A themed seminar series on ‘Financialization, Development and Economic Inclusion’ run by the Department of International Development and the Department of Anthropology takes a closer look at how financialization is undermining public accountability in the provision of public services.
This article is part two of a two part blog post.
As we saw last week, thinking through the economic feasibility of nationalizing UK public utilities requires greater reflection on what financialized processes are already costing us as citizens, taxpayers and consumers. In the International Development/Anthropology ‘Financialization, Development and Economic Inclusion’ themed seminar series, a third talk by Kate Bayliss (SOAS) updated us on how the privatization of water in the UK has turned water from a public good into an asset class for private investors. While investors are ostensibly courted to bridge financing gaps in the improvement of water delivery and infrastructure, efforts to attract private finance have required the government to spend resources and restructure the water system to create bankable projects attractive to investors. In the UK, this has led to the creation of a range of special purpose vehicles for the majority of water companies, overseen by a state regulator, Ofwat, who sets investor-friendly prices every 5 years, with advice from consultants professionally committed to the maximization of shareholder value. The special purpose vehicles involve a murky consortium of institutional investors, including private equity funds, sovereign wealth funds, pension funds, and insurance companies, as well as private investors with addresses in tax havens. Water bills have been securitized by issuing bonds to generate a guaranteed resource flow to private investors.
The result is that private investment serves to extract profits through dividends rather than contributing to infrastructural improvements. Kate Bayliss was involved with a recent study by the University of Greenwich, which showed that, in the past decade, the nine main English water companies have collectively made £18.8bn of post-tax profits and £18.1bn has been paid out as dividends. Capital expenditure, and in some cases dividends themselves, have been financed by taking on more debt, building up a colossal £47 billion in debt in companies that had no debts at privatization. Ongoing problems of severe water leakages and evasion of pollution controls indicate that investment in water infrastructure is less about service provision and public values than extraction. Conversely, Scottish Water, which remains in public ownership, invests over one-third more on a per capita basis in water infrastructure than privatized English companies.
The heavy private investment in English water companies doesn’t bring down water bills either. Some 27% of our waterbill goes on ‘return on capital’, meaning payout to investors, interest and debt repayments. In England water bills have increased by 40% since privatization – 16% in real terms – while in the Scottish public water utility, the real value of water bills has remained the same over the past 17 years. Rising water bills are seriously affecting the ability of some household to afford water. An affordability risk of 5% is considered bad, but in the UK 30% of households have problems affording their water bills, which has become the most common type of debt for poor households. Financialized water is more focused on investors’ than consumers’ ‘value for money’, and now frames the ability to afford water bills as an individual rather than a public responsibility.
As Kate Bayliss explained, these issues erupted into a scandal last year after the University of Greenwich report was released. The then Environment Secretary, Michael Gove, decried the abuse of public trust by water companies’ use of ‘offshore financial arrangements, securitisation, highly-geared structures, high levels of executive pay, high dividend payments’. Yet finger wagging by the Conservative government is more about public performance than real change. In fact, efforts to introduce ‘benefits sharing’ for poor consumers have run into trouble with the financial sector. The credit rating agency, Moody’s, has reacted to redistributive measures such as ‘benefit sharing’ by downgrading the UK water sector outlook from stable to negative, owing to a heightened risk of future political interference. Interestingly, BT chief executive Philip Jansen also denounced the nationalization of parts of BT by raising the spectre of financial markets: even though they extract resources from consumers and the state, and provide poor service, millions of people are shareholders either directly or through their pension funds.
From inside this tangled web of privatized utility provision, the real question is whether nationalization would cost us more than privatization is already costing us. Should we be content to turn our utilities into asset classes for private investors, in the hope that something will trickle back to us through the stock market – and what of those without shares or pensions to fall back on? And how does all of this affect the political space for public opposition? Under the financialized terms of private investment in dam construction discussed by Pon Souvannaseng in Part 1 of this blog, Ugandan and Laosian rural dwellers were unable to benefit from financialized energy projects, and local civil society faces increasing challenges in contesting these complex arrangements. Even with the benefit of Kate Bayliss’ lucid explanation of water financialization, and a room full of academics were struggling to understand their own water bills. And Kimberly Chong showed how global management consultancies are hard wiring these impenetrable financialized management logics into formerly public corporations across the globe. Greater transparency won’t help ensure democratic accountability where systems are so convoluted and so divorced from the logic of public value and consumer protection that the public, and the majority of parliamentarians, can’t understand them.
Jeremy Corbyn may have an allotment, and probably owns at least one pair of Birkenstocks, but that doesn’t mean that the Labour Party’s ideas about nationalization are throwbacks to the 1980s. 21st century economic policy needs to organize public services in ways that benefit the public, rather than allowing private investors to dip their invisible hands into taxpayers’ money and the consumer’s wallet. If we really want to ‘take back control’, we should focus less on the European Union, and turn our full attention to the unaccountable grip of financialized private investment on our public services.
Please join us next term for the rest of the Financialization, Development and Economic Inclusion seminar series on Wednesday fortnightly, from 5.00-6.30 pm in Connaught House room 7.03.
Dr Kate Meagher is Associate Professor in Development Studies in the Department of International Development.
The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.