Privatisation Essay

Discuss the desirability of combined public/private management of water resources. 

Water, the “original public utility” (Hassan, 1985: 531) has undergone a lot of restructuring in recent years. Urban and population growth from the 16th century onwards necessitated a systematic approach and the water industry has been under both public and private control since. Water in England and Wales is currently run by a combined system of public and private management, with the public side acting as a regulatory body. This essay will discuss the desirability of this combined public/private management of water resources by reviewing its successes and failures and conclude by examining if the public/private combination is the most desirable method of management.

The discussion of how to manage water resources in England and Wales is not new and the debate over public or private enterprise can be seen quite clearly in the nineteenth century. By the beginning of the nineteenth century, many waterworks did not adequately meet the needs of the population and local government began to look towards private companies as the influence of economic liberalism grew. This quickly came into force with only 10 out of the 190 local authorities having their own water works by 1846 (Hassan, 1985). There were also specialist cases including Leeds and Liverpool who had ‘mixed enterprises’. These ‘mixed enterprises’ were “the only local authorities which participated with the elected representatives of the share-holding body in the management of water works” (Hassan, 1985:534). However, this type of laissez-faire attitude towards the water industry was seen as a failure by the 1840s as the debate over whether unregulated private companies controlling the country’s water supplies began again. This meant that by 1914 the management of water resources had changed again and around 80% of districts were supplied municipally (Hassan, 1985).

The radical Thatcher government of the 1980s wanted to reduce the powers of the state and privatisation was a way of doing this. This included privatising the water industry which has been described as “the least popular and most problematic of utility privatisations” (Kay, 1994; cited by Merrett, 1997: 134). In 1989, the ten Regional Water Authorities in England and Wales were privatised becoming publicly limited companies leading to a change in ownership, financing and regulation. Three regulatory bodies were created; the Environment Agency, an environmental regulator; the Drinking Water Inspectorate, regulating drinking water quality and Ofwat, an economic regulator (Bakker, 2003). It is argued that this combined public/private partnership is desirable for a number of reasons.

ofwat   Environment Agency 

Images: (University of Bristol [www], Water Guide [www]) 

One argument is that privatisation has benefited customers through highly improved services including improvements in water purity and advances in cleaning up sewage disposal (CPS, 2004, [www]). For example, although under public control water as considered a ‘social right’, throughout the mid-twentieth century water supply was becoming a financial burden and water quality was declining with England being labelled as the ‘dirty man of Europe’ (Bakker, 2000). However, investment rose considerably following privatisation with around £3billion a year invested during the 1990s compared to around £1.5billion a year during the 1980s (Byatt, 2004). This led to many improvments such as bathing water complying with standards rose from 66 to 99%; the percentage of river and canals classified as good or fair rose from 84% to 94% and compliance with drinking water standards rose to 99.9% (Byatt, 2004).

British Beaches 

Image: (iStockphoto [www]) 

Another positive outcome of privatisation is that the amount of households at risk of water shortages has decreased considerably (CPS, 2004 [www]). For example, properties at risk from low pressure fell from 1.3% in 1993 to 0.06% (Byatt, 2004).

The current arrangement with three main regulatory bodies is also appealing. While the water companies themselves have been privatised the regulation of the water industry is controlled by the state. Under public control, there was a conflict of interest with departments almost being self-regulatory. However, under the combined public/private management, regulation is much more efficient with different economic, environmental and consumer interests being separated and therefore the water industry faces much greater scrutiny (Bakker, 2000). This means water has to meet higher standards leading to increases in water quality. Another phase of regulation, the introduction of K values – a price-cap regulation technique, is also considered to have been successful. Water price increase limits are set by a K factor, worked out using the following formula; 

‘RPI – X = K 

Therefore K is worked out by the Retail Prices Index (RPI) minus an efficiency factor (X). This means that in theory price caps should be an incentive for companies to increase efficiency as it will mean they can increase profits (Bakker, 2003). This seems to have been successful with K factors reducing after privatisation leading to a cut in real terms of water prices. 

All of these factors show that the combined public/private management of water resources has been successful and benefited the customer in terms of improved water quality, reduced shortages of water and better and stricter regulation. However, there are some concerns that privatisation of the water companies has actually not done as well as many think due to a number of reasons including mismanagement of the utility.  

