English customers “misled” on investment driving bills – Scottish Water invests more

Customers in England seem to be losing significantly from the industry being in private hands when benchmarked against public-owned Scottish Water. That is one conclusion from a recent report by academic, Karol Yearwood, The privatised water industry in the UK: an ATM for investors.

The paper argues the efficiency and quality of the English industry is on par with Scotland, but that investments are lower and costs to consumers higher. It also asserts that econometric evidence strongly suggests that the real price increases in England can mainly be attributed to growing debt levels, while in Scotland bills seem to have a strong correlation with overall financial expenditure.

Further: “There seems to be a significant discrepancy between usages of debt between the industries. In Scotland, debt depends on costs and capital expenditures. In England the same doesn’t hold, as the companies could have afforded to finance all their operations and investments without taking on any debt at all. Instead, evidence suggests their debt taking was driven by overly high dividends, which exceeded their cash balances in all but one year since privatisation. The cost of the constantly growing debt is then passed on directly to consumers in the form of higher bills.”

Yearwood inferred that without dividends, companies wouldn’t have had to take on so much debt and as a result, interest payments could have been much lower, leading to lower pressure on bills. “In fact, English customers seem to lose out on all fronts as even the key argument used by proponents of privatisation, ‘massive capital investments’, looks bleak when compared with Scottish Water which invested on average 35% more than the ten English companies in the last 16 years.”

The paper concluded: “In the course of this paper, not only have we showed that Ofwat’s explanations for price increases seem unrepresentative of the truth, but also that the reality looks far worse – increasing bills seem to be the implication of large dividend pay-outs, which have been disproportionate to the industry’s financial capabilities.

"As a result, I believe English customers have been misled with a fog of statements about ‘high private sector investments’ and should be made aware of this other, until now, hidden issue driving bills higher. It is very easy to impress the public by stating a massive, £140 bn investment figure, however, what’s crucially missing is context: the number translates bleakly into an average of slightly more than £200 per household per year vs an average of £270 in Scotland.”

The report is an edited and expanded version of Yearwood’s MSc thesis at LSE, published under the banner of Greenwich University’s Public Services International Research Unit (PSIRU).