator cannot deal with this then it may be time to change how the regulator works.
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Right.
Electricity is generated competitively, but distributed by a single grid. It made sense to privatise the generation.
Water falls out of the sky. There is, more or less, only distribution to worry about. The provision and maintenance of water distribution assets could be a competitive business if contracts for particular assets were auctioned off, with penalties for leakages and failures. But we didn't do that, so it isn't competitive.
Involving the private sector without involving markets and competition is a very bad sign. It suggests corporatism, an indecent relationship between politics and business, a new command economy with publicly funded private sector fat cats.
Water privatisation works well in the developing world to provide better water supplies, so there must be something to it in that case.
In the UK I think the idea is to encourage investment in the system by offering the prospect of profits from investment.
This clearly works, people are making profits and investing, the problem is, due to the lack of market we have big profits being made but the system failing to get up to scratch.
One solution might be to insist that most profits go towards fixing problems in the system until they are fixed (or almost all fixed) thus providing an incentive to improve service quality which is absent without the market. This could be a disincentive to invest in water companies however, and government intervention will quite naturally make investors nervous, governments are notorious for changing the rules and the prospect of them making the threshold for returning profits higher and higher leaving investors with low returns.
Another option may be to set targets which if they're not met will mean the company running the franchise will lose it and be barred from operating any for a number of years. This of course also has some serious inherant problems.
I think the reason it works so well in the developing world is that the task there is about building new infrastructure, whereas in the UK it's mostly about administering and repairing an existing system. In developing countries the profit motive can be a useful incentive to cause companies to provide supply to areas previously poorly-supplied; in the UK, there's no such need.
Of course Scottish water is still run by the state, and even Labour MPs are calling for it to be privatised. Scotland has IIRC the worst quality water in the UK.
Maybe the profit motive has something going for it after all.
(Although I take your point about the regulatory regime).
Yes, the problem is that utilities are not performing to the standard we expect. We want tougher regulation, but this adds to "regulatory risk" and deters investment, unless inflation-busting charge increases are also allowed (as they have been).
So perhaps this is the challenge: for regulation to both tougher and less uncertain (less risky). There should be less discretion for the regulator to impose or waive penalties. Penalties should be formulaic and automatic. That is a kind of simple payment by results - simple bottom line objectives for companies to pursue. The challenge is then in setting fair formulae up front. And if they are more certain, they need not be so harsh to have the desired incentive effect. So perhaps they will not deter investment (and therefore increase charges) so much.
Yep - 'the rule of law' rather than 'the rule of man', a good solid liberal principle if ever I heard one!
There's precious little risk on Thames Water's side at the moment, that's for sure. Fine them hard.
The real risk is that a government makes it difficult/impossible for a utility company to meet its targets, usually because some other (government-associated) group wants to get its hands on the rents, but that's not the case here. Not that I suppose we're immune to it, but I think we can safely say that Thames hasn't been frustrated in that way.