Private Island: Why Britian Now Belongs to Someone Else (15 page)

Indoor running water and the novelty of water closets proved popular. The more houses the company supplied, the greater the demand; the greater the proportion of houses with mains water in Cheltenham, the more uncomfortable it became for the town's liberal consciences that the poor couldn't afford it. The company was coming under pressure from three sides: from the town, to supply more water more cheaply; from the springs of the Cotswolds, which couldn't cope with demand; and from its shareholders, who expected profits and dividends to be timely and fat. When government officials arrived from London in
January 1847 to hear about plans for a new reservoir, they walked into this conflict. At the time fewer than half of Cheltenham's 4,700 houses had mains water; the hospital and orphan asylum got water free, but there were no public fountains for the poor; in some of the poorer parts of town, up to ten tenements drew water from a single pump. The company was making a profit of £677, 15 per cent of its turnover. With the national debates that would lead to the 1848 Public Health Act at their height, the government agents told the company that the Act of Parliament needed to get the project going was more likely to get backing if it ‘contained some provision for the comforts of the poorer classes'. The company retorted that if the landlords of the poor were prepared to pay for piped water, the poor would get it.

The feud between the Board of Commissioners and the water company went on for years, despite the cross-membership of the two boards, culminating, in the 1860s, in Shewell's long tenure as head of both. On 15 August 1863, Shewell chaired a meeting of shareholders, who voted to pay themselves a massive dividend and bonuses worth 95 per cent of the company's profits, give up the effort to supply more water, and sell out to the ratepayers. The plan had the enthusiastic support of the town's liberal newspaper, the
Cheltenham Examiner
, but a few weeks later the town commissioners – also chaired by Shewell – voted down the plan. One commissioner, who believed like most people in Cheltenham that there was plenty of water in the Cotswolds if the company would only fetch it, declared prophetically: ‘There is enough water to be got off the hills to drown Cheltenham twice over.'

Letters from India took about six weeks to reach England at this time and it would have been just after this knock-back that Shewell heard of the death, from illness, of his nineteen-year-old daughter Louisa in the cantonment at Mhow on 27 August, where she was staying with her brother William, an army major. The timing is probably coincidental, but it was in this period that the relationship between Shewell the water company boss
and Shewell the top politician in town began to go downhill. Shewell (company) seemed to decide that if Shewell (town) wanted more water, then more water he would have. To the horror of the genteel ratepayers of Cheltenham, it emerged that his water company was planning to make up the supply shortfall by taking water from the River Severn – described by one MP at the time as ‘the common sewer of the Midland Counties' – at a place called Mythe, just upstream from Tewkesbury.

‘It is thus sought to substitute,' thundered the
Examiner
, ‘for the pure and limpid supply we now obtain from the spring head, the contaminated waters of the Severn.' As the town resisted the plan, hostility towards Shewell, and the undemocratic way the commissioners were elected by a minority of citizens in stitched-up contests, deepened. The town begged the company to install double taps for its customers – one with nasty Severn water for washing and flushing, another with nice Cotswold spring water for drinking. The company said it would cost too much. An attempt by the town to buy the company fell through. To Shewell (company's) fury, which Shewell (town) shared and failed to conceal, the other commissioners spent thousands of pounds trying to set up their own, rival water concern.

By October 1865, relations between Shewell and the town commissioners' clerk, George Williams, an indefatigable opponent of the Mythe scheme, had reached the stage of open warfare. Yet in the cosy world of old-time west of England politics, nothing could stop Shewell. In November 1865 he came up for reelection as chairman of the commissioners for the seventh time. He was opposed. One commissioner declared: ‘I would not say that Mr Shewell would set up his private interests against the general interests of the town, but human nature is such that private interests must, to a greater or lesser extent, sway the transactions of life.' Nonetheless, Shewell was re-elected by sixteen votes to thirteen, to the cheers of the Tory end of the table, and five years later the Mythe waterworks opened for business.

