The problem with this is that it ignores the essential reason the water companies were privatised in the first place. Although government debt is cheaper than private sector debt, infinite amounts are not available on cheap terms and every government everywhere has to control public borrowing because it is so much more tempting than taxation when politicians want to spend money. And before privatisation the water sector was endemically under invested : and if restored to public ownership the problem will return. Along with the problem that labour unions see public ownership as meaning that potential insolvency is no longer any bar to pay claims. We will be back in the 1970s. Private capital is more expensive but only because it carries a risk premium and good quality regulation limits that. To assess the failure of weak willed water sector regulation as indicative of inherent impossibility is to overlook the failures of the alternative. And the truth that no critic will admit is that capital investment by the industry has been constrained by political pressure to limit water bills, and that is the reason we have shit in our rivers: but we have not wanted to pay for the investment. And in the end, we will continue to get what we are willing to pay for
This couldn't be more wrong. Water was transferred debt free - there was no investment because it all went on dividends and debt to leverage other investments, all of which failed.
But that is not the point. The point is how these businesses are financed. The aim
was to achieve a capital structure of 60% debt and 40% equity as the basis for RoA returns on the Regulatory Asset Base. The regulator lost control of leverage:
Surely a 60% debt to 40% equity ratio was far too high and simply encouraged equity holders to load up the companies with debt, most of which was held by overseas financial institutions that paid no uk tax on the interest payments they received. Before the widespread privatisation of water existing private water companies probably had gearing of about 20-30% and there's little evidence they were constrained in their capital investment programmes at this level.
The debt of a reasonably well run utility at 60% of a regulatory asset base should be investment grade: and like it or not, debt interest under U.K. tax law is, provided arms length, deductible. Equity is more expensive - and capital costs are ultimately borne by customers. The problem was when firms loaded a capital structure above the operating company with excess leverage and this excess had a contaminating effect on the ability of the regulated operating company to finance itself with either debt or new equity. The continued political noise about water privatisation has also increased perceived risks and thus the cost of both debt and equity. If we cannot tolerate private capital then we revert to public ownership. This was not a panacea in the past. Having enormous capex requirements on the public balance sheet has opportunity costs in limiting the public sector’s ability to invest - in social housing for example.
Public investment in infrastructure may indeed have an opportunity loss in respect of other public services, but the use of private finance represents also represents an opportunity loss for alternative private investment.
The issue is whether the capital is allocated and managed better in private hands than in the public sector, and whether those efficiency gains are large enough to offset the higher financing costs that private investors generally require. The evidence from the privatisation of natural monopoliies is that it doesn't.
«that capital investment by the industry has been constrained by political pressure to limit water bills, and that is the reason we have shit in our rivers: but we have not wanted to pay for the investment.»
I used to reckon that in a capitalist system the owners of a business invest their own capital to earn a profit, here instead I learn that they invest their customers' capital to earn a profit for themselves.
Perhaps every capitalist wants to be like landlords: tenants pay rent covering both the capital cost of the property and a substantial extra on top of that as a reward for being given the opportunity to gift the property to the landlord.
«Although government debt is cheaper than private sector debt, infinite amounts are not available on cheap terms»
The issue is not complicated: whether on public or private terms what is the level of investment that "the economy" can sustain? That problem exists only if the public or private owner try to invest more than "the economy" can support, and as mentioned here:
«before privatisation the water sector was endemically under invested»
As to this why would one expect a *private* monopoly to invest more than a public one? The owners of a private monopoly would *obviously* try to invest as little as possible to maximize ROI. Indeed that is what happened: the new owners of the privatized monopolies did exactly that and would rather flood rivers with sewage than waste their own capital on sewage treatment plans. They only invested if the regulators "helped" by gifting them the capital with surcharges on customer bills so investors would reap the benefits of higher capital investment without actually using their own capital.
«The problem with this is that it ignores the essential reason the water companies were privatised in the first place.»
Because Thatcher said something like "The only thing worse than a private monopoly is a public monopoly". And because Thatcher (and Blair) were committed to pinochetizing the english economy:
“I was aware of the remarkable success of the Chilean economy in reducing the share of Government expenditure substantially over the decade of the 70s. The progression from Allende's Socialism to the free enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons. [...] Our reform must be in line with our traditions and our Constitution. At times the process may seem painfully slow. But I am certain we shall achieve our reforms in our own way and in our own time.”
«An overlooked issue for sensible policies is the challenge of how to future-proof them against malicious and stupid governments?»
Easy answer validated by 40 years of experience on how to future-proof policies against governments elected by "populist" voters: delegate policy formulation to "independent institutions" run by "liberal technocrats" whose careers depends not on the whim of "populist" voters but on the generous "sponsorship" of enlightened wealthy "philosopher kings" :-).
«"liberal technocrats" whose careers depends not on the whim of "populist" voters but on the generous "sponsorship" of enlightened wealthy "philosopher kings"»
Side note: Brexit was allowed to happen only because the "BeLeaver" side was also generously sponsored by wealthy "philosopher kings" that is it was an argument that split the ruling class so the servant classes were permitted for once to influence the outcome, which for "ReMainiacs" was "undemocratic".
