Following the notorious drought of 1995 Yorkshire Water became probably the most despised of the privatised utility companies in the UK. After the humiliation of its leaky pipes and 'fat cat' tag the company sneakily changed its name to Kelda in 1998, presumably in the hope that Yorkshire customers had short memories. The group seems to have a penchant for innovative restructuring, but as their latest moves show, the group's directors seem to have an equal talent for courting controversy. James Rees sheds some light.
In June Kelda announced its intention to separate the ownership of its assets (infrastructure, land and pipes) from the day-to-day operational services. The assets (valued at £1 billion, although given free to the company at privatisation) would be sold to Yorkshire Water customers, creating a new institution in the UK, a Registered Community Asset Mutual (RCAM). Financing for the deal would come from the banks. After the restructuring the RCAM would control the assets and buy in operating services for water and sewage provision from competing contractors. Initially, for the first three to five years, Yorkshire Water Services (a.k.a. Kelda) would be the sole supplier of these services, and would not submit to regulation by Ofwat.[1]
So for the first time since privatisation the means of water supply would be in public ownership. Not too surprisingly however Kelda's apparently selfless gesture had a catch (or several). They quite rightly said that shareholders would benefit greatly from the sale, and argued that real competition would be introduced for the first time. But the plan involved the transfer of £1.4 billion of debt built up by management since privatisation. More importantly Kelda completely failed to convince anyone that there were any advantages to customers and the environment if the plans were to go ahead. In the absence of any benefits to customers, wouldn't it be interesting to see why Kelda are so keen on hiving off its assets?
Like any public company Kelda aims to maximise shareholder profit, but it has found to its chagrin that this is impossible to maintain. Following privatisation, utility bosses were able to extract huge profits from the services they had bought at rock-bottom prices. Recently water regulator Ian Byatt has wised up and imposed price controls and enforced the program of investment in service improvement. Now that the milch-cow has dried up, the indebtedness of the water services side of Kelda's business causes investors to be wary of financing Kelda's more lucrative sidelines of waste management and expansion in the less-developed world. Faced with a water delivery business which is by definition in a limited and well-regulated market, Kelda's bright idea was to flog it off, keeping shareholders on-side in the process and concentrating on making a packet elsewhere.
It is of course questionable whether contracting out of operating services in the marketplace would bring benefits to customers – the experience from other privatised industries hardly bodes well. Competitive tendering generally encourages cost-cutting, corruption and responsibility-dodging. The Environmental Agency in its response to the plans said: "Kelda's proposal offers nothing for the environment... it could actually increase risk".[2]
Its main concerns are where responsibility for environmental accidents and water quality would lie: confusion over responsibility would hinder prosecutions for causing environmental harm. The board of the RCAM was to be made up of three Kelda appointees and two customer-elected representatives. Surely anyone could see this is an unhealthily cosy relationship between the mutual and the service provider who just happens to be Kelda. But staggeringly, the old duffers on the board hadn't considered the conflict of interest created by their shareholdings in Kelda and the £2.4 billion sale they would be negotiating with that same company! Confronted with this at a public meeting in Leeds the board resorted to old fashioned bluster and lies.
In its own way Ofwat accepted these fatal problems and roundly criticised Kelda in the public announcement of the decision to prevent the changes. Byatt demanded that Kelda seek the informed consent of its customers, and must ensure the independence of the mutual from its former parent.[3]
Kelda's plan should never have left the boadroom but it seems certain that Kelda will come back with mutualisation Mk 2, and again other water companies will watch with interest. Kelda's plans are essentially dictated by shareholders and the prejudices of directors. Neither are likely to be satisfied with the profits to be made from the supply of a 'commodity' in a non-expansionary and regulated market, demanding heavy capital investment over the coming years. After all, the people of Yorkshire as elsewhere care about their health and environment. In a telling phrase from Ofwat's report: "water companies should concentrate on achieving service to customers and ensuring that the necessary investment takes place to deliver drinking water and environmental programmes"[4] ; what it doesn't mention is that water should never have been privatised in the first place.
[1] The proposed restructuring of the Kelda Group. www.open.gov.uk/ofwat/kelda.html
[2] Kelda proposals offer nothing for the environment. www.environment-agency.gov.uk/modules/mod44.2311.html
[3] Ofwat press release, "Kelda's proposals to restructure Yorkshire Water are not acceptable" 25 July 2000.
[4] www.open.gov.uk/ofwat/pressnoticelinks.html
ibid See especially www.waterwatch.org.uk