When, in 2008, I asked Peter Gavan, Severn Trent's director of external affairs, if I could visit the Mythe waterworks, he said I could not. The floods, he said by way of explanation, were history; the implication being, I suppose, that history was not a good thing for a business to have. During the four days I spent in Tewkesbury a month later I cycled past the works each day on my way to and from the B&B where I was staying. It was surrounded by a temporary flood barrier built of components I'd last seen in Kandahar in Afghanistan in 2006, where they protected British troops and their allies from attack: textile and steel-mesh bins, filled with sand or earth, made by the Leeds company Hesco Bastion.

Edward Shewell's youngest son, Arthur, a lieutenant-colonel, was killed in Kandahar in 1880, rescuing a wounded comrade outside the Kabul Gate. His father didn't live long enough to hear about it; he died in 1878, two years after the town commissioners were replaced by a more democratic council and a few months before that same council finally bought the water company out. It would be easy to caricature Edward Shewell and his cronies as corrupt old Tory buccaneers, damning the poor and holding back progress. That would be unfair. The ratepayers of Cheltenham could have bought the company out much sooner than they did, but feared the responsibility, and weren't ready to accept the principle that universal access to water and sewers benefited everyone, even if the rich ended up paying proportionately more for it.

More than that, Shewell, manipulative as he was, was something that his latter-day counterparts, the Colin Matthewses and Tony Wrays, emphatically aren't: a genuine entrepreneur and risk-taker, and a localist, deeply embedded in the community he both served and exploited. Even his attempts, through political control of the town, to establish what Severn Trent has today – a monopoly of water supply in its area – couldn't fend off the risk of real competition from other water sources. He and his partners made fortunes out of selling water to Cheltenham,
but they took a risk to build the Mythe waterworks, and the risk may not have come off. Mythe did open in 1870, but only to supply Tewkesbury – a fraction of the market its backers needed. Cheltenham refused to take Severn water until 1894, long after Shewell was dead and the water company was municipal property. Cheltenham has used it ever since. Shewell's Mythe waterworks entered history as a nineteenth-century private concern, spent 111 years in public ownership, and entered the twenty-first century – much expanded and modernised – as a private asset again. But the private water companies of twenty-first-century Britain are very different creatures.

The privatisation of Britain's water companies in 1989 had nothing in common with the romantic notion of shareholder capitalism, where inventors and entrepreneurs have ideas, start businesses and sell shares to bold investors in order to raise money to help those businesses expand. Far from being exciting new entrepreneurial ventures, the companies involved were settled operations that had been around in one form or another for almost 200 years, and had benefited, for more than half that time, from steady infusions of ratepayers' and taxpayers' money.

The most striking contradiction between water privatisation and Thatcherite free-market romanticism was the monopoly nature of the water companies: millions of customers who have no choice of supplier, no choice but to take the water, and no choice but to pay for it. Millions of captive monthly payments in perpetuity: an investor's dream. Yes, there was a regulator, Ofwat, to limit prices, and to make sure the companies invested in rebuilding the ageing water and sewage systems, but there seemed little danger that the government of Margaret Thatcher would prevent shareholders making a fat return. And so it proved, even unto her successors.

The simplest way to understand the way the water set-up works in England is to think of it as a form of buy-to-let scheme, with us, the customers, as the tenants, paying water bills, like
rent; the shareholders as landlords, owning the water companies; and the company staff, like a property management agency, collecting the rent and maintaining the property. Every so often a government inspector – Ofwat – comes round, sets a limit on how much rent the property managers can charge, and tells them they should get a move on with the renovation. But if we don't like the property, the management agency or the landlords, or if we think the rent is too high, we don't have any choice. We can't move to a cheaper property, or a better-run one; we're stuck.

