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Fiascos: United Kingdom

In what was arguably the most massive privatization deal in recent history, in 1988 the Thatcher government transformed its 10 regional water authorities (RWAs) into private profit-making ventures. The RWAs were sold as 25-year concessions by issuing shares on the stock market, creating private monopolies in 10 regions of the United Kingdom – only Scotland and Northern Ireland were excluded.

These new private monopolies were granted a range of government subsidies, at the expense of taxpayers and consumers, to boost corporate profitability.

• The Thatcher government wrote off all the debt of the water companies before privatization (about US$8 billion).
• The government granted the private companies what they called a "green dowry" of US$2.6 billion.
• The government offered the companies for sale at a substantial discount – about 22% of the stock market value (measured as the difference between the issue price of the water companies’ shares and the share price after the first week of trading).
• The companies were given special exemption from paying taxes on their profits.

There was soon a sharp public outcry as consumer water prices rose. On average, prices rose by over 50% in the first 4 years. The first 9 years produced price increases of 46% in real terms (adjusted for inflation). The public was further outraged when information was released about director’s pay and the profits of the 10 water companies. The real value of the fees, salaries and bonuses paid to the director’s increased between 50% and 200% in most of the water companies. The profits of the 10 water companies rose 147% between 1990 and 1997. Profit margins in the UK are typically three or even four times as great as the margins of water companies in France, Spain, Sweden or Hungary. This could explain why most of the 10 UK companies were quickly purchased (after the 5-year "protection" period) by the big corporate water multinationals – including Suez, Vivendi and RWE.

As might be expected, the rise in customer water prices was followed by an increased rate of household disconnections for non-payment. The disconnection rate tripled in the first five years, with 18,636 households disconnected in 1994. Again, there was a broad public outcry arguing that cutting off people’s water endangered public health. A 1994 study showed rates of dysentery rising in most major urban areas. When disconnections for non-payment became more controversial, the water companies started using "pre-payment meters" for customers unable to pay their bills. These meters only supplied water when customers had paid money charged on a plastic card. When the account was empty, the meter cut-off water supply. The companies called these "self-disconnections." By 1996 over 16,000 pre-payment meters had been installed. Public outrage grew until Parliament passed a new public water law called the Water Industry Act of 1999 that forbid disconnections for non-payment and the use of pre-payment meters.

There have been serious transgressions in the environmental performance of the UK companies, such as lack of basic conservation measures, sewer backflow, waterway pollution, and poor drinking water quality. In 1998, the major water companies in the UK were ranked as the second, third, and forth-worst polluters. The UK’s Environmental Agency regularly prosecutes the water companies for pollution offenses. The ten water companies were prosecuted a total of 260 times between 1989 and 1997. Paying the fines was simpler than making the needed investment in rehabilitation of infrastructure and treatment plants. Since 1998, the situation has improved somewhat and the water companies have been prosecuted for a total of 22 water pollution offenses. Lack of attention to maintaining the water and sewerage system has contributed to wastage from leaks and poor drinking water quality. The Drinking Water Inspectorate (DWI) identified lack of compliance on key parameters (excessive amounts of nitrite, iron, lead, PAH and other pesticides) in more than 20% of water zones.

The 10 UK water companies have little incentive to make capital investments to rehabilitate and improve the water and sewer infrastructure. In fact, capital expenditure starting accelerating before privatization and peaked in 1991-92 and then began to fall in the post-privatization period. It appears to be common practice for the companies to budget large capital expenditure needs (which are then used to calculate the allowed price rises). But, rather than making the budgeted infrastructure improvements, the companies use the shortfall in expenditure to boost profits. For example, Southern Water submitted plans for a series of new sewage treatment plants that were never built. Yorkshire Water "saved" on its capital expenditure budget by getting a promise from government to re-define coastal waters as sea waters instead of estuary waters – permitting the company to dump raw sewage instead of expanding treatment plants.

Perhaps the assessment of the British newspaper, The Daily Mail, sums it up best.

…(T)he water industry has become the biggest rip-off in Britain. Water bills, both to households and industry, have soared. And the directors and shareholders of Britain’s top ten water companies have been able to use their position as monopoly suppliers to pull off the greatest act of licensed robbery in out history. (July 11, 1994)

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