A bad water selloff may leave us all wet

Madelaine Drohan
Globe and Mail
February 10, 2001

If the privatization of water and sewage in Ontario is anything like the British experience, Ontario residents are in for a rocky ride. The end destination will be better water quality and sounder infrastructure. But getting there will be both painful and costly to consumers. Ontario can learn from Britain’s mistakes.

Britain decided to privatize its water and sewage system in England and Wales in 1989 and divided the industry into 10 separate regional monopolies. Unlike most cases of water privatization around the world, Britain sold both infrastructure and operations to the new companies. It is more usual for the government to retain ultimate ownership of the infrastructure.
At the time, British water systems were suffering from aging infrastructure and a lack of investment by the government. Privatization was sold as the solution. Shareholders would foot the bill for improvements and consumers would benefit from a safer water supply and cleaner lakes, rivers and beaches.
Those promises have been mostly fulfilled. According to an international survey of water privatization compiled by Environment Probe in Toronto and available on its Web site, water quality in England and Wales has improved, pollution levels are down, there is less sewer flooding and fewer consumers face supply restrictions.
Leakage, which at its height saw up to a third of treated water lost after it entered the system, has been reduced by about 30 per cent. A recent item in The Economist claims that in a taste test last year, people actually preferred London tap water to bottled mineral waters. That sounds like success.
But the privatization exercise has not been without controversy, beginning with the sale price. The National Audit Office in Britain reported that the government could have raised another £2-billion ($4.36-billion) from the sale of the water and sewage systems. (The gas, electricity and rail industries were also thought to be undervalued at time of sale.)
When water rates rose — the Environment Probe report says they have doubled since 1989 — consumers balked.
What made things worse were tales of directors at the new companies awarding themselves large pay increases at the same time as water rates were rising and service had shown only marginal improvements.
Trevor Newton, then-managing director of Yorkshire Water, became the man consumers loved to hate when he falsely professed to be taking only sponge baths during a water shortage in the region served by his company. He was discovered to be slipping over to his in-laws in an area not affected by the drought to have a good long soak in their tub.
Continued improvements in water quality and service have made privatization more popular among consumers. In the 10 years following privatization, the water companies invested an estimated £33-billion in new infrastructure. Critics point out that much of this was funded through higher water rates. Still, these days it is the companies, not consumers, who are complaining. Following negative publicity about the large profits the water companies were making in the mid-1990s, the government brought in a windfall profits tax in 1997.
The companies now claim it is impossible for them to continue in business, particularly since a tough review of water rates by the regulator last year imposed limits on the rate of return they could make on their assets.
These new regulations are being blamed for the companies’ inability to raise money and for a drop in their share prices. The answer that some of the companies have cooked up is to split themselves into two parts, with one owning the infrastructure and the other managing the operations. One part would be stuck with all the debt, the other would be debt-free and able to raise money more easily.
What can Ontario learn from all of this? Set a realistic price for the assets to be sold. Establish regulation that allows companies to be profitable without gouging water users. Prepare consumers psychologically for higher rates. And hope the new entities are better at public relations than some of the British companies have been.
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