Bakker (2000) believes that the effects of the Yorkshire Drought in 1995 were made much worse by mismanagement of the resource by the private company Yorkshire Water leading to debate again over whether water should be a private or public resource as it became “an emblem of crisis in privatised water management” (Bakker, 2000:4). Reservoirs had been near 100% before the drought following one of the wettest ever winters and groundwater levels were above average, yet by August 1995 many reservoirs were only at 25% capacity. Whilst the 1995 summer was especially dry it is argued that mismanagement played a large part in the drought.  

Yorkshire Drought

Image: (The Guardian [www]) 

Yorkshire Water supplied demand through a gravity-fed source called the ‘Grid’. The Environment Agency had voiced concerns about using the Grid however the system was still used as it was a much cheaper way of supplying water. When the drought was causing severe shortages water couldn’t be supplied to the areas that needed it as the Grid could only pump water in one direction, which was usually from the wet west to the dry east (Bakker, 2000). 

Another concern was the lack of investment into leakage control and headroom management. High leakage rates meant that at the height of the drought the amount of water lost in leaks was nearly equal to the amount of water used for domestic consumption. Although hose-pipe bans were imposed and customers were advised to conserve water, Yorkshire Water still didn’t have a leakage reduction programme in place at the height of the drought undermining any efforts to encourage a reduction in water use (Bakker, 2000). 

The final mismanagement was applying for drought orders, which would allow river abstractions to increase above licensed conditions, six weeks late. 

While the drought was mainly a natural event, the public/private management does appear to have mismanaged the event. Bakker (2000) notes how “both the company and regulators failed to recognise that an overall supply deficit had existed within the Yorkshire region several years prior to 1995” (p14). Rainfall records had not been updated regularly enough and these would have showed how past patterns of rainfall were no longer reliable. However, this was not solely the fault of the water companies – the regulatory bodies also did not notice that there were several warning signs indicating a drought. Although the Yorkshire Drought of 1995 is a just a case study, it has been put forward that the underinvestment and mismanagement observed are actually typical traits of the privatised water industry, which is why it been included in the argument. 

Another argument against the combined public/private management of water is linked to water prices. Water prices have risen since 1989, however this is explained by the need to invest in infrastructure (CPS, 2004 [www]). What does cause concern for many is that consumers almost pay for water twice in the form a water bill from the water companies and also through taxation from the government. This could suggest that consumers aren’t doing so well, however research does show that water prices in England and Wales are still amongst the lowest in Europe. 

Overall, it seems that the combined public/private partnership is the most desirable management of water resources in England and Wales. Although there have been cases of severe mismanagement, such as in Yorkshire and other worries linked to water prices, the combined management appears to be the most successful option. Improvements in water quality and purity, investment in infrastructure, reduced percentages of the population at risk of water shortages, tighter regulation and other reasons prove why the combined management is more desirable that complete public or private management. 

REFERENCES: 

CPS, 2004, [www] http://www.cps.org.uk/search/default.asp, (8th December 2007). 

Bakker K J, 2003, From public to private to … mutual? Restructuring water supply governance in England and Wales, Geoforum, 34, p359-374. 

Bakker K J, 2000, Privatizing Water, Producing Scarcity: The Yorkshire Drought of 1995, Economic Geography, 76, p4-27. 

Bakker K J, 1999, Deconstructing Discourses of Drought, Transactions of the Institute of British Geographers, 24, p367-372.

Byatt I, 2004, “Managing Water for the Future: The Case of England and Wales” in Managing Water Resources: Past and Present, Trottier J and Slack P (eds), Oxford, Oxford University Press, 73-88.

Hassan J A, 1985, The Growth and Impact of the British Water Industry in the Nineteenth Century, The Economic History Review, 38, p531-547. 

iStockphoto, 2007, [www] http://www.istockphoto.com/file_closeup/?id=3020585&refnum=406336 (7th December 2007).

Merrett S, 1997, Introduction to The Economics Of Water Resources, London, UCL Press.

The Guardian, 2007, [www] http://www.guardian.co.uk/environment/2007/aug/10/weather.uknews?gusrc=rss&feed=science (7th December 2007). 

University of Bristol, 2006, [www], http://research.cen.bris.ac.uk/cc06, (7th December 2007).

Water Guide (2008), [www], www.water-guide.org.uk/images/ofwat.gif, (2nd January 2008).

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