Case study: the financialisation of water in England and Wales

This paper uses the systems of provision (sop) approach to explore the role of finance in the delivery of water and sewerage in England and Wales. Since privatization of the ten water and sewerage companies in 1989, the nature of private ownership, and its engagement in the sector have evolved. Initially listed on the stock exchange, with shares allocated to customers and the general public, ownership has now become consolidated. Only three of the ten firms remain listed. Four are in the hands of private equity, owned by global financial investors. Two are owned by Asian infrastructure conglomerates, and one is owned by a not-for-profit company. In contrast to mainstream economics, the sop framework sees sector outcomes in terms of relations between agents, embedded in historically evolved structures and processes. Rather than perceiving consumption patterns to be the result of independent decisions made by atomistic individuals, the sop approach considers consumption to be linked to production as part of a vertically integrated process. As a result, each sop is different and depends on the commodity or service in question and the context in which provision is located. Water has specific material properties which affect its delivery and which also impact on the way in which consumers engage with producers. When the wider historical, political, geographical and socioeconomic context is added to the mix, this creates a sop that is unique to the delivery of water in England and Wales. Applying the sop approach shows that relations between agents are contested in the sector, with the interests of private shareholders diverging from those of end users in important respects. The state has the role of mediating these competing priorities, largely through the regulator, Ofwat. However, the state itself has a specific, if evolving, political agenda which feeds into policy making. Locating finance - both for production and consumption - in the context of the interplay of these divergent interests provides a deeper understanding of how specific outcomes emerge. The paper shows that the water sector is heavily financialised and that global financial capital is deeply embedded in production processes. Financialisation has in some cases created opaque financial structures and secured high returns for producers. Innovative securitisation procedures, via off-shore jurisdictions have enabled some companies to raise gearing to levels unanticipated in the last price review process in 2009, and unimaginable at the time of privatisation. Shareholder distributions appear to be boosted by complex transactions across extensive corporate group structures. At the other end of the scale, the sector is financed by payments of customer bills. Since privatisation, prices have risen substantially and a growing proportion of households is struggling to pay their bills (although consumers have benefitted from substantial capital investment). Furthermore, regressive outcomes result not just from transfers from consumers to investors, but also from the rise in the proportion of turnover allocated to rentier incomes. In contrast, the share of income allocated to wage labour has declined over the past twenty years. The state prioritises regulatory stability in order to continue to attract private investors to finance the country’s infrastructure more generally. Hence, the sop is shaped by the needs of investors. Measures to support low-income households are small in relation to the financial returns. Things are changing in the sector. The current price review (PR14) looks set to be more demanding on water companies than previously. The recent water White Paper will require firms to separate their retail and wholesale activities in anticipation of greater competition.. However, for these measures to make a significant dent in the structural inequality of the sop, investors will need to see their revenues fall, in which case they may decide they can make higher returns elsewhere.