Thursday, July 11, 2019

The balance sheet of UK privatisations

Updating this, here is the latest balance sheet of English and Welsh 1988 water privatisation,
England handed regional water services to private monopolies in the late 1980s, free of debt and with a £1.5bn "green dowry" grant. Since then the companies have racked up £51bn of debt and paid out £56bn in dividends, according to an analysis of Ofwat’s accounts.
An earlier balance sheet from a University of Greenwich research study,
England is the only country to have fully privatised its water and sewerage system, with ownership transferred from the state to large regional monopolies in 1989. Investors paid £7.6bn for the water and sewerage companies in 1989 but the UK government took on the sector’s entire £4.9bn in debts and gave the new private corporations £1.5bn of public funds... The owners of the nine companies — many of which are overseas investors, including sovereign wealth funds — paid out £18.1bn in dividends in the 10 years to 2016, even though post-tax profits amounted to £18.8bn during the decade, according to the researchers’ analysis of their financial reports. Three companies — Anglian Water Group, Severn Trent Water and Yorkshire Water Services — have paid out more in dividends than their total pre-tax profits over the past decade... Greenwich researchers said the cost of maintaining and improving water and sewer infrastructure has been paid for almost entirely by an increase in debt, which has risen from almost zero at the time of privatisation to nearly £40bn in 2016. The interest payments on the debt are higher than what would be paid by the public sector, which can borrow more cheaply. Together, the £1.8bn in dividends and the extra £500m of debt interest payments each year pushed up bills for each of England’s 23m households by about £100 a year.
In fact, the Greenwich study finds that the companies could have funded all their capital expenses since privatisation 28 years back without taking on a single penny of debt, since the cash generated easily exceeded the investment requirements.
Since privatisation, the aggregate cash flow generated by the English and Welsh companies after operating costs was £36bn more than the £123bn they spent on fixed assets such as new pipes and network infrastructure (all in 2017-18 prices), the study found. This suggests their capital spending could all have been funded out of internal resources.
The balance sheet for England's water consumers,
The English water companies generated operating profits of about £3.5bn in 2016. At current 10-year rates of 1.6 per cent, the interest cost on £90bn of funding would be about £1.5bn annually — suggesting there could be a dividend for the public from state ownership. Research carried out by David Hall, visiting professor of the trades union-funded Public Services International Research Unit at the University of Greenwich, claims to have quantified the benefit to taxpayers. The water companies presently have £42bn of debt between them, and paid an average of £3.2bn a year in dividends and interest between 2007-2016. Refinancing all their equity and debt capital with public borrowings would reduce those costs by £2.3bn a year, the research estimates, by eliminating dividends and cutting debt service costs. That is equivalent to a saving of £100 on the average water bill of about £400.

The balance sheet of Thames Water, the largest among the ten (nine private) UK utilities (and this),
In the decade between 2006 and 2016, Macquarie paid itself and fellow investors £1.6bn in dividends, while Thames was loaded with £10.6bn of debt, ran up a £260m pension deficit and paid no UK corporation tax... Macquarie, for instance, received returns of between 15.9 per cent and 19 per cent during the 11 years it controlled Thames Water, according to Martin Blaiklock, an infrastructure consultant.
The question that should be asked is what were the regulators doing when such asset stripping was going on.

The balance sheet for railways,
The cost of running the UK’s railways is 40 per cent higher than it is in the rest of Europe, according to a 2011 government report by Sir Roy McNulty, the former boss of UK aviation group Short Brothers who has long experience in transport regulation... Since privatisation, the bill has mainly been shared between the taxpayer and the passenger. The contribution from the state has almost doubled from £2.3bn in 1996 to £4.2bn in real terms in 2016-17, despite a conscious decision in recent years to push more of the cost on to users’ shoulders. Ticket prices have risen: they are now 25 per cent higher in real terms than in 1995 and 30 per cent higher than in France, Holland, Sweden and Switzerland. The latest average rise in fares of 3.4 per cent, announced on New Year’s Day, was greeted with outrage... Despite the vastly expanded usage, the network’s costs have not obviously come down relative to its income. According to the 2011 report, unit costs per passenger kilometre were roughly 20p in 2010, much the same as they were in 1996... Critics argue that train operators are able to make returns, and pay themselves dividends, despite contributing very little in the way of risk capital. While operating margins of 3 per cent are not high, the train companies paid nearly all the £868m operating profits between 2012-13 and 2015/16 as dividends — £634m in the four year period.
Sample this (or this) for asset stripping
Three-quarters of UK's train operating companies in the 20 franchises are foreign state-owned firms, and everyone of them are now net recipients of public subsidy,
Britain’s railways are partly renationalised already with the infrastructure operator Network Rail, which controls 2,500 stations as well as tracks, tunnels and level crossings, already in the hands of the public sector and its £46bn debt on the government balance sheet. Those parts of the railways that are in private hands, such as the train operators, are heavily subsidised by government — a net £3.3bn in 2016/17, according to the Department for Transport. 
Finally, the balance sheet of UK's pioneering PFI in education and health (and this),
A National Audit Office report last month found schools built using the PFI are 40 per cent more expensive and hospitals cost 60 per cent more than the public sector alternative.
In terms of value for money of PFI projects in general,
The VfM assessment compares private finance costs with a government discount rate of 3.5%, which is 6.09% with inflation, known as the Social Time Preference Rate (STPR), which is higher than government’s actual borrowing costs. The higher the rate applied, the lower the present value of future payments. For example a payment of £100 in 12 years will have a present value of just £49 when discounted by the STPR. Discounting using a lower discount rate, which compares private finance with the actual cost of government borrowing, results in fewer private finance deals being assessed as VfM.
Talking about public sentiment,
A recent poll by the Legatum Institute found that 83 per cent of respondents favoured renationalising the water industry that Margaret Thatcher, then prime minister, sold in 1989. For energy and the railways, 77 per cent and 76 per cent respectively backed the reversal of their privatisations.
So, the UK Chancellor of Exchequer had this to say in the last budget speech,
I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither... I have never signed off a PFI contract as Chancellor... and I can confirm today that I never will. I can announce that the Government will abolish the use of PFI and PF2 for future projects.

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