Causing a stink: water shareholders invest less than nothing

Guest blog by Professor David Hall from the Public Services International Research Unit (PSIRU) at the University of Greenwich.

New analysis from the University of Greenwich reveals shows that in the 33 years since privatisation, the shareholders of the 10 English and Welsh water and sewerage companies (WASCs) invested less than nothing of their own money in the companies. Shareholder equity (share capital and share premium) in the companies fell from £3.8 million in 1990 to £3.4 million in 2023 – a cut of 62% in real terms.

This analysis is especially relevant as problems of water contamination in Devon and sewage pollution in the Lake District emphasise the need for investment, and as OFWAT considers its response to the companies’ bids for real price rises of 30%, which the companies claim is how the investment has to be financed. 

Our new research highlights the lack of capital injections from the shareholders own funds. This cumulated equity of £3.4 million represents only 25% of the total so-called ‘shareholder funds’ on the balance sheet - the rest of the balance sheet consists of ‘retained earnings’, the portion of profits kept with the company. Investment is not being financed by new shareholder capital, but by surplus profits from consumer charges.

These retained earnings would be equally available to public sector owners – and the Greenwich analysis shows that the private companies in 1990 inherited £5.7 billion in retained earnings from the previous public sector water authorities, and from government subsidy, but instead of growing over the years, the real value of retained earnings has halved. 

In stark contrast, instead of retaining profits, the shareholders have over that 33 year period decided to take out dividends with a cumulated real value of £72.9 billion (at 2023 prices), over 10 times the value of earnings retained on the balance sheet.

The combined effect of the extraction of dividends, reduction in real value of shareholder equity, and reduction in retained earnings, is a real loss of £85.2 billion (at 2023 prices) for the water and sewerage services of England and Wales.

Even the original purchase of shares at privatisation injecting a total of £3,767 million was effectively largely financed by extracting dividends of nearly £3 billion from the balance sheets inherited from the public sector – as well as benefitting from nearly £5 billion which appeared on the balance sheet thanks to the government’s write-off of debts.

This evidence from England and Wales is consistent with international evidence on the failure of the private sector to invest in water services in the global south and elsewhere. A global review by PSIRU in 2006 concluded that cutbacks in aid in the vain hope of private investment, meant that: “The net contribution of 15 years of privatisation has thus been to significantly reduce the funds available to poor countries for investment in water.”

The idea that a privatised water system can deliver new capital from shareholders for investment is a dangerous illusion: it does not happen. After 33 years when the private owners have been allowed to take so much money out of the system, it is not plausible to argue that there can be some ‘better’ regulation that will transform this situation. A rapid transition to public ownership is needed to end the large-scale extraction of money, as well as providing long-term advantages of democratic oversight and transparency.  Other countries, and other sectors, should take careful note of these results, carry out similar analyses on remaining privatisations – and resist any attempt to introduce any more privatisations.

Read the full report here.