Utilities submerged in overwhelming debt: Alex Brummer

The battle to rescue Thames Water continues, prompting questions about why the regulator Ofwat or anyone in Whitehall failed to acknowledge that its debt level, at 80.6% of capital (compared to the industry average of 68.5%), posed a potential existential threat in a time of rising interest rates.

Water privatisation in 1989 marked the end of Margaret Thatcher’s tenure as prime minister.

As expected, there were dissenting voices against such a radical approach to public utilities.

Leaking money: Much of the great sell-off to foreigners took place in the Blair-Brown years in government with barely an eyebrow raised

Successive Labour governments upheld public ownership as a matter of principle until Tony Blair abolished Clause 4 in 1995. It seems unlikely that the Labour Party under Keir Starmer would revert to that approach again.

Despite the challenges faced by privatised sectors, it is hard to deny the transformative impact of the Thatcherite revolution that decentralized financial decision-making in large parts of the economy.

Britain’s privatisation model has been replicated worldwide and is now a central feature of International Monetary Fund interventions and advice.

So, what went wrong in the UK? The idea of shareholding democracy, inspired by the US, was embraced by the public following the successful ‘Tell Sid’ campaign in 1986, which took British Gas to the London stock market.

Indeed, the privatisation of British Gas has been highly successful. The division into three companies – Lattice (networks), BG Group (exploration, sold to Shell for £55 billion), and Centrica – proved to be a lucrative investment. Surprisingly, all three remain largely under British ownership.

However, the problem with the water utilities, power industry, steel production, railways, and airports was that they fell into the hands of disinterested overseas owners with complex financial structures. This was detrimental to the necessary investment in modernizing Britain’s infrastructure and meeting industrial needs.

One paradox is that much of the foreign sell-off occurred during the Blair-Brown era without much scrutiny.

Moreover, in the case of power, Gordon Brown’s utility tax, intended to fund youth employment schemes, triggered multiple takeovers by foreign companies.

With the exception of Electricite de France (ironically state-owned), most of these deals resulted in dividends flowing overseas instead of being reinvested in Britain.

Trigger: Gordon Brown’s utility tax, to pay for well-intentioned youth employment schemes, was the trigger for multiple overseas takeovers

EDF has proven to be a reliable partner in securing Britain’s nuclear future at Hinkley Point and potentially at Sizewell C, using domestic contractors. On the other hand, Scottish Power, owned by Spanish company Iberdrola, has diverted dividends to fund wind farms globally instead of investing more in Scotland’s climate change goals and consumers.

SSE, one of the few UK power companies listed in London, has made significant investments in carbon-free production. The £10.3 billion sale of BAA to Spanish construction firm Ferrovial with a heavy debt burden has resulted in detrimental impacts on infrastructure investment and prioritizing dividends and bonuses for foreign owners over the interests of carriers and consumers, resulting in one of the most chaotic and unreliable airports in Europe.

The owners tend to increase landing fees and impose exorbitant car park and drop-off charges, especially during the Covid era. The steel industry has experienced continuous crises since Anglo-Dutch Corus was sold to Tata for £6.2 billion in 2007.

Could any of this have been prevented?

If the government had retained a golden share in the public utilities, similar to its approach with BAE Systems and Rolls-Royce, it could have deterred debt-laden buyers driven purely by financial motives.

It is also evident that regulators, particularly Ofwat, were overly focused on consumer prices and neglected the risks associated with complex ownership structures.

The main culprits are compliant boards that took the money and fled, along with pension fund investors who prioritized immediate cash over national interests.