Economic Theory

The case against “water Corbynism”

It will be interesting to see if Defra’s ‘toughest targets ever’  – a 25-year plan to cut storm sewage discharges – will be sufficient to quieten the clamour over the performance of the water companies.

The Guardian has called for English water companies to be renationalised. It is not alone. The Labour Party has long wanted to see water returned to the public sector (although Keir Starmer has rowed back on this recently), and predictably, so do many unions. Perhaps counterintuitively, according to one poll, 68% of Conservative voters are of a similar mind.

Leaving aside fundamentalist arguments that water, being an essential commodity, should not be in private hands (an argument seldom deployed in relation to food supply), or that capitalist owners should not be allowed to profit from its provision, the charge sheet is as follows:

  1. In a country blessed with a high level of rainfall, we have insufficient storage capacity and have not built a new reservoir in thirty years. Hence when we face what passes for England as drought conditions, hosepipe bans and potential wider restrictions on water use are seemingly inevitable.

  2. The water companies report high levels of leakage, meaning water is ‘wasted’ while in short supply elsewhere.

  3. There have been far too many cases of companies tipping sewage into rivers and the sea during periods of exceptional rainfall.

We have a centuries-old water and sewerage system, built up by a mix of private enterprise and local government initiative. In 1945 there were 1000 organisations providing water and 1400 responsible for sewage disposal. It has never been a tidy nationalised industry in the sense of the railways or, once upon a time, steel or air transport. By the 1970s it was, however, organised into regional authorities centred around river basins. These authorities relied for investment on government funds, and the record over many years was very poor. Water was always going to be behind the Health Service, education, defence and other spending priorities. In economic downturns governments of whatever party would cancel or postpone public sector investment rather than cut recurrent expenditure – classic can-kicking which is responsible for many of the country’s infrastructure problems.

Privatisation in 1989 opened up the opportunity for private investment to disconnect improvements to water supply and sewage disposal from the vicissitudes of public spending priorities. In this it has been broadly successful, with investment having increased sharply and most performance indicators (including environmental markers such as wildlife sustainability) showing steady improvement over time. This is despite increasing pressures on the system including population growth, new building (including in areas liable to flooding), higher levels of household water usage, paving over of gardens, the creation of drain-blocking monster fatbergs  – and NIMBYism which has prevented the creation of new reservoirs.

Some issues are misunderstood by the public. Take leakages. The outdated system of water supply pipes, many dating back well over 100 years, will inevitably leak, particularly as changes in soil conditions over time lead to cracks as the ground expands and contracts. To stop all leaks would be massively expensive, and a Sisyphean task as new leaks spring up all the time. ‘Zero leakage’ – like most zero targets – is a nonsense. So the question, for an economist at least, is: what is the optimal level of leakage? This is what Ofwat has to determine from time to time: it has to work out the appropriate level of leakage repair which can be done in a given period at a sustainable cost.

Ofwat sets target levels of leakages for the different suppliers. They will vary because of the different costs associated with particular areas; digging up land in open country, for example, clearly costs less than digging up whole streets in cities. But these targets are broadly met; firms are fined substantial amounts if they fail to meet them.

Similar reasoning relates to sewage overspills. When we have exceptional rainstorms – which may be increasing in frequency with climate change – all that water has to go somewhere. If contained within the system, it means domestic flooding and sewage coming back into the home. The only option in the short run is to dump it in rivers and the sea, with consequent health dangers. Again the regulators – Ofwat and the Environment Agency – set acceptable levels and frequency of discharge and firms are fined for going over the limits.

These fines could go further and tighter restrictions could be imposed – though some of the wilder ideas about jailing company directors for overspills are bonkers. The awkward truth is that preventing leaks and sewage overspill is very expensive. Ofwat is charged with keeping costs to the consumer down, and water prices have risen little in real terms in recent years. A massive increase in reduction of leaks and overspills would cost many billions, with the creation of hundreds of miles of new pipes and dozens of treatment plants.  In order for firms to be able to raise money for this level of investment they would have to be able to raise the price we all pay for water. It is not the shareholders – often entities such as the university teachers’ pension fund – who would pay, as in the fantasies of Guardian columnists and other windbagging opinion formers. There are also physical limits on the capacity of the companies and their contractors, plus all the bureaucracy associated with infrastructure investment in this country, so it will inevitably be a long haul – hence Defra’s 25-year plan.

My point is not that we should do nothing; of course, we should be going as fast as we reasonably can to rebuild and future-proof our water supply and sewage disposal systems. The regulators need to up their game – and we need to look closely at the dodgy revolving door between water companies and ex-regulators.

But it is difficult to see how nationalisation – in itself inevitably a long-drawn-out and costly process – would produce any improvement over smarter regulation of the private sector.

Costs would be reduced to the extent than no dividends would be paid, but government borrowing still has a cost. Investment would again be subject to shifting political priorities. As importantly, the past experience of nationalised industries – particularly where unions (inevitably strengthened by nationalisation) are powerful – suggests that productivity growth would be slower than under commercial pressures.

And we have examples close to home that suggest nationalisation is very far from a panacea.

The water industry is devolved, and in Northern Ireland and Scotland remains in government hands. But Northern Ireland’s industry has been chronically underfunded and its record, for instance on leakages, is no better than that of England. Meanwhile Scotland has a growing sewage spill problem: indeed in some respects it seems to be lagging behind England.

Although the Conservatives are unlikely to latch on to the apparent popular demand for nationalisation, stranger things have happened. And there are plenty of others who would jump into these murky waters feet first if given a chance by the fluctuations of the political cycle. Their arguments need repeated rebuttal.



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Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

1 thought on “The case against “water Corbynism””

  1. Posted 05/09/2022 at 18:36 | Permalink

    The position would be far better if the water companies’ parents had spent more on water engineering and less on financial engineering by loading debt-free utilities with debt to pay overly generous dividends and top managers’ salaries. Perhaps Prof Shackleton would make a really useful contribution by showing how this can be unwound. Prevention of dividends is the least the regulators could do to address the effect of their past failures.n

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