Thursday, 2 July 2020

Doesn't sound too terrible to me.

From The Guardian:

England's privatised water firms paid £57bn in dividends since 1991

In the past 10 years, the companies have paid out £17bn in dividends and directors’ pay has soared...  According to the analysis by David Hall and Karol Yearwood of the public services international research unit of Greenwich University, the nine privatised companies in England have amassed debts of £48bn over the past three decades – almost as much as the sum paid out to shareholders. The debt cost them £1.3bn in interest last year.

As outrageous as the directors' salaries are, they are robbing their shareholders and not the customer. Whether it's dividends or interest doesn't really matter, it's a legal rather than economic distinction in the context of a utility company with a 100% captive customer base, steady income and known costs. And as far as I am aware, most of the interest payments goes to the parent company, they do it to save a bit of tax.

Dividends and interest work out at about £55 per person per year, assuming 2 people per household and an average water bill of £500 a year, the dividends and interest are over 20% of your water bill.

In relative terms, compared to competitive businesses, this is a staggering amount. For example, Tesco has sales of just under £7 per share and paid dividends of 9p per share (from here) i.e. it paid out just over 1% of its sales in dividends.

But in absolute terms, £1 per week per person is not a lot of money. A sensible government would just impose a lower price cap (£450 instead of £500) while imposing the same standards and costs, so that the owners can only collect £5 from each customer in dividends and interest.

The Neo-liberals will argue that the £55 per person "tax" is worth paying, because bills are lower (or quality and reliability better) than they would have been if water was still nationalised. In other words, foreigners (who own a large chunk of English water companies) are better at running our country than we are. This might or might not be true (I suspect it isn't) but it's difficult to make a fair comparison.


Nessimmersion said...

The argument isn't that foreigners are better, it is that the private sector is better at it than the state.
It could be ring fenced, such that utilities may only be owned by people residing I certain postcodes etc.
The more relevant comparison would be between the 4 constituent parts of the UK, looking at cost and water/ sewage quality.
England- privatised.
Scotland - state run quango
Wales - state run directly?
Norn Irn- not sure.

L fairfax said...

@"As outrageous as the directors' salaries are, they are robbing their shareholders and not the customer."
Why don't pension funds, non exec directors etc not complain? I can't believe you need premier league directors to run a water board. It is a monopoly.

Mark Wadsworth said...

N, S, W and NI stuck with nationalised companies. But in S, water rates are included with council tax so no accurate figure for how much people pay.

In W and NI, I think they have separate water bills, but how do we know whether these are subsidised or whether the state makes a profit on it? And how do we adjust for 'quality'? Shouldn't water be cheaper in Wales because they have more rain?

And while the private sector is clearly better that state in a competitive environment, if there is an opportunity for rent seeking, the private sector is far worse value for money (housing, banks, health, education and water).

like I always say, the government builds the roads, the private sector makes the cars to go on them. That's the best way of doing things.

Mark Wadsworth said...

LF, "Why don't pension funds, non exec directors etc not complain? I can't believe you need premier league directors to run a water board. It is a monopoly"

I assume this is because pension fund managers and non-execs are on the same gravy train. You scratch my back, I scratch yours. Nod through our pay rises and we'll give the non-execs a pay rise and offer pension fund managers well paid non-exec jobs when they get bored of managing pension funds.

The article says boss of nationalised Scottish water gets £366,000 salary (which is outrageous enough). The privatised company bosses get ten times that!!

mombers said...

The private sector is very good at rent extraction when given a monopoly. Regulators thankfully step in and say you need to demonstrate what your costs are before we agree to prices. If not, water bills in London would be much, much higher instead of significantly lower than UK average. But how to you write tight enough rules to prevent costs being misrepresented? Blatant example is interest deductibility. Interest is not a cost of production - a water company can run fine on equity alone. But raise a bond whose interest just about wipes out your profit and you can not only not pay corp tax but you can also say to the regulator 'we're not making a profit so we need to bump prices up'. Then issue more debt, rinse and repeat.

Mark Wadsworth said...

M, water is one of the few things where there are still proper price caps (although they could drop them by 10% IMHO).

Interest, we are agreed, is not a cost to a landlord or utility or monopolist. I don' think the regulator is daft enough to fall for that (although HMRC apparently is).

(In the absence of price caps, how much would you be prepared to pay for domestic water? I'm sure a couple of thousand quid a year, unless you want to walk round dirty all the time.)

Bayard said...

Two points, firstly, it doesn't really matter whether a company like a water company is private or public, it will still be run for the benefit of its senior management, not its owners, in as far as the owners let it be and shareholders have as much success as civil servants in stopping this sort of thing.
Secondly, in the old days of the water boards, they owned all the water. The only water they didn't own was the rain, but they owned that as soon as it hit the ground. One of the first things the new boards did was put all the water millers out of business by charging them to use "their" water except for a few that took them to court and won. When the Festival Hall was built, it was partially heated by a heat pump, which drew heat from the Thames, which was all very fine until the Thames Water Board charged them for using "their" water to heat the building.
Ideally, the pipes should be owned by the government and the water companies supply water into a national grid, thus allowing competition on who supplies your water.

Nessimmersion said...

As I vaguely recalled Tim Worstall touched on this a while back:

Mark Wadsworth said...

N, yes, he is a big fan of privatisation. The real question, from the point of view of the customer - does the higher quality-reliability justify the higher water bills? Which is where price caps come in.

Without caps, the profit maximising thing to do is whack up prices to thousands of pounds a year and ignore the difficult stuff. You make 80% of your profit from 20% of your customers.