Ofwat argues that English water companies are more efficient than they were before privatisation, pollute less, provide cleaner drinking water and have spent tens of billions of pounds renovating the country's water system. All but the first proposition are true; the first may be too. But that's to compare the privatised water companies with the investment-starved, bureaucratic, centrally funded leviathans of the 1970s and 1980s, not with what they might, or should, have been. In January 2008, the Oxford economist Dieter Helm published a hair-raising analysis of the regulation of Britain's privatised utilities that might have shocked the nation, had its dense technical vocabulary been more comprehensible to MPs and non-economists. Helm argued persuasively that Ofwat had permitted the growth of a system which efficiently ripped customers off, while exposing utility companies to a risk of bankruptcy that has never been higher.

It works like this. When Ofwat decides how much the water companies should be allowed to charge customers, one of the key numbers is how much the regulator thinks it's fair for an investor who puts money into the water industry to get back: the ‘return on capital'. But a water company can get investment in two ways. It can get money by selling shares to shareholders – ‘equity' – or it can borrow money directly; that is, take on debt. Crucially, equity commands a higher expected rate of return for investors than debt, because shareholders are expected to
be more tolerant of risk. The problem Helm identified was that England's water privatisation lumped together two entirely different sides of the business: on the one hand, the existing assets (waterworks, pipeline networks, reservoirs, pumps and so on); and, on the other, operations plus investments in new equipment. The first side was low-risk, and could easily be financed with debt. The second was riskier, and more suitable for finance with a mixture of debt and equity. But Ofwat only has one figure for what it considers a reasonable return on capital: an average of debt and equity.

In other words, Ofwat bases the amount customers pay for water on the assumption that water companies will take on a certain mix of expensive equity financing and cheaper debt financing. But what if water companies simply take on more debt than Ofwat expects? Then the customers will still pay for water according to Ofwat's assumptions, but shareholders will pocket the difference between the two. And that, Helm says, is exactly what happened. ‘Investors,' he wrote, ‘now contemplate an extraordinary open goal … The scale of this transfer [from customers to shareholders] is enormous.' In an article in the
Financial Times
inspired by Helm's analysis, Martin Wolf wrote: ‘Investors have been able to buy the companies (BAA and the water companies, for example), replace the equity with debt and enjoy a licence to print money. Professor Helm estimates that this financial arbitrage has been worth up to £1 billion a year, at the expense of the customers, predominantly in water. This is, quite simply, a scandal.' As if this wasn't bad enough, Helm pointed out that the huge recent increase in utilities' debt threatened the stability of the riskier side of their business, the day-to-day operations. ‘The utilities may not be robust against adverse external shocks,' he said bluntly. ‘They might go bankrupt.'

Emma Cochrane, the head of corporate finance at Ofwat, wrote to me in an email that the regulator was familiar with Helm's ideas, had considered them ‘very carefully', and rejected them. Helm believes the role of Ofwat itself makes investors in
water companies effectively invulnerable to risks where their fixed assets are concerned, passing the risk on to customers; Ofwat disagrees. Cochrane also questioned how easy it would be, as Helm suggests, to split the safe pipes-and-reservoirs side of the water business off from the riskier operate-and-build side. ‘You argue that Ofwat has permitted a system that both rips off customers and exposes utility companies to bankruptcy risk. I'm not sure you can argue both,' she wrote.

The Mythe debacle seems to give ammunition for both sides: on the one hand, Ofwat was sufficiently protective of Severn Trent's shareholders to allow the company not to compensate customers for losing their water supply. On the other, Severn Trent lost £14 million as a result of the Mythe failure. Yet on balance, the shareholders seem to win, whatever happens. After the flood, profits were down, but dividends were up, and Severn Trent hadn't lost a single customer, because the customers have nowhere else to go.

On the face of it, Cochrane might seem to be fair in questioning whether a company can be both rapacious and vulnerable. Yet as we saw in the previous chapter, in the five years of Railtrack's sorry existence, the privatised railway infrastructure company sucked in vast amounts of money from government and rail-users, blew out almost £4 billion in debt repayments and dividends, and then collapsed.