Geoforum 34 (2003) 359374

www.elsevier.com/locate/geoforum

From public to private to . . . mutual? Restructuring water

supply governance in England and Wales
Karen J. Bakker
Department of Geography, University of British Columbia, Room 217, 1984 West Mall, Vancouver, BC, Canada V6T 1Z2
Received 24 April 2002; received in revised form 25 November 2002

Abstract
A little over a decade after privatization, the water supply industry in England and Wales is undergoing a period of restructuring;
many water companies have withdrawn from equity markets, some have separated asset ownership from operation and maintenance, and others have made proposals to return water supply infrastructure to public control through mutuals or customer
corporations. This paper situates the restructuring of the water industry within broader debates over associative self-governance
taking place in Britain. Underpinned by a conceptual framework drawing on insights from regulation theory, in which governance
models are enacted through regulatory practice, the interrelationship between restructuring and re-regulation of the water supply
industry is analyzed. The paper argues that the failure of the post-privatization regulatory model to contain the contradictions
between stable returns and the eciency imperative, on the one hand, and politically acceptable rates of return and the equity
imperative, on the other, led to a re-regulation of the water supply industry, which was a key factor in restructuring. Restructuring
has entailed multiple strategies (diversication, internationalization, vertical de-integration, mutualization, securitization), which are
briey analyzed. In contrast to analyses which depict restructuring as a retreat of the market, the analysis presented in this paper
emphasizes the continuity of the commercial governance model applied in the water supply industry in 1989. In interpreting restructuring as an industry response to re-regulation of services provision, the paper interrogates the incentive structure underpinning
current proposals for a mutual future for public services in Britain.
2003 Elsevier Ltd. All rights reserved.
Keywords: Water supply; Regulation; Privatization; Governance; Mutual; England and Wales

1. Introduction
In June 2000, Yorkshire-based Kelda Group unveiled
plans to mutualize its water services subsidiary. A private company created in 1989 at the time of the privatization of the English and Welsh water supply
industry, Kelda proposed to sell its regulated water
supply businessYorkshire Waterto consumers through creating a non-prot community mutual. Consumers would own the assets, and the operation and
maintenance of the water supply system would remain
the responsibility of the rump private company. While
the operation and maintenance of the water supply
system would remain in private hands, asset-owning
consumers would have direct input into running their
local water business.

E-mail address: bakker@geog.ubc.ca (K.J. Bakker).

0016-7185/03/$ - see front matter 2003 Elsevier Ltd. All rights reserved.
doi:10.1016/S0016-7185(02)00092-1

Customers, promised Yorkshire Water press releases,

would benet from mutualization. New, cheaper nancing could be found which would permit increased
investment or reductions in bills. The conict between
the shareholder and customer interest would be eliminated. As the company declared in a press release on the
proposal:
We are proposing this because we think it is in the
best interests of all partieswhether customers,
shareholders, or the community. Our shareholders,
40,000 of whom live in Yorkshire, get a fair price
for the assets in which they have invested in over
the last ten years. Our customers get the twin benets of ownership and in the long term they stand
to gain from the cheapest possible way of nancing
a water service. The community benets from the
protection of vital regional assets in perpetuity.
This forever removes the tensions between the

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K.J. Bakker / Geoforum 34 (2003) 359374

