Richard North, 16/06/2013  

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When the ten regional water authorities, created by Edward Heath's Water Act in 1973, were put up for sale on 22 November 1989, the Government declared six main objectives for the sale.

These were: to improve efficiency in the industry; to promote wider share ownership; to maximise sale proceeds and ensure a healthy aftermarket; to maintain the momentum of the privatisation programme; to privatise within the lifetime of the existing Parliament; and to privatise all ten water authorities together.

The official report on the sale, however, did point to the real reasons for what many people think was a privatisation too far. The Heath legacy had left us with orphan water authorities, the component operations expropriated from their largely municipal owners. 

Then, more than a decade of under-spending had left an industry needing massive capital investment in order to meet European Community water quality directives. Two years after privatisation, with the new investment not materialisng, the British Government faced the humiliation of being dragged before the European Court of Justice as the "dirty man of Europe". Unwilling to add the cost of implementing EU directives to the public borrowing requirement, the Major government had to act.   

Thus, as Booker recounts in his column today, in 1991 the regulatory model was changed. With the arrival of Ofwat, protecting the interests of consumers was kept up in lights but it had to compete with the new requirement of allowing the new water company owners "a reasonable return on capital".

With that, the pricing structure that has emerged allows the water companies to base their charging on what is known as the "regulatory capital value" (RCV) which has soared from the original 1989 sale value of £3.6 billion to, currently, about £60 billion.

Each year, water companies are allowed to increase their charges by the retail price index, based on this value, plus a mysterious "K" value, set generously so as to encourage investment, with the Government having "stacked the cards" in favour of shareholders over consumers, and thus enhancing the capital accumulation process. With the use of the RCV as a baseline, it has been called "a prime example of corporate welfare".

By this means, average domestic water charges have increased threefold since privatisation, and the regulator has effectively been "captured", regurgitating industry propaganda to justify its existence.

Thus, in February of this year, we saw Pamela Taylor, Chief Executive of Water UK. the trade body for the British water industry, declare that, but for the "considerable and significant efficiencies" since privatisation, the average annual bill of £390 would be £130 higher.

Yet, in fact, we see Scottish Water - traditionally producing water at a higher cost than in England, now undercutting English companies by more than £50, while remaining in public ownership.

Shocking, when we approached Ofwat for details of the charging scheme, it volunteered, unbidden, the industry propaganda line, telling us that "Ofwat's challenge means companies are significantly more efficient now than they were at privatisation … Without this challenge (i.e. if companies had carried at the same level of efficiency as in 1989) bills would be more than £120 higher".

And now, as Booker points out, in recent years all but seven of what are now 19 companies, each enjoying a local monopoly, have been sold off into the ownership of a multinational array of financial concerns. British consumers, as Corporate Watch reports, have become helpless milch-cows, with almost one third of the money spent on water bills going to banks and investors as interest and dividends.

Particularly aggrevating then are the tax dodges which the companies are now employing, and especially the use of the "Eurobond" tax loophole that exempts shareholders from having to pay a 20 per cent withholding tax. This, the Government said it would close, but attempts have been abandoned.

All this thus has the hallmarks of a regulatory failure, and the only real hope of ending this state-sanctioned theft to continue must lie in concerted action between the Government and Ofwat. Yet, as Booker concludes, the draft Water Bill shortly to go through Parliament proposes only that the financial constraints imposed on the industry by Ofwat should be further relaxed.

The looting class must be served, and the consumer interest continues to take second place.


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