Andy Burnham came to power promising greater “public control” over the UK’s utilities, such as water and energy. His reasons for doing so were to cut what is described as the “privatisation premium” paid for public services by consumers, and to improve their quality. The plight of the stricken Thames Water exemplifies the scale of those problems.
Yet two months on, the government has failed to provide any real clarification of what it means by “public control”, beyond stating that this may not necessarily mean public ownership of these companies. One option under discussion is to build a network of regional political bodies to hold water companies to account. But such a step would not, by itself, confer the control needed to meet the prime minister’s objectives.
Meanwhile, in a febrile environment for borrowers, uncertainty about “public control” is imposing real costs, both on those companies affected and the UK government. As a result of this uncertainty, bond issues by utility companies that would have financed investment are being deferred and their costs are rising. Thames Water is in a state of suspended animation, in part because no one knows what its ultimate proposed ownership and regulatory structure will be.
With public ownership not having been ruled out, its potentially significant cost is another factor adding to pressures in UK government debt markets. In the face of these mounting costs, there is a strong case for the government to quickly clarify its intentions. What should it mean by public control of utilities, in order to secure the best possible services at a reasonable cost?
Good governance typically involves seeking an appropriate balance between incentives and expertise. For public services, this means a set of incentives well aligned with the interests of customers – namely, the general public – while having the expertise to deliver services effectively. This underlines the perils of the privatised model.
For example, Thames Water is owned by a consortium of investors, including highly leveraged hedge funds. This governance structure has no shortage of high-quality financial expertise. Unfortunately, this highly “innovative” (and leveraged) financing structure is singularly ill-suited to a low-risk public utility; investor incentives are horribly misaligned with the public good.
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