The UK water companies have joined Amazon, Google, and Starbucks in being criticised in the press regarding offshore debt and alleged tax avoidance. The revelations have also revealed the huge debt carried by the privatised water utilities.
This story had been bubbling away for a while (e.g. Thames and Anglian were criticised last November) but really erupted on 14th February, Valentines Day, when the Independent broke an exclusive accusing the overseas-owned UK water companies (now in the majority) of using similar tax minimisation schemes until now thought to be the prerogative of global companies like Amazon and Google, and of seemingly acting like generous Valentines to overseas owners at the expense of the UK tax system (the story was based on research by Corporate Watch; it quickly spread to the Guardian, Telegraph, Daily Mail, Utility Week and others). The schemes the water companies used were quite complex and apparently involved paying excessive interest on loans from ‘offshore’ owners that wiped out or seriously depleted taxable profits.
The Corporate Watch findings were released just as Ofwat announced water bill increases of 3.5% from April 2013, and provocatively stated:
‘Almost one third of the money spent on water bills goes to banks and investors as interest and dividends.
People are paying £2 billion more a year – or around £80 per household – than they would be if the water and sewerage supply was publicly financed.
Six companies are avoiding millions in tax by routing profits through tax havens, using a regulatory loophole the government has chosen to keep open.
The CEOs of the 19 water companies were paid almost £10m in salaries and other bonuses in 2012.’
The full report went into detail on these issues. Let’s look at two here. First, a staggering £49 billion in total borrowings has been amassed by the water companies since privatisation, upon which more than £3 billion in interest payments was paid in 2012, on top of £884 million in dividends to their owners, against total revenue of £10 billion. (Hence the ‘one third’ of water bills figure above.)
Second, Corporate Watch estimated almost £2 billion a year could be saved from customers’ bills if water utility debt was financed publicly (apparently assuming that although the water companies have tried to avail themselves of the best commercial rates since privatisation, interest charges would still be considerably less if sourced via government). Of course with UK gross national debt at a record high – about £800 billion; another £49 billion would raise it about 6% – no one’s saying this is going to happen (particularly as the private capital funding of the water industry, and removal of its capital spend off the government’s back, was probably the major motivation for its privatisation back in 1989).
The media has rightly emphasised the minimisation of tax paid by the overseas-owned UK water companies, but I believe the real scandal here is that privatisation has dealt a heavy blow to future generations. They will have to pay for infrastructure improvements demanded by this generation of water users. And yet the post-privatisation regulatory regime has created an incentive to invest money rather than to operate more efficiently, in my view. Water companies have simply benefited from developing large capital schemes that enabled them to drop capital ‘savings’ direct to their ‘bottom line’ and increase their profit.
Finally there’s never any suggestion of paying down the debt; quite the reverse! The debt mountain continues to increase as companies are still encouraged to invest in capital projects. There have been many warnings recently about ‘interest-only mortgages’ and how this debt will be the next financial crisis that hits mortgage holders. The water companies’ debt is a ‘interest-only mortgage’ of gigantean proportions. Their debt should really be added to the UK debt mountain but for political and commercial reasons it has been well hidden in 19 water company balance sheets, as we have now seen…