The British experience of privatisation.

A good test of the private versus public argument is, however, to be found in the United Kingdom. Most privatisation in the global water and sanitation sector is limited to operational management but in Britain, the assets of the water boards were sold to private investors. Until 1989, most British water was delivered by public utilities, organised around river basins rather than municipalities. As in America, there were some small private companies, but these were little more than historical curiosities. Yet in 1989 the privatisation programme introduced by the then prime minister, Margaret Thatcher, reached water, and all ten English and Welsh water utilities were floated on the stock market. Instead of retaining the assets in public hands and franchising out operations and maintenance, as France had done, the British government chose to privatise the assets as well.

How does the record look 17 years on? In terms of quality, service delivery and efficiency, the answer is excellent; in terms of stock market performance, less so. At the time of privatisation, thanks to years of Treasury cheese-paring, the British water utilities faced a daunting backlog of capital investment needed to comply with European water-quality directives. This persuaded the government to hand the new water companies a lavish sweetener. They were forgiven all their debt and allowed to raise prices. The first director of Ofwat, the new water regulator, now concedes that the initial regime was too generous. Ofwat’s price regime was tightened at reviews in 1994 and 1999. By then most of the much-needed capital investment had been made, and efficiency gains had kicked in. Yet several utilities, especially those that had taken on the biggest debts, were under pressure. A painful windfall tax was duly imposed in 1997 and shareholders began to grumble. Mergers between utilities were frowned on by the regulator, so that avenue to cost-cutting was closed, and the utilities had to look for other solutions. Some merged with regional electricity companies, others were sold to the French or other foreign companies. Welsh and Yorkshire (now Kelda) Water pondered becoming mutually owned companies. The regulator blocked Kelda’s plan, but allowed the sale of Welsh Water to Glas Cymru, a sort of mutual owned by a group of local investors.

Does such a complex experience deserve a favourable verdict? The answer is to be found north of the border, in Scotland. In 1989, Scotland’s water was comparable to the English utilities in every respect, but the government kept it in public hands. For a while, the Scots benefited from lower bills. But as the new Scottish regulator has recently conceded, things look different now. Scottish Water is less efficient than its’ southern peers, its service delivery is poorer and its water quality is worse; it is, in short, ten years behind. To catch up, it is having to raise water tariffs above English levels. The Scots, it turns out, are paying a high price for keeping their water in public hands.

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