English water – profitable “cash cow” for global investors

My last post was about an English water company owned by an overseas bank making millions from British taxpayers. Today comes news of a bid for another English/Welsh water company which, if it goes ahead, looks likely to enrich – or should that be further enrich – its owners and investors.

British water company Severn Trent looks set to become a juicy investment vehicle for Canadian investor Borealis, the infrastructure arm of the Ontario Municipal Employees Retirement System, and the Kuwait Investment Office. The approach is said to be at an early stage, although shares in Severn Trent soared on the news, and shares in Britain’s two remaining listed water companies, Pennon Group and United Utilities, also rose, as their money-making prospects are enhanced by the news, as Securequity sales trader Jawaid Afsar explained to Reuters News:

“United Utilities and Pennon will attract further speculative interest. These are cash cows, generating huge amounts of profits and generating very good dividends, and these make attractive targets for overseas investors.”

The Reuters article continues:

“Yield-hungry investors have been showing strong interest in British water and sewerage firms as they seek stable cash flows and a favourable regulatory structure.”

Stable cash flows – that would be because council tax payers, whether rich or poor, HAVE to pay their water bills  – unless they have their own septic tank.

Let’s hope  Scottish Water stays in public hands.


Making money out of water

Privatisation is a controversial issue. The lines between “pro” and “anti” privatisation used to be clearly drawn between right- and left-wing, politically speaking. Those lines have become increasingly blurred.

Traditionally, left-wing parties like Labour advocated nationalisation of many industries, while right-wing parties like the Conservatives preferred privatisation. The Labour government of the late 1940s nationalised coal, iron, steel, gas, electricity and transport. The Thatcher government of the 1980s brought most of these industries and public utilities back into private ownership.

From 1997, New Labour continued the practice of privatisation, outsourcing central government services and building on the private finance initiatives (PFI) introduced by the Conservatives.

One of the biggest advantages of privatisation is that it introduces competition, and that can inspire research and development while reducing prices for the consumer. This has been the case in the telecoms industry, as well as gas and electricity – although many consumers don’t even bother to take advantage of it.

But in industries where competition is restricted or where contracts are awarded by the government rather than the consumer, the public can get a very bad deal indeed.

One such industry is water. Water was privatised in England and Wales in 1989, but in Scotland and Northern Ireland it is still publicly owned.

Not only was water privatised – there was no deregulation to allow competition. This means that if you live in England and Wales and you are not happy with your water and sewage treatment supplier, the only alternative is to go off-grid and get your own private water supply.

The Thatcher government proposed privatisation of the water supply in 1984, but there was such an outcry from ratepayers that the idea was quietly shelved in the run-up to the 1987 general election. Once the Thatcher government was comfortably back in power, the water privatisation went ahead, initially only in England and Wales.

The Conservatives intended to privatise the Scottish water supply in the 1990s, but there was such widespread hostility to the plans, including a referendum organised by Strathclyde Regional Council in March 1994 that returned a 97% vote against the proposal, that the government decided instead to restructure water regulation in Scotland. This eventually led to the creation of Scottish Water, a public body, in 2002.

There have been further attempts to privatise the Scottish water supply. Thankfully these have not been successful. Water is essential for life. If the public water supply becomes contaminated, it can lead to epidemics.

In my opinion water is not something that people should be allowed to profit from, yet this is what is clearly happening in the areas where the water supply is privately owned. The Thames Tideway scheme is one of the worst examples. It’s not so much the project that is at fault, but the way it is being financed.

The Thames Tideway scheme

The London sewerage system, originally designed and built in the 1850s, is now straining to cope with the increased population in the city. Overflows are increasingly common, averaging 50 a year, discharging raw sewage and rainwater.

A long-overdue project to upgrade the sewerage system is to be undertaken in the next few years. Known as the Thames Tideway Scheme, it will consist of a 25km tunnel running under central London. This will be built in conjunction with the Lee Tunnel, which is already under construction. The project is scheduled for completion in 2022 at an estimated total cost of £4.2 billion.

The project will be paid for by Thames Water’s domestic sewerage customers, which will result in an increase in their annual bills by an estimated £70 to £80 at 2011 prices. This is despite the fact that Thames Water’s owners have made significant profits, including dividends of £2.6 billion paid to shareholders in the past 10 years, and that there has been awareness of the imminent need of a major upgrade to the sewage system for years.

In January questions were asked in the House of Lords as to why shareholder dividends were not being reduced in order to finance the project. Questions were also asked about the amount of tax the company pays.

Although some of the figures quoted by the peers were apparently inaccurate, it is clear that they were making a very valid point. The Thames area water supply is clearly a goldmine for its shareholders and investors, but the people who have no choice but to pay for it seem to be getting a raw deal.

Private equity vehicle?

When Liberal Democrat peer Lord Stoneham asked whether Thames Water was simply “a private equity vehicle designed to save tax for its overseas investors at the expense of London customers and UK taxpayers, who are supposed to stump up for its infrastructure investment”, Conservative peer Lord de Mauley replied:

“Thames Water pays its tax. Tax relief is allowable against the capital expenditure incurred with the aim of encouraging investment by companies. Water and sewerage companies have significant capital programmes in comparison with their revenues. They therefore benefit from tax allowances proportionately more than others.”

Capital programmes? Isn’t it the customers and council tax payers who are stumping up for the capital expenditure in this case?

In a statement, Thames Water said: “It is important to note that many of Thames Water’s shareholders are pension funds in Britain and elsewhere, which rely on dividends to pay people’s pensions.”

