Essay 2 – Privatisation of Water

Discuss the desirability of combined private/public management of water resources.

Water privatisation refers to the transfer of ownership of water resources from the public sector to the private sector. Globally, over two-thirds of water and sanitation systems are publicly owned, but in an increasingly capitalistic world, privatisation is becoming ever more common. Focusing on England and Wales this essay will discuss the reasons for, and consequences of, water privatisation and examine the desirability of combined private/public management. The UK is the only country that has ‘completely privatised its water supply and sewerage systems through asset sales, floating previously publicly owned utilities on the stock exchange with infrastructure, property, and water supply and sanitation networks intact’. Over the last two decades, the UK water industry has changed from the ‘supply of a service to citizens at subsidized rates, towards the sale of a commodity to consumers on a full cost-recovery basis’.

vs.

In the early 19th century water resources were predominantly the responsibility of private businesses. Provision was socially and spatially varied and many towns were even without mains networks. Leeds & Liverpool were unique examples in that they each maintained public/private ownership, with the public part acting as a regulator, a concept which formed the basis for the part-nationalisation legislation in the 1840’s. Regardless of the nature of the ownership, or perhaps as a result of the ownership, water supplies and waste management in the 19^th century were often overstretched, unreliable and of inferior quality, a fact highlighted by the cholera epidemics in 1831, 1848, 1854 and 1866. By the start of the 20th century water resources were largely under public control with ‘centralised wastewater management’ and there had been vast improvements in water quality and sanitation.

The 1973 Water Act reorganised the water industry by removing it from local authority control, and establishing ten state-owned Regional Water Authorities (RWA) and ‘Subsequent legislation initiated and formalised the transformation of the water industry…from a public service to a business organisation’ and economic efficiency and water quality became priorities. The Government encouraged greater efficiency by allowing water bill increases, sometimes higher than inflation, and introducing cost-benefit analysis. However, due to financial constraints and the further deterioration of the Victorian infrastructure, the Conservatives decided to fully privatise water and sewage utilities in 1989. The ten state-owned regional water companies became ‘public-limited companies, each with a full London Stock Exchange listing of its shares’ and were given monopoly rights in their region for 25 years. ‘As an adjunct to privatization, three regulatory agencies were established: the Office of Water Services (OFWAT), the Drinking Water Inspectorate (DWI) and the Environmental Agency (EA)’. OFWAT provides ‘strong financial incentives for firms to be cost-efficient while encouraging them to invest’ and the EA and DWI are concerned with maintaining water quality.

There are many advantages of water privatisation. Private companies are often more efficient than governments due to free market competition leading to ‘lower prices, improved water quality, more choice, less red tape and quicker delivery’. Privately-owned industries often have more incentive and expertise to ensure their businesses succeed, whilst governments may be politically motivated and prone to corruption. Such factors allow private water companies to generate large profits and a high rate of return, allowing further investment. ‘The total pre-tax profits for the 10 UK water companies increased on average by 142% and a report comparing profit margins in the UK with those in Sweden, Spain, Hungary and France show that profit rates in the UK were extremely high by international standards’. Although the economic restructuring required to achieve such profits often led to a rise in unemployment in 8 of the water companies, employment actually increased at 2 of the companies and the remaining employees at other companies received better training, higher wages and improved working conditions. Furthermore, whilst publicly owned companies are ‘required to be more accountable to the broader community and political stakeholders’ private companies are better able to serve their customers and make unbiased decisions.

Private companies also have a greater financial ability to finance the large investments and technical expertise needed to repair and improve the water systems and meet new European water quality standards. The ten privately-owned companies invested £40 billion into the industry after privatisation. The water companies invested heavily into minimizing environmental impacts and so privatisation has also resulted in marked environmental improvements. In the first five years of privatization, the ‘percentage of plants complying with their discharge permits increased from 87 to 96 resulting in a significant improvement to more than 3000km of rivers and canals’. Compliance with European standards improved from 76% in 1989 to almost 92% in 2000 and the number of swimmable beaches in England increased from 401 in 1989 to 461 in 2000.

