Wednesday, June 18, 2014

Privatisation - a pathway to systemic failure

When Margaret Thatcher was PM of Britain one of the many acts of privatisation her government enacted was that of the water utilities. All are now in private hands and most owned by non-UK multinationals - although it is often hard to know who owns what.  In an insightful article in the Guardian on Monday Aditya Chakrabortty reveals how privatisation is failing English citizens:

"Few businesses are more basic than the supply of water. But Thames now doesn't look anything like a water company; it more closely resembles a Russian doll. Holding company sits within holding company sits within holding company: in all, there are five intermediate firms between the business that supplies the water and sorts the sewage and the eventual shareholders. That's before you reach the two subsidiary firms that go out to the markets to raise cash, one of which is naturally based in the tax haven of the Cayman Islands.

Who gains from such a corporate Byzantium? Not regulators and politicians, nor journalists and analysts, because such a layout is the opposite of transparent. But the beneficiaries are identified by John Allen and Michael Pryke at the Open University, who pored over Thames's accounts from 2007 (the first full year after the Macquarie consortium took over) up to 2012. In three of those five years, investors took more dividends out of the business than it raised in profits after tax. Bung in interim payments, and there was only one year in which the consortium of shareholders took less out of the company than it had in post-tax profits. What replaced the profits? In a word: debt, which more than doubled to £7.8bn in that period.

The academics conclude: "A mound of leveraged debt appears to have been used to benefit investors at the expense of households and their rising water bills." Not just investors, mind: those at the top of the business have obviously been cashing in. All the middlemen – lawyers, tax consultants and financiers – associated with the intermediary firms would also have been taking a hefty cut. And in last week's report, Thames chief executive Martin Baggs was revealed to be on a pay package of £1.29m. No wonder staff call him "Moneybaggs"."

From an Australian persective what is significant is that Macquarie Bank is the effective owner of Thames Water despite the Russian Doll-like company structure.  Current Australian Ministers such as Malcolm Turnbull and Joe Hockey are former investment bankers so Australians can probably look forward to the same pressures to privatise despite the growing evidence that privatised utilities systemically fail the societies that they were originally formed to assist.  The history of Margaret Thatcher's actions tends to suggest that privatisation serves another purpose - making your mates richer!