The problem with this is that it ignores the essential reason the water companies were privatised in the first place. Although government debt is cheaper than private sector debt, infinite amounts are not available on cheap terms and every government everywhere has to control public borrowing because it is so much more tempting than taxation when politicians want to spend money. And before privatisation the water sector was endemically under invested : and if restored to public ownership the problem will return. Along with the problem that labour unions see public ownership as meaning that potential insolvency is no longer any bar to pay claims. We will be back in the 1970s. Private capital is more expensive but only because it carries a risk premium and good quality regulation limits that. To assess the failure of weak willed water sector regulation as indicative of inherent impossibility is to overlook the failures of the alternative. And the truth that no critic will admit is that capital investment by the industry has been constrained by political pressure to limit water bills, and that is the reason we have shit in our rivers: but we have not wanted to pay for the investment. And in the end, we will continue to get what we are willing to pay for
This couldn't be more wrong. Water was transferred debt free - there was no investment because it all went on dividends and debt to leverage other investments, all of which failed.
But that is not the point. The point is how these businesses are financed. The aim
was to achieve a capital structure of 60% debt and 40% equity as the basis for RoA returns on the Regulatory Asset Base. The regulator lost control of leverage:
Surely a 60% debt to 40% equity ratio was far too high and simply encouraged equity holders to load up the companies with debt, most of which was held by overseas financial institutions that paid no uk tax on the interest payments they received. Before the widespread privatisation of water existing private water companies probably had gearing of about 20-30% and there's little evidence they were constrained in their capital investment programmes at this level.
The debt of a reasonably well run utility at 60% of a regulatory asset base should be investment grade: and like it or not, debt interest under U.K. tax law is, provided arms length, deductible. Equity is more expensive - and capital costs are ultimately borne by customers. The problem was when firms loaded a capital structure above the operating company with excess leverage and this excess had a contaminating effect on the ability of the regulated operating company to finance itself with either debt or new equity. The continued political noise about water privatisation has also increased perceived risks and thus the cost of both debt and equity. If we cannot tolerate private capital then we revert to public ownership. This was not a panacea in the past. Having enormous capex requirements on the public balance sheet has opportunity costs in limiting the public sector’s ability to invest - in social housing for example.
Public investment in infrastructure may indeed have an opportunity loss in respect of other public services, but the use of private finance represents also represents an opportunity loss for alternative private investment.
The issue is whether the capital is allocated and managed better in private hands than in the public sector, and whether those efficiency gains are large enough to offset the higher financing costs that private investors generally require. The evidence from the privatisation of natural monopoliies is that it doesn't.
«that capital investment by the industry has been constrained by political pressure to limit water bills, and that is the reason we have shit in our rivers: but we have not wanted to pay for the investment.»
I used to reckon that in a capitalist system the owners of a business invest their own capital to earn a profit, here instead I learn that they invest their customers' capital to earn a profit for themselves.
Perhaps every capitalist wants to be like landlords: tenants pay rent covering both the capital cost of the property and a substantial extra on top of that as a reward for being given the opportunity to gift the property to the landlord.
«Although government debt is cheaper than private sector debt, infinite amounts are not available on cheap terms»
The issue is not complicated: whether on public or private terms what is the level of investment that "the economy" can sustain? That problem exists only if the public or private owner try to invest more than "the economy" can support, and as mentioned here:
«before privatisation the water sector was endemically under invested»
As to this why would one expect a *private* monopoly to invest more than a public one? The owners of a private monopoly would *obviously* try to invest as little as possible to maximize ROI. Indeed that is what happened: the new owners of the privatized monopolies did exactly that and would rather flood rivers with sewage than waste their own capital on sewage treatment plans. They only invested if the regulators "helped" by gifting them the capital with surcharges on customer bills so investors would reap the benefits of higher capital investment without actually using their own capital.
«The problem with this is that it ignores the essential reason the water companies were privatised in the first place.»
Because Thatcher said something like "The only thing worse than a private monopoly is a public monopoly". And because Thatcher (and Blair) were committed to pinochetizing the english economy:
https://www.margaretthatcher.org/document/117179
“I was aware of the remarkable success of the Chilean economy in reducing the share of Government expenditure substantially over the decade of the 70s. The progression from Allende's Socialism to the free enterprise capitalist economy of the 1980s is a striking example of economic reform from which we can learn many lessons. [...] Our reform must be in line with our traditions and our Constitution. At times the process may seem painfully slow. But I am certain we shall achieve our reforms in our own way and in our own time.”
«An overlooked issue for sensible policies is the challenge of how to future-proof them against malicious and stupid governments?»
Easy answer validated by 40 years of experience on how to future-proof policies against governments elected by "populist" voters: delegate policy formulation to "independent institutions" run by "liberal technocrats" whose careers depends not on the whim of "populist" voters but on the generous "sponsorship" of enlightened wealthy "philosopher kings" :-).
«"liberal technocrats" whose careers depends not on the whim of "populist" voters but on the generous "sponsorship" of enlightened wealthy "philosopher kings"»
Side note: Brexit was allowed to happen only because the "BeLeaver" side was also generously sponsored by wealthy "philosopher kings" that is it was an argument that split the ruling class so the servant classes were permitted for once to influence the outcome, which for "ReMainiacs" was "undemocratic".