Empty threats about jailing bosses wont fix Britain’s water industry
Repairing the industry will take decades of much higher water bills. Steve Reed should show political courage and admit this.
Steve Reed is hardly the smartest beast in the Labour meadow, but even he must have noticed the effluent that he was obliged to discharge last week, by insisting that water company bosses should go to jail for covering up sewage spills.
As Environment Secretary, he knows that kicking the water company bosses is always good for a round of applause. He also knows that however often he repeats his threats alongside pledges to clean up Britain’s rivers, he is chronically short of the one thing that matters; money.
As he and his colleagues rant away at greedy executives, they must know that even if every water company CEO was just paid the minimum wage, it would have no impact on the money required to fix this woebegone industry. We have been treated to endless homilies from Mr Reed and his predecessors. We do not need the problem to be restated in a photo-op on the shore of Lake Windermere or a stinking sewage overflow. We know.
Essentially, the fine words and pretty pictures are just a displacement activity. If the government is serious about really cleaning up the landscape, then there is only one source of funds (spoiler alert: it’s not the water company executives). It’s not even their shareholders. Those in Thames Water have already written off their investment. Shares in United Utilities, for all its failures in Windermere, have returned a capital gain of just 25 per cent from their peak in 2000; that’s 25 per cent over 25 years. It’s a utility delivering a utility return.
The unvarnished truth is that despite privatisation, the political pressure to keep water bills down has been impossible for Ofwat, the regulator, to resist. Its task has not been helped by the rules of engagement being complicated beyond parody in their complexity. Thames’ previous owner, the Aussie bank Macquarie, knew exactly how to play the game, extracting dividends and replacing equity capital with debt.
The debt is now too much for the business to bear, but Macquarie is reported this week as being “very proud” of its stewardship of the business. This may betray a sense of humour, although the joke is at our expense. The other gainers from wrecking Thames at each five-year price-setting farago are the lawyers, acting for Ofwat and the companies. This is, of course, the British way.
Other things matter, too, like putting competent executives in charge of the companies themselves. Such people are not as commonplace as Labour seems to think. They are expensive, and can choose where to earn their rewards. Running a major water company is a lot harder than it looks, and the rewards are barely competitive at today’s levels. Mr Reed should (and probably does) know better than to spew out empty threats about sending them to jail. Given the speed of British justice and the difficulty in awarding blame years later, no talented executive would agree to risk a trial hanging over her indefinitely. And has Mr Reed heard of D&O insurance?
Much the same applies to the system of fining the companies for failure. Talk makes both politicians and regulator feel good, indulging the fantasy that a crackdown (another British favourite) will mean the executives lose bonuses and the shareholders pay. In reality, fines merely reduce the capital available to tackle years of under-investment. Fixing this industry will take decades of much higher water bills (or higher taxes on the same customers) and there will be more sewage horrors to come. Perhaps Mr Reed might show a little political courage by admitting this. His proposal that beatings will continue until morale improves makes him look, well, bovine.
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