PRIVATISED in England, a mutual in Wales, a nationalised industry in Scotland and a government department in Northern Ireland—there is no better proving ground for different ideas about utility provision than Britain’s water industry.
The question is a pressing one because the government has decided that it has to get bureaucrats away from Northern Ireland’s costly system. The province’s devolved (but currently suspended) government has been told to devise a new structure.
A few years ago, there would have been little support for privatisation. After the Conservative government privatised English and Welsh water in 1989, bills shot up, prompting a public outcry, even though most of the money was spent on modernising the decrepit and messy systems the private firms had inherited. But over time, the bills went down, while beaches and rivers have become much cleaner.
Nonetheless, Welsh water went out of private ownership in 2001, moving to a one-off mutual structure, in which it was bought with £1.8 billion ($2.9 billion) of borrowed money by a not-for-profit company owned by 200 prominent locals. Thanks to the efficient management developed in the previous years of private ownership, bills are quite reasonable.
Not so in Scotland. In the early 1990s English bills were 70% higher than those north of the border and the lesson drawn was to shun privatisation. Strathclyde Council ran a postal referendum in 1994 in which 97% of those voting rejected selling off what one MP called “God’s water”. That was backed up by advice from Coopers & Lybrand (now part of PricewaterhouseCoopers) that privatisation would mean bills rising 152% over the coming 15 years, compared with only 95% if it stayed in the public sector.
Since then, though, the divergence between the performance of water suppliers north and south of the border has been startling.
Over the past decade, Scottish household bills have gone up by 94% in real terms. English bills have gone up by only 22% since 1989.
But the heaviest burden falls on business. A medium-sized office in Scotland pays 16 times more than its English counterpart. Big thirsty industries face a serious competitive disadvantage: managers at BP’s refinery at Grangemouth in Scotland are facing a bill this year from Scottish Water for £12.7m. South of the border, the equivalent bill would be more like £7m. Moreover, BP says Scottish Water is frustrating its efforts to find alternative supplies, so it is thinking of taking the state-owned water company to court.
Small firms are just as agitated. John Downie, Scottish director of the Federation of Small Businesses, says his members are facing water bill increases of between 50% and 300% this year, taking them to between four and five times the level of equivalent bills in England. He wants a Scottish parliamentary inquiry. “This is costing jobs,” he says. Altogether, it looks as though Scottish companies are paying about £190m a year more for water than their counterparts in England.
All that might be excusable if the aquacrats were doing much better with the extra money. But in fact Scots get poorer drinking water, more pollution from their sewers and their pipes are more than twice as leaky. Private water firms beat the public sector on all counts.
What’s gone wrong? After all, a publicly owned water industry does not have to pay dividends to shareholders and can borrow money at lower interest rates than private firms. “Essentially, the service was run by engineers,” says Alan Alexander, chairman of Scottish Water, a new company formed in 2002 by a merger of three regional state-owned utilities. “No-one gave much thought to economics.” Politics has also played a role. The utility has been in thrall to trade unions, so it is over-manned. And the need to keep politicians sweet may explain why business charges have risen so much faster than the domestic bills most voters pay.
Scotland’s water regulator, Alan Sutherland reckons that about £86—more than a third—of the £231 average domestic bill in 2001-02 was wasted. So ministers told Scottish Water to cut its costs by 45% by 2005-06. Bills won’t start coming down until 2007, though, because the company must find £1.8 billion to spend on upgrading its pipes and sewers. Scotland’s costly water is a salutary reminder of the cost of the country’s love affair with state provision.
Better to privatise it late than never.