There are, however, also many drawbacks to privatisation. Water privatisation faces particular opposition as many consider water a basic human right and are concerned that if water is treated like a commodity then lower-income and vulnerable groups will suffer. Such concern is not unfounded as water bills have risen well above inflation since privatisation, as the increased profits were usually passed on to shareholders rather than consumers through reduced bills. Between 1989 and 2004 the average bill rose from £118 to £250. In fact, the price increases were so excessive that in 1999 OFWAT ruled that the water bills should be reduced by 12.3%. Privatisation has also lead to increased socio-spatial polarization of access and cost to water between lower- and higher-income groups. Consumers in different regions have experienced significantly different rates of increase in charges for both water supply and sewerage services, and in some regions there is even intra-regional differences in zone charges’. The South-West region and regions with lengths of polluted coastlines have experienced the highest overall rates of increases, resulting in spatial inequality, and the charges have ‘proportionally risen faster for low-income families’ resulting in social inequality. Raising water prices may lead to a reduction in water consumption but ‘greater water efficiency requires capital expenditure that lower income families may not be able to afford’ and so it can lead to further social inequality. As the main aim of private companies is to maximize profits they will usually serve the needs of those who are able to pay as opposed to the needs of the majority (journal), which further exacerbates socio-spatial inequality. A strict disconnection policy ‘increases compliance, increases revenues and improves profits’ but it potentially denies vulnerable groups access to an essential life resource. The water companies claim that they only disconnect those who can afford to pay but refuse to do so, but in the first five years after privatization the number of households disconnected for non-payment tripled and the majority were low-income households. In the UK legislation was introduced prohibiting companies from disconnecting for non-payment, but in many countries, such as the USA, water companies can disconnect households.

Private companies often face conflict between profitability and service levels, and often over-react to short-term events by cutting back on maintenance or staff costs to minimise short-term losses. Water is an essential resource and should be closed to market forces in order to protect it from the unpredictability of the market. ‘Despite the government’s claims that ‘private-sector provision of goods and services subject to the disciplines of market forces would be more efficient than public-sector provision‘, there has been little opportunity to develop market competition in the water industry and the ten water companies essentially control the supply. Although private companies have greater access to capital for investment, state-owned companies can borrow money more cheaply as they are ‘ultimately backed by the taxation and printing press power of the state’.

In privatizing the industry, the government has ‘divested themselves of political responsibility for the rapid price increases associated with the high projected capital expenditures…necessitated by the increases in standards imposed through new European Union directive’. This may be beneficial for the government but it can have detrimental effects on consumers as the public has little control over private companies and private companies may not have the social and moral responsibility to protect the needs of the general public. A democratically elected government, on the other hand, is accountable to the people through legislature and are motivated to maximize efficiency to ‘safeguard the assets of the nation’ and gain public support.

Although privatisation has brought discernible improvements in water and environmental quality, there are still numerous issues in need of attention. Technical efficiency and waste minimization has been increasingly scrutinized by regulators since privatization. There have been numerous pollution incidences such as heavy metal poisoning and eutrophication, and after public complaints over leakage rates in the mid-1990’s companies have been given leakage targets, monitored by Ofwat. Water companies have also suffered droughts, such as the 1995 Yorkshire Drought Crisis, and after the 2007 floods many households were without clean water for weeks.

The issue of privatisation is very complex and the extent and nature to which you benefit from water being privately or publicly owned, depends on whether you are a consumer, business or government. The water companies enjoy large profits and a large degree of control, whilst the governments have been able to pass the investment buck and yet still maintain some regulation of the industry. The ‘privatized regime is in many respects better for consumers than its nationalized predecessor’. Although there have been increases in water charges, I think they are justified because they are due to increased investment in the industry which has led to improved water and environmental quality and sustainability.

However, there has been some concern over whether consumers are receiving value for money or whether the increased financial and political outweigh any improvement to their water supply. ‘In the case of the UK, privatization does not show that the private sector has absolute efficiency advantage’ and a recent World Bank paper examining efficiency concluded that: ‘most cross-country papers on utilities find no statistically significant difference in efficiency scores between public and private providers’. There have also been issues of leakages, such as in the case of Thames Water, and several contamination incidences, such as in the case of Yorkshire Water, and there are concerns that the rising water bills and increased disconnection rates are widening socio-spatial inequality.

Overall, it seems that the disadvantages of privatisation outweigh the benefits, and I think a resource as vital as water should be in the hands of the public-sector, which is more likely to prioritise public health 1over profits. However, improvements in water quality and efficiency require heavy investment, which the public sector is often unable to commit to. For these reasons, I believe that combined private/public management is the most desirable option, particularly for consumers. The private companies provide capital and expertise to improve water and environmental quality and the public regulatory system, comprising of the EA, DWI and OFWAT, ensures the private companies have legal obligations regarding water quality and ‘incentives to maintain a satisfactory balance between the potentially conflicting interests of the shareholders and the customers’ (journal 2). Although privatisation can ‘become less advantageous according to the extent to which the state is regulating the water industry’, I think it is an economic sacrifice worth making to ensure the public-sector maintains a certain degree of control over the water supply and public health.