Regulatory failure is the root cause of the ownership and legitimacy challenges now faced by the water industry, according to Professor Dieter Helm – but the best way forward is neither to renationalise nor to cling to the status quo, but to adopt a new catchment based control model.
In a new paper, Water boarding, Helm contended it is control and regulation, rather than ownership, that is the key to delivering the best water outcomes. After setting the scene by summarising Labour’s nationalisation ambitions and the government/Ofwat position of ‘proving privatisation works’ by toughening up regulation, Helm argued: “Here is a radical and controversial claim: it does not really much matter much who owns the water companies and hence it is not worth bothering to change it. Labour’s nationalisation will not solve the many challenges that the industry faces; and privatisation has not proved a panacea. The water industry could function reasonably well under either ownership model – provided it was properly regulated.”
Helm criticised water regulation past and present. Early failures, he said, essentially left the door open for companies to pursue the avenues that have recently hit the headlines: financial engineering, gearing, excess returns. “The regulator made serious, fundamental and long lasting mistakes in 1994, which have bedevilled the industry ever since, and they are the basis of the attacks on the subsequent conduct and performance of the industry ever since.”
Subsequent regulation, he continued, has been about making amends: “Having sold the pass in the mid 1990s, the subsequent years have been spent by the successor regulators trying to row back from the most glaring mistakes.” He gave little credence to the key plank of bearing down on corporate governance; and he considered the complexity of the PR19 methodology “out of all proportion to the task” with little obvious benefit.
As a way through the quagmire, Helm returned to a subject of one of his previous papers, catchment system operation. “The CSO model places control firmly in the public domain for the specification of the key outputs (and for environmental protection and enforcement). It integrates water, farming and floods into a coherent overall framework, and it leaves it to competitive firms to get on with delivering what the public interest demands. How to implement this CSO model is what a grown up debate about water should be all about, not revisiting the less important obsessions of the past.” He added: “The nationalisation vs. privatisation argument is at best a sideshow and a very British political obsession.”
Helm promised subsequent papers would flesh out the new model.
Source: http://www.dieterhelm.co.uk/natural-capital/water/water-boarding/