11.04.2024

Money, debt and crap

Thames Water has defaulted on debt repayments; there is talk of renationalisation. Meanwhile there is an ongoing scandal about the release of untreated sewage into rivers and seas. Mike Macnair investigates the problems and possible solutions

Thames Water’s holding company, Kemble Water Finance, last week announced default on interest payments on a £400 million bond, triggering debt restructuring negotiations. According to the Financial Times, the result “threatens to wipe out the stakes of Thames Water’s nine shareholders, which include the Chinese and Abu Dhabi sovereign wealth funds, as well as Canadian and UK pension funds”.¹ The decision may be genuine insolvency, but also may be a negotiating gambit in the company’s ongoing efforts to persuade Ofwat (or the government that stands behind it) to allow massive price rises.

If we ask why Thames Water’s parent company has such excessive debts, the answer is that a company with low debt at privatisation has been saddled with large debts after its acquisition by the Australian ‘vampire kangaroo’, Macquarie, which has made a speciality of acquiring infrastructure companies, loading them with debt inter alia to pay off the acquisition costs, and then selling them on to institutional investors on the basis that, since such companies cannot be actually allowed to close down, they offer a safe income stream.²

In the 1960s-70s arrangements of this sort, whereby companies were acquired on the basis that the acquisition costs were subsequently paid out of the company’s assets, so that the acquirer of control at the end of the day gets something for nothing, were characterised by the courts as fraudulent.³ But, since the 1980s ‘Big Bang’ deregulation, and especially the rise of ‘hedge funds’ and ‘private equity’, they have become acceptable ‘financial engineering’ or ‘financial innovation’, and Macquarie’s business model will no doubt have relied on legal advice to this effect.⁴

But there is undoubtedly a serious problem of ‘moral hazard’: because the risk of loss remains with the state, which cannot allow the shutdown of the relevant infrastructure, while the gains are made by the financial players. Under a real fully free-market regime recognition of this moral hazard would require the financial engineers to be legally liable to indemnify subsequent owners, and the state where a bail-out was required, for losses caused by excessive debt loading.

Thames is not the only problem case. The Daily Telegraph on April 9, under the headline, “Thames Water collapse fears spread to rivals”, reported that the prices of bonds issued by other water companies have fallen, while in the Financial Times (April 8) Frédéric Blanc-Brude argued that the ‘capital asset pricing model’ used by investors, based on “the expected return of ‘the market’ and how much this company correlates with it”, is wrong.

Overflows

Meanwhile, on March 31 it was reported that the Oxford and Cambridge Boat Race on the Thames - a long-standing flagship sporting event - had been affected by untreated sewage in the river.⁵ This is part of the same story: the water companies are demanding large price rises to allow them to pay for infrastructure improvements, supposedly necessitated by excessive rain; The Times has been campaigning about river pollution since February 2023.⁶ The companies explain the problem by ‘extreme weather’. A couple of years ago the story was one of ‘insufficient rain’; this year it is one of ‘excessive rain’.

It is unlikely that either is true; we are probably merely concerned with the public relations people exploiting global warming stories (mainly affecting countries other than the UK) as an excuse. Analogously, the expression, ‘fatbergs’ (first used in 2008), may have been invented to explain sewer blockages caused by wet-wipes and other ‘luxury’ toilet papers, as instead being caused by people putting cooking fats down the drain, which had been done for many years before the ‘fatberg’ problem emerged. The issue was that the water companies were unwilling to confront the commercial interests of the producers of wet-wipes, and so on, so ‘spun’ the problem as being one of households’ and small businesses’ behaviour instead.

