Nice response.
I don’t disagree with everything you’re saying, but it comes down to whether you believe that profit maximisation can drive behaviours that result in a more efficient overall outcome.
I think the value for money for consumers is the key objective - the price control effectively determines the cost allowances and outcomes companies need to deliver through to a process of benchmarking and determining stretching view of efficiency.. Profits are then driven by incentives to outperform cost allowances and performance targets as well as an allowed return on historical investment.
The current Regulatory Capital Value (RCV) in the water industry is roughly £85bn (£3200 per household) which is the amount of capital expenditure investors have made and have not yet recouped through bills. Utilities are typically valued with reference to their RCV - with multiples of 1.5-1.8x.
To nationalise the industry we would need to repay the investment - presumably at a rate of 1x. National debt is already fairly crippling (as it was around privatisation and hence a motivation for doing it) given the near perfect storm of Covid, Brexit, Ukraine and energy prices. This winter, I am sure the the level of national debt will increase further to record levels given the cost of living crisis. Put simply, I don’t think we can afford to nationalise the sector. And one of the main benefits of privatisation is that the debt does not sit on the public purse. (To not pay would undermine any future private investment in national infrastructure creating a large risk premium for future investments and we need private capital for future infrastructure investment on a big scale given energy transition).
The issue around exec pay and dividends isn’t particularly palatable - but it is the drive for profit maximisation that means this is a natural outcome. Profits result in dividends, the execs are incentivised to deliver profits. If you agree that profit maximisation drives efficiency, then dividends and appropriate incentives for execs in theory is ok. The level and scale of them however is what grabs the headlines - and of course they feel out of kilter with what we think is reasonable. And I am not going to try and justify them apart from highlight that annual dividends of <£2bn on a total investment of £84bn equates to c3% annual return - investors make more money through the equity value rising than through dividends. It is also important to acknowledge that the stable nature of the sector and predicable dividends is what attracts investment - ie pension funds invest in such companies to help them manage future pension obligations.
Now I imagine you don’t believe that profit maximisation is the right incentive for the sector. I have sympathy with this view, but ultimately I believe that there would be more misallocation of resources, with greater overall costs (including more jobs at higher pay rates) and worse service (as was the case prior to privatisation). But we then enter a more theological debate about capitalism vs centralisation. I personally believe the current system in water has the checks and balances to ensure that as consumers we don’t pay too much whilst striking the balance on risk and reward for investors.
You’re right that jobs have reduced and salaries set at a level based on benchmarking. But then the average jo pays a lower cost for their water as a result. I realise that I’m on a hiding for nothing on here for talking about trade union rights and protections: so let’s leave that one there!
The model of ex-ante regulation protects consumers and investors by seeking to strike a balance on risk allocation between consumers and investors. A few examples:
- The eye-watering expensive energy cost of pumping water are currently significantly higher than companies have been allowed. This will have a serious impact on company profitability and we as consumer are partially shielded from 50% of those cost.
- Likewise current chemical cost are very high compared to what companies forecasted and we’re allowed.
- It is also likely that more people won’t pay their bills than companies forecast.
So there are a bunch of risks which investors face that provide protection to consumers (or in the nationalised counterfactual, the public purse).