Thames Water is owned by Kemble Water Holdings Limited, a consortium of investment funds led by the Australian Macquarie Group. Macquarie takes a management fee of around £3.5 million a year.

Here is a list of the Kemble Consortium:

Macquarie European Infrastructure Fund LP –            Macquarie European Infrastructure Fund II –            Macquarie Diversified Infrastructure Fund –            Macquarie-FSS Infrastructure Trust

–            Macquarie PRISM Pty Ltd –            LODH Macquarie Infrastructure Fund LP

•            Stichting Pensioenfonds ABP

•            Alberta Investment Management

•            AMP Capital Investors

•            Australian Super Pty Ltd

•            British Colombia Investment Management Corporation

•            United Super Pty Ltd

•            Finpro SGPS SA

•            Motor Trades Association of Australia Superannuation Fund Pty


•            OPSEU Pension Trust

•            Stichting Pensioenfonds voor de Gezondhelt, Geestelijke, en

Maatshappelijke Belangen

•            Queensland Investment Corporation

•            Santander Private Equity

•            SAS Trustee Corporation

You can read more about these companies from page 18 of this pdf document.

It seems clear that the London water supply has been converted into an asset for investors to make money out of. And there is a lot of pressure from big business and financial interests to find other public money-making vehicles. We can’t afford to ignore what’s going on, because ultimately, it’s us who will have to foot the bill.

Why are big political parties so similar?

In a recent Sunday Times article, Jamie Oliver said that said that although he did not support UKIP he loved the fact that the party was “stirring it up”.

I expect a lot of people feel the same way. One reason for the huge success of UKIP (the UK Independence Party) at the May local elections in England and Wales is that it offers change, at a time when the mainstream political parties all seem to be doing the same thing.

What a terrible situation, for people to be feeling so disenfranchised that they welcome the success of a party they don’t even support, just because it offers them a small feeling of influence in the political system, a system that seems to have been hijacked by wealthy business interests.

If the political parties are all saying and doing more or less the same thing, it effectively disenfranchises the voter. Although there are many smaller parties whose policies are very different from the three mainstream parties, they don’t have the slightest chance of achieving power – so what’s the point of voting for them? It would just be a waste of your vote. No wonder many people have given up on voting altogether – except in those rare times when a smaller party like UKIP seems to be in with a fighting chance. At those times, even people who might disagree with a lot of what that small party stands for might support it, simply because it offers the possibility of change.

But the chances are that even if a small party does achieve power, like the Liberal Democrats at the last general election, it will be forced to make such compromises that the policies that made it stand out in the first place will just evaporate. How depressing.

However, hope is at hand. Things could be different. Take the example of Scotland under devolution.

Why Scotland is different

Proportional representation is used for voting in Scottish elections – the partially proportional “additional member system” (AMS) or the “single transferable vote” system (STV) for local government elections.

This makes a big difference. The Scottish voting system gives smaller parties a much greater chance of achieving real power and growing into big influential parties, without having to water down the policies that made them stand out.

It also explains why UKIP made only very small gains in the three Scottish by-elections that have been held this year.

Under the “first past the post” system used in England and Wales, anyone who votes for a small party knows their vote is likely to be wasted – unless, like UKIP, one of these smaller parties is experiencing a huge surge in support.

But under the Scottish voting systems, small political parties and independent candidates have a much greater chance of winning seats. This means people can vote for a small party knowing that that party has a fair chance of achieving power, even if there isn’t an unusually large surge of support for it. If people in Scotland are feeling the same way as Jamie Oliver, they don’t have to rely on UKIP to “stir things up”.

It also means the Scottish political parties don’t have to keep their policies in the amorphous “centre ground” in order to achieve political power and influence. They don’t have to appeal to the “lowest common denominator” and achieve a huge groundswell of support in order to achieve even the slightest chance of power, as parties do under the “first past the post” system in England and Wales and in the United States, where the “first past the post” system is also used.

Despite the huge gains UKIP made in the local elections, they have little chance of achieving any real power in a general election. They are more likely to split the right-wing vote, increasing Labour’s chances. This is what happened in David Cameron’s constituency of Witney at the council elections. Winning candidate Laura Price (Labour) got 756 votes. The UKIP candidate won 746 votes and the Conservative candidate was pushed into third place with 697 votes.

If the AMS voting system had been used, right-leaning voters who wanted to protest or vote for a party that offered a clearer choice would have been able to vote for UKIP without contributing to a split in the right-wing vote. They could have made UKIP their first constituency choice and Conservative their second, regional choice. Or they could have done it the other way round. UKIP would then have a greater chance of achieving power.

This works for left-wing as well as right-wing parties. If the AMS system had been used for UK general elections in the 1980s, when the SDP-Liberal Alliance were briefly in the ascendancy, it might have prevented the left-wing vote being split.

Voting systems that are based on proportional representation put more political power in the hands of the electorate, the voters. Political parties are beholden to voters, not to business lobbyists, as they are under first past the post.

What difference does all this political theory make to my life?

A considerable difference. Free prescriptions and tuition fees are two things. The Small Business Bonus Scheme is another. These things have come about not because the SNP is more left-leaning than Labour, but because politicians in the Scottish Government are more beholden to the voters than to big business lobbyists. And that’s because the Scottish voting system offers voters greater representation.

Unfortunately in UK general elections, Scots are still stuck with first past the post.

  • About this site

    Our democracy in the UK is deeply flawed. Under the "first past the post" system, which is used to elect the Westminster House of Commons, the majority of UK voters are not represented in Parliament by the party they voted for.
    This website is not calling for anarchy or revolution, but for a fairer and more democratic parliamentary system.

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