A recent Westminster Hall debate of the Backbench Business Committee discussed whether the water industry in England and Wales should move to a mutual or publicly-owned model rather than being fully privatised.
Water companies have not had an easy ride recently. The Government has criticised their financial structure and the high dividend payments they made. Ofwat has sought to address this latter point through the PR19 process, which requires water companies with high levels of debt to share the financial gains with customers (instead of taking out debt and using the money to pay dividends to shareholders, which MPs accused them of doing).
Against this backdrop, there was a debate in Westminster Hall on 22 January 2019 to consider the future of the water industry in England and Wales. It was called by Gareth Thomas, the MP for Harrow West and Chair of the Co-operative Party. His agenda was that the privatised water industry in England and Wales is not working, as in reality there is little competition and weak regulation. His suggestion was to move to a mutual model, similar to Glas Cymru (Welsh Water), with democratic public ownership by consumers and employees. This would involve forming consumer and employee trusts which could then use bond issues to buy out equity investors’ stakes, with legislation to embed the not-for-profit principle and an asset lock to prevent future demutualisation.
Glas Cymru is a company limited by guarantee which was formed in 2000 to acquire Dwr Cymru Welsh Water, the water and sewerage provider in Wales, from Western Power Distribution (who had bought its previous incarnation, Hyder, when it had got into financial difficulties). It financed the purchase of Welsh Water through a £1.9 billion bond issue, thought to be the largest ever non-government backed sterling corporate bond issue.
Unlike the English water companies, it has no shareholders and any financial surpluses are either paid back to its customers through rebates on their bills or (in recent years) reinvested in projects such as flood prevention measures and support for vulnerable customers. The main advantage of this model is the ability to access cheap finance.
Given the party that Mr Thomas represents, this proposal is not perhaps surprising. Labour and SNP MPs in the debate went further and called for the water companies to be taken into state ownership, citing the publiclyowned Scottish Water’s performance as an example of why this was beneficial. We can expect to see more detail on Labour’s proposals in the coming months, but for background see our article Nationalisation: How would it be done and what would it mean?
Of course, the Glas Cymru model potentially avoids one of the major obstacles to nationalisation: government having to find the capital to buy out existing shareholders. Glas Cymru is entirely financed in the capital markets, with no government support.
Even Conservative MPs seemed amenable to mutualisation of the water companies. Richard Benyon, Conservative MP for Newbury and chair of the UK Water Partnership, said “We should encourage companies to look at employee share ownership schemes. That whole concept of finding ways to democratise capital is a huge, rich seam that we could collectively work on. Water companies are good places to encourage not just employees, but customers, to develop a higher interest in the ownership of that company, which is a better way to get more people involved without damaging any investment potential.”
Water companies are getting on board with this. South West Water has proposed an element of mutual shareholding as part of its wider ownership base, in its latest business plan.
So the future of water companies may well be mutual, but what seems certain is that they need to be seen to be more accountable to their customers and the current PR19 process is encouraging this.
This artcle was first published by Utility Week.