In the case of sewage overflows, the high variability of rainfall in Britain is not a novelty of recent global warming. Hence, to consider the likely causes, we need to look at what has happened in the recent past. Sewer blockages due to ‘fatbergs’ are clearly an element of the problem. A second element, mentioned by The Times, is agricultural run-off due to excessively intense agriculture (factory farms, and so on). This, in turn, has been incentivised by the forms of agricultural subsidies under the EU, and so far continued after Brexit, since the new scheme is only just coming into force.⁷

A third element is the structure of incentives affecting housing developments. These steer developers towards ‘greenfield’ sites not previously built on, where upmarket housing can be built cheaply and sold at high prices.⁸ The result is increased pressure on drainage systems, both from surface water run-off and from increased sewage in areas not previously covered by high-intensity sewers. Already by 2019 this was the subject of EU legislation, which the UK government decided to relax in August 2023.⁹

It is tempting to read this as a story simply of capitalist greed, and the solution to be simply renationalisation. This is the line to be found in the Morning Star and Solidarity (the latter adding “under democratic and workers’ control”).¹⁰ The Socialist calls for ‘socialist’ renationalisation, meaning “with compensation paid only on the basis of proven need and placing it under democratic workers’ control and management, so that decisions on investment are made by accountable representatives of workers and service users.”¹¹ The Communist calls for renationalisation without compensation and under workers’ control, and “Expropriate the super-rich to invest in quality infrastructure and utilities!”¹²

More greed

Socialist Worker has not commented this week, but last December Yuri Prasad had mainly a ‘greed’ story, but offered a more extended ‘green’ answer, arguing for new water-saving technologies, changes in crops, and so on, as well as renationalisation.¹³ Whatever the merits of this ‘green’ approach, it addresses last year’s ‘insufficient rain’ story rather than 2024’s ‘too much rain’.

The problem is addressed by green-market economist Sir Dieter Helm in a recent blog post.¹⁴ Suppose we do renationalise the water industry - even without compensation. (Helm, obviously, does not suppose it). It would produce the results of the short-lived Truss government’s mini-budget: that is, an immediate general crisis of government finances. Equally, suppose nationalisation under workers’ control (I leave aside for the moment ‘democratic’ control).

It will still be true, first, that major capital investment is still required to replace 19th century water and sewerage infrastructure - that is Helm’s point. Second, raising these costs by increasing charges to domestic consumers (Thames Water is seeking 56% price rises by 2030¹⁵) can only hope to progress what is needed at a snail’s pace (meaning that episodic supply failures and sewage pollution will continue nearly unabated for the next hundred or so years). The funds have to come from outside the industry.

The current regime of privatisation was created in the belief (probably) that privatisation would attract real capital investment from private sources.¹⁶ But the infrastructure companies have to compete to attract capital with financial engineering operations, whose capital gains are taxed at rates radically below the rates affecting income. They are therefore forced to offer returns that are unrealistically high relative to the actual available income from supplying water, maintaining sewage services, and so on. These required rates of return drive the financial engineering scams that have affected the water industry - but also all the other privatised utilities.

In this sense The Communist is right to propose, “Expropriate the super-rich”. The problem is that this idea is completely illusory without overthrowing the free movement of capital in general (the assets of the super-rich are largely either mobile, or outside UK control). The same applies to Solidarity’s long-running slogan, ‘Tax the rich’. The top 1% already pay 30% of UK tax revenue.¹⁷

The ‘wealth’ of ‘the rich’, moreover, is largely a matter of flows of income into the UK arising from the financial operations of the City of London and related legal, accountancy, and so on, services. These flows are attracted into the City by its character as a semi-offshore jurisdiction and the UK as a low-tax, low-regulation location (relative to other ‘developed capitalist’ countries, including the USA). ‘Tax the rich’ would cut off these flows and immediately pose for a ‘socialist’ Britain the problem of how to pay for the 46% of food eaten here that is imported.

What is posed is the question of planning in natura - planning for material outcomes, as opposed to tinkering with market incentives. And this, in turn, poses the necessity for common action at a continental level. The working class could take Europe out of the regime of capitalism. The various ‘nationalisation’ slogans, in contrast, reflect the commitment of both the Morning Star, and the soi-disant Trotskyists, to ‘socialism in a single country’.

Information

Third, if what I have suggested above about the causes of the recent development of sewage pollution is right, solving the problem will also require at least regulatory prohibition of the sale of sewer-blocking hygiene products, and radical reform of the incentive structures affecting both agriculture and housing development.

