Economy

Privatising monopoly public utilities makes no sense

Experience in UK and with Eir is that private owners don’t invest in networks but just saddle companies with debt and take dividends

The privatisation of Telecom Éireann, now Eir, netted the government more than €6 billion in 1999 but the owners subsequently leveraged the company by borrowing heavily while taking out dividends. Photograph: Alan Betson

John FitzGerald's face
John FitzGerald
Fri Apr 12 2024 - 05:00

Margaret Thatcher’s government undertook a raft of privatisations of the UK’s public utilities, which included the rail system, the electricity system, the gas system and most of the water system. The logic was that the privatised firms would be operated much more efficiently, at lower cost, while the sales of these bodies would net substantial sums for the government.

In 1992, the Tories also privatised Northern Ireland Electricity. To raise the sale price achievable for the government, long-term contracts were agreed before privatisation that guaranteed the new investor good returns by allowing them to charge a very high price to consumers. This exceptional burden on Northern Ireland consumers lasted for over a decade.

In some cases, where the new businesses operated in competitive markets, the hopes of efficiency gains were realised. In both Ireland and Britain, electricity generation saw lower costs after markets were opened to competition from private operators.

However, where utilities were natural monopolies, as with the UK water and rail networks, the experiment has ended very unhappily both for households and for the UK taxpayer.

READ MORE

In principle, privatised utilities are subject to a regulator to ensure that charges for services by monopoly networks are reasonable and that the businesses are well run. However, UK regulators allowed the new owners to borrow heavily while extracting huge dividends, rather than maximising important investment. This left the companies highly indebted and, in some cases, needing some form of a bailout by the taxpayer.

The UK rail network had to be taken back into public ownership in 2002 because of mismanagement, inadequate investment and major operational and safety failures resulting in a number of fatal accidents.

The latest casualty is the largest water utility in the UK, Thames Water. Under the ownership of the Australian firm Macquarie, Thames Water and its associated companies borrowed heavily between 2006 and 2017. Sums raised against the utility’s assets were used to increase dividend payments to shareholders rather than to invest in its primary purposes of providing clean water and treating sewage.

Now the Thames Water companies have total debts of over £33 billion (€38.6 billion) and cannot repay a small tranche of debt that has just become due, having paid out dividends of £7 billion since privatisation. Inadequate levels of investment over many years have resulted today in major pollution discharges into the river system. The annual Oxford-Cambridge boat race attracted big headlines about rowing through raw sewage.

Thames Water now faces big fines. To try to stay afloat, the company has requested that the fines be waived, and that consumers’ bills be increased by more than 50 per cent by 2030. Even those measures may not be enough to save the business. The outcome could be that Thames’s lenders and shareholders, including Irish bank AIB, could lose heavily. The UK government may have to step in.

Fortunately in Ireland, with the exception of telecommunications, we have maintained key networks in State hands, avoiding the worst mistakes seen in the UK.

Our one major privatisation was Telecom Éireann. It netted the government more than €6 billion in 1999. But over the following decade, the owners leveraged the company by borrowing heavily, while taking out dividends. This left the company in a parlous position so that when nationwide broadband needed to be developed, the company couldn’t finance it, and the State had to pay for this key investment.

[ From Telecom Éireann to Eircom to Eir: a timeline ]

The privatisation of monopoly networks does not make sense. But, if it does take place, the regulator needs the power to prevent the owners of companies such as Telecom/Eircom/Eir or Thames Water from borrowing heavily while paying themselves large dividends.

[ EU backs ComReg decision to restrict Eir on fibre broadband ]

However, the State just owning a key network is not enough. To keep costs low, and protect consumers, inputs should, wherever possible, be sourced competitively. For example, major construction work should generally be put out to tender, ensuring downward pressure on costs, rather than handled in-house.

But it is also essential that public utilities have access to adequate capital.

The decision to finance Uisce Éireann through domestic water charges was abandoned in the face of public pressure. This means the company’s debt is treated as government debt, and it is totally dependent on the Government to finance a vital investment programme to serve our growing population, and replace a 19th-century pipe network. The Government is on the hook for any failures arising, including EU fines for continuing pollution of our waters.

And as households are not charged for their excess water consumption, there is no incentive for those who have major leaks on their side of the network to get them fixed.

[ Ecological tragedy in Clare heralds imminent water crisis in Ireland ]

READ NEXT
LATEST STORIES