interest of shareholders and those of customers

(Yorkshire Water, 2000).
The news made headlines: Has privatization gone
full circle? The query began to seem less far-fetched in
the months that followed, as several water companies
made restructuring proposals. One English water company made a formal proposal to mutualize; others advertized their assets for sale, and still others proposed a
radical renancing of their core businesses, withdrawing
from equity markets on which the public water companies had been oated just over a decade before. With
support from the Welsh Assembly, the water supply and
sewerage company operating in Wales sought and won
approval from the industry regulator to convert itself
into a not-for-prot company, owned by its members
and limited by guarantee (a conventional form for
charities in Britain).
Proposals to return water supply infrastructure to
public control through the mutual model have attracted a great deal of interest given the innovative and
inuential British model of water supply privatization,
and the rapid growth of privatization and private sector
participation in water supply around the world in the
past decade. Some analyses have depicted the restructuring proposals as a retreat from privatization, and as
a reassertion of the commons or the community over
the commodity property relation.
In contrast, this paper examines the degree to which
alternative ownership and management structures under
consideration entail changes in the commercial governance model implemented in 1989. The analysis situates
the restructuring of water supply companies in England
and Wales within the generalized trend of the erosion of
traditional bases of political power in the advanced industrialized democracies over the past couple of decades, and associated restructuring of states. Within the
so-called shift from government to governance, formal
state authority is supplemented or supplanted by increasing reliance on informal authority, particularly in
forms of negotiated patterns of publicprivate-community cooperation. Roles previously allocated to governments are now increasingly and controversially
categorized as more generic social activities which can
be carried out by political institutions, but may also be
carried out by other actors (Pierre, 2000; Jessop, 1997, in
press).
Within this more generalized and ongoing transformation have emerged new trends in governance models.
One such model is associative self-governancea
revived, rather than novel model for socio-economic
organization, particularly of community services. In
Britain, some advocates of associative self-governance
support the creation of community mutuals to run
public services see, for example, Mayo and Moore
(2001) and the debate in www.themutualstate.org). The

idea of giving consumers of services such as health, education and utilities more control over service provision
has received signicant and growing attention within the
UK, including high-prole support from some Labour
MPs and government Ministers. 1 The Labour Partys
recently released National Policy Forum consultation
document on health and social care, for example, makes
explicit reference to the creation of mutuals or public
interest companies within the NHS (Labour Party,
2002). Other alternative ownership and management
structures are being actively pursued. Following the
collapse of the privatized railway infrastructure provider, Railtrack, the government has decided to implement a not-for-prot public trust in its place. In the
London borough of Hackney, the failure of the local
education authority led not to a private for-prot alternative, but instead to the creation of an independent
not-for-prot trust.
The proponents of associative self-governance ascribe, if implicitly, to a community model of governance (Table 1), in which collective as well as individual
incentives may be created under alternative ownership
and management structures which resolve the trade-os
between shareholder and customer interests evident in
the case of privatized monopoly services (Birchall, 2001,
2002; Holtham, 1997; Kay, 1996; Morse, 2000). This
position contrasts with the market model of governance
which underpinned the regulatory frameworks created
at the time of utility privatization. Proponents of the
market model of governance assert that neither governments nor consumers should be involved in operational or management functions, and categorize
consumers as customers rather than citizens (as under
nationalized or state-led governance models), or empowered users.
This paper approaches these broader governance
debates through a case study of the re-regulation and
restructuring of the English and Welsh water supply
industry since its privatization in 1989. The analysis
attempts to bring insights from regulation theory to bear
on debates over governance of local services. In particular, the paper draws on regulation theory as politicoeconomic method (see, for example, Bakker, 2000;
Bridge, 2000; Tickell and Peck, 1992, 1995), and seeks to
explain the interrelationship between governance, industry restructuring processes, and evolving regulatory
practice. Regulation, from this perspective, is understood in its broad sense as the (socio-economic, discursive, political) enactment of governance, and thus as a
mode of facilitation necessary for the functioning of
markets, rather than a distorting intervention in some
putatively perfect market. If governance is enacted (at
least in part) through regulation, then debates over

See www.themutualstate.org/ and Mayo and Moore (2001).

K.J. Bakker / Geoforum 34 (2003) 359374

361

Table 1
Governance models for locally-provided public utility services
Command

Commercial

Collective

Organizational structure
Accountability mechanism
Primary decision-makers

Civil service
Hierarchy
Administrators, experts, public
ocials

Corporation
Contract
Individual households, experts,
companies

Association/network
Community norms
Leaders and members of
community organizations

Primary goals

Guardian of public interest

Conformity with legislation/policy

Maximization of prot
Ecient performance

Serve community interest

Eective performance

Key incentives

Expert/managerial feedback in
public policy process
Voter/ratepayer opinion

Price signals (share movements or

bond ratings),
Customer opinion

Agreements and shared goals

Community opinion

State authority backed by

coercion;
Political process via elections
Litigation

Financial loss

Livelihood needs

Takeover
Litigation

Social pressure
Litigation (in some cases)