Hence the problem with nationalisation “under workers’ control”. We do need to fight for workers’ control - not just in the water industry, but generally. The point is well made by Robert Schlosser: rational, collective economic decision-making requires the input of all the workers, with all their specialist knowledge of actual production, not the speculative ideas of leftist ‘cadres’.¹⁸ But solving the problems of the water industry cannot be done on the basis of the resources, information or regulatory powers of the water industry itself. It requires planning on the scale of general social resources.

Further, is ‘what I have suggested above’ right? I flag this point because what I have suggested about the causes of the sewage overflow problem is conjectural. It has to be conjectural, because the public information available about the issue is radically dominated by spin operations in the interest of the water companies themselves, and a variety of other businesses. The problem, then, is that getting to ‘democratic workers’ control’ or ‘democratic control’ requires overcoming the control of information possessed by the capitalists, their states, and their political agents, including the labour bureaucracy.

As constitutional measures that implies, for example, banning the funding of news media by commercial advertising; declaring that payments to lobbyists for private access to government officials and elected representatives amount to bribes; imposing a scale-fees regime on the legal profession and radically reducing judicial review. In terms of what could be done immediately, what is posed is the question of a mass Communist Party as an alternative political voice that could support an actually independent workers’ media.

Getting political democracy generally is necessary to ‘democratic workers’ control’ as much as to ‘democratic control’. The crisis in the privatised water industry - and it probably has now reached the point of crisis, rather than merely chronic problems - poses this particularly obviously.

1. Financial Times April 5.↩︎

2. Financial Times June 27 2023.↩︎

3. Eg, Selangor United Rubber Estates v Cradock [1968] 1 WLR 1555; Wallersteiner v Moir (No2) [1975] QB 373.↩︎

4. Big Bang: ‘How the Big Bang changed the City of London forever’, BBC News October 27 2016. Hedge funds history: www.preqin.com/academy/lesson-3-hedge-funds/history-of-the-hedge-fund-industry (showing real take-off in the 1980s).↩︎

5. BBC News March 31.↩︎

6. The Times February 11.↩︎

7. www.euractiv.com/section/agriculture-food/news/tie-farming-subsidies-to-performance-oecd-tells-eu; on the British post-Brexit scheme, see www.gov.uk/guidance/funding-for-farmers; and www.edie.net/defra-seeks-to-allay-food-security-fears-with-tweak-to-farmer-payment-schemes.↩︎

8. www.politicshome.com/members/article/incentivising-development-away-from-precious-greenfield-sites.↩︎

9. www.gov.uk/government/news/100000-more-homes-to-be-built-via-reform-of-defective-eu-laws; and www.port.ac.uk/news-events-and-blogs/blogs/sustainability-and-the-environment/why-the-uk-government-is-relaxing-rules-for-river-pollution.↩︎

10. Editorial Morning Star March 28; Labour left Alan Simpson, ‘Crap politics: from the rivers to the sea’ April 8; R Evans, ‘Public ownership of water and utilities!’ Solidarity April 3.↩︎

11. C Joyce, ‘Thames Water crisis: we need socialist nationalisation’ The Socialist April 3.↩︎

12. B Farcas, ‘Water industry in crisis - make the bosses pay!’ The Communist April 4.↩︎

13. Y Prasad, ‘Why are Thames Water bosses drowning in multibillion debt?’ Socialist Worker December 13 2023.↩︎

14. dieterhelm.co.uk/publications/kicking-the-thames-can-down-the-river-the-cost-to-the-environment-to-the-economy-and-to-the-rest-of-the-industry.↩︎

15. Financial Times March 29.↩︎

16. Eg (a relatively recent neoliberal account), J Jessop and JR Shackleton Renationalisation: back to the future? Institute of Economic Affairs Current Controversies No72, November 2019.↩︎

17. www.lse.ac.uk/research/research-for-the-world/economics/how-much-tax-do-the-rich-really-pay.↩︎

18. communaut.org/de/wider-den-fetisch-von-partei-und-politischer-macht.↩︎