The private ownership of utilities (1), essential infrastructure services, is as flawed as state ownership and for the same reason – availability of capital. There is a fundamental conflict between ownership obligations and desires and the service provided; in the private model, surplus is extracted by dividends on capital invested or interest on capital loaned; in the public model the utility competes for capital with other governmental priorities and preferences so is always constrained.
Where does that leave us? It seems to me that certain services need their capital locked in so that it cannot be extracted or distributed but only reinvested in service provision or price reduction and, for this to happen, they need to own themselves and be beholden to the public they serve for the performance of their duties, the fulfilment of their purpose. Long term capital, essential to sustainable performance, can be obtainable via a system of tradable debentures or bonds the value of which would vary with the rate of interest relative to the market.
Joseph Chamberlain (2), a social reformer, radical politician and imperialist, is reported to have suggested:
“It is difficult, if not impossible to combine the citizens’ rights and interests and the private enterprise’s interests, because the private enterprise aims at its natural and justified objective, the biggest possible profit.”
Kondratieffs Long Wave Economic Theory (3) suggests that neither the notion of ‘superprofits’ nor that of ‘the market will provide’ is useful as the basis of a business model for a utility, particularly one which is mature and serving a mature economy. This is perhaps especially so for a utility whose service provision is embraced in the United Nations Sustainable Development Goals (4):
Number 6: Clean Water and Sanitation
Number 7: Affordable and Clean Energy
When thinking about the utility of utilities in a mature economy such as the UK (where the foundations of the water industry go back to the 15th century, the railways are nearly 200 years old, and Bazalgette’s London sewer system goes back to the 1860s) it is useful to recognise that capital invested can never be repaid. If universal service is to be sustained, the cost per unit of output needs to be controlled while prices must generate only sufficient surpluses for reinvestment in maintaining and extending services. This is financially, socially and environmentally defensible.
Many of the assets owned in the system will require maintenance, upgrade and, to serve a growing population, extension. If, for the sake of argument we propose an average 30 year refresh/renewal cycle for built assets then we can suggest that every pound locked in for additional assets requires a proportionate increase, i.e. about 1/30. This would apply to the maintenance budget of each subsequent year for, e.g. treatment works, pipe systems, generators, distribution mechanisms, storage systems. Improvement in this ratio can be achieved by investment in life extending maintenance and more effective stewardship of the whole.
Profits (whether extracted or reinvested) must come at the expense of cost-reduction or reduced investment. Even in a self-owning utility, there is a necessary tension between the present and future, a tension that can only be resolved by understanding the purpose for which the utility exists.
Utilities are so much part of the fundamental architecture of the nation (and critical to the economy) that they cannot be allowed to decline, especially where a growing population or an increasing need is driving demand.
This thinking suggests that neither the Kondratieff approach (repayment of capital) nor that of the marketeers (profits) will lead to a sustainable business or performance model. The initial investments made, mainly by private operators, in the development of national infrastructure were repaid (or not) in the profits and losses made by those investors and later (at least in the UK) in the process of nationalisation (partly a strategy for saving some of those utilities, partly realisation of a political preference).
History tends to confirm the thinking. The post nationalisation period saw a transfer of resources to social investment having the effect of limiting investment in capital projects. At the same time operating expenses were constrained through taxation and a bureaucratic, provider dominated, system. In both cases and whatever the motivation the financial constraints led to a slow decline in quality of service.
Privatisation in the 80s and 90s, presented as a solution to the apparent decline of the post-war period, imposed a shareholder benefit oriented business model. This, while coupled with a demand for capital investment led to increased prices and generated improved performance in some, regulated, aspects of the utilities. However the shift to focus on shareholder benefit (the legal obligation imposed on Directors) led to revaluation of the assets acquired through privatisation (the value as sold having been set to attract investors) and compliance to the letter of the regulatory regime with apparent extraction of value via dividends and borrowing. It can certainly be argued that the effective behaviour of the state was to underinvest in the necessary facilities, limiting growth in capability while private ownership has seen the extraction of ‘superprofits’ through revaluation of acquired assets to support borrowing with investment limited to the regulated requirements (against which price increases have been permitted).
If a utility is an essential service to the public, to the nation, then it must be sustained for the public good and it must be apparent that neither the public nor private ownership business models is appropriate to that – the one extracting value, the other inhibiting it.
If neither of the business models is suitable, what should we do?
I suggest that self-ownership (the utility owns itself) through a community interest company, a strategic focus on satisfying purpose (meeting the needs of the public served), with surpluses locked in for investment, prices set to cover operating and investment costs, long term capital provided through debentures or bonds and executive reward (which would need to be market related) paid against service performance not profit performance should be explored thoroughly. While the focus of this blog is on the financial aspects of ownership, there is surely an equally strong case to be made for factoring in the benefit to social and environmental capital that can accrue from a form of community ownership and stewardship in which everyone has a stake.
This is a think piece, I do not claim to have all the answers, I do think the question is worth addressing.
References:
1: https://dictionary.cambridge.org/dictionary/english/utility
2: https://historywm.com/collections/joseph-chamberlain
3: https://www.sociostudies.org/almanac/articles/long-wave_economic/
4: https://www.undp.org/sustainable-development-goals
Prior Work