Two months after Andy Burnham came to power promising greater “public control” over UK utilities such as water and energy, the government has failed to clarify what this means in practice. The prime minister’s aims are to cut the “privatisation premium” paid by consumers and improve service quality, with the plight of Thames Water illustrating the scale of the problems. However, uncertainty about “public control” is imposing real costs on affected companies and the UK government, with bond issues by utility companies deferred and costs rising.
Governance challenges: privatisation vs nationalisation
Thames Water, owned by a consortium of investors including highly leveraged hedge funds, exemplifies the perils of the privatised model. While this governance structure has no shortage of high-quality financial expertise, the highly “innovative” (and leveraged) financing structure is singularly ill-suited to a low-risk public utility, with investor incentives horribly misaligned with the public good.
Full nationalisation faces the opposite problems. While incentives would be aligned by statute with the public good, without commercial discipline and expertise there are fewer reasons to expect the company to be run expertly and efficiently. Past experience – from British Rail to British Steel to British Leyland – demonstrates this risk.
A public-benefit company model
“Public control” should mean seeking governance structures with aims aligned with those of the general public, not necessarily central public ownership or operation. This could be achieved by turning utilities into public-benefit companies with a primary, constitutional objective of delivering high-quality services, with profitability subordinate to that broader aim. This could be introduced within the current ownership and licensing regime, potentially without expensive compensation to shareholders.
The government could take a special or “golden share” at a nominal cost of £1, as used to maintain BAE Systems and Rolls-Royce (and latterly Royal Mail) in domestic ownership. These companies would go beyond “benefit” or B Corps, with more demanding governance requirements tailored to their needs and standards, possibly taken off the shelf – for example, Ofgem already requires energy companies to comply with certain international environmental standards.
Enhancing governance and regulation
Utilities could be required to have a minimum fraction of their shares publicly listed and traded, helping transparency and market discipline, as publicly quoted utilities have tended to outperform the alternatives across all metrics. Executive pay could be linked to public-benefit outcomes, and each utility could create an independent customer group to incorporate its views in all dimensions of decision-making. There is good evidence across the utilities of customer involvement improving outcomes.
This would imply a paradigm shift in the culture and architecture of regulation, currently alternating between regulatory capture and mutual distrust. Public-benefit utilities would be constitutionally obliged to want the same outcomes as public-interest regulators, with open-book accounting routine as both prioritised the delivery of high-quality public services.
There is an urgent need for the government to clarify its intention around public control before uncertainty imposes further costs on fragile utilities and public finances alike. A public-benefit structure would achieve a much better balance between public-good incentives and operational expertise at a much lower cost for consumers, investors and the government – measured in single pounds rather than hundreds of millions. Burnham won power by daring to be different, and daring to be different – within practical bounds – should also inform his approach to public control of utilities.