Citizen, voter
Collective, top-down
Municipally-owned utility

Customer
Individualistic
Private corporate utility

Community member
Collective, bottom-up
Mutual, co-operative

Key sanctions

Dominant consumer role

Participation of consumers
Cognate business models

Adapted from: McGranahan et al. (2001).

preferred socio-economic models should play close attention to processes of re-regulationthrough which
governance models are worked out in practice.
The rst section of the paper briey summarizes the
regulatory framework created at the time of the privatization of the English and Welsh water supply companies
in 1989. The second section explores the regulatory
creep experienced in the industry throughout the 1990s,
as the regulatory framework evolved stricter standards,
more demanding information requirements, and imposed increasingly stringent price caps on water companies regulated activities. The third section analyses
the ensuing restructuring of the water companies, which
have pursued a variety of strategies: diversication, internationalization, mutualization, and renancing. Mutualization must be understood within the context of
this restructuring, as one strategy attempted by companies to escape the capital-intensive, low return, increasingly stringently regulated water supply sector. As
discussed in the concluding section, this analysis calls
for careful critiques to be made of proposed models of
associative self-governance, and interrogates optimistic
readings of a mutual future for public services in
Britain.

2. Privatization as re-regulation
In December 1989, the water authorities that had
been created at the time of nationalization of the water
industry in 1974, with over 50,000 employees and assets
valued at over 28 billion (current replacement cost),
were oated on the London stock exchange. The ten
Regional Water Authorities became publicly limited

companies (plcs). The core business of water and sewerage services was transferred to a subsidiary company
acting under a license (formally known as the Instrument of Appointment) granted by the Department of
Environment, Transport and Regions. A group plc
structure, of which the core business is one subsidiary,
was adopted by the water companies (Fig. 1). The
boundaries of water supply areas were unchanged by the
transfer to private ownership. In their existing regions of
operation, the water companies were appointed as vertically integrated regional monopolies, providing the
entire cycle of services to their customers, from extraction of raw water, delivery of processed water, and
collection, treatment and discharge of wastewater. The
smaller private companies, engaged exclusively in supplying water (descendants of statutory water companies
established in the 19th century), were appointed to
provide water services to their previous customer base.
Privatization entailed a change in ownership, nancing, and regulatory structure of the industry. Three
regulatory agencies were created: an environmental
regulator (now the Environment Agency), a drinking
water quality regulator (the Drinking Water Inspectorate), and an economic regulator (the Oce of Water
Services (Ofwat)). This paper focuses on the economic
regulatory framework administered by Ofwat, at the
core of which is the price-cap method of utility regulation. Within this regulatory framework, users were
categorized as customers, whose needs were to be balanced with shareholders and the environment in an informal process of regulatory negotiation (referred to
within the industry as tri-partite regulation) which
emerged in the early 1990s (Foster, 1992; Saunders and
Harris, 1994).

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K.J. Bakker / Geoforum 34 (2003) 359374

Fig. 1. Schematic water and sewerage company corporate structure.

The technique of price-cap regulation, designed by

Treasury economist Stephen Littlechild in the mid1980s, is central to this regulatory framework, and has
been applied to all of the privatized British network
utilities (Littlechild, 1988). Water companies maximum
price increases are capped in a system conventionally
referred to as RPI
X K (a simplied version of the
formula used to determine the price increases). Under
this system of regulation, each water company is required to cap or limit the annual rate of growth of the
(weighted average) price of its regulated services by a
factor K, which is calculated as the rate of growth of the
Retail Prices Index (RPI), minus an eciency factor (X ).
Given eciency gains (X > 0), prices will normally increase slower than the rate of ination. 2
The price cap system operates on the assumption that
the regulator, gathering information about rms performance and required investment, can set an upper
limit on price increases that allows an ecient company
to achieve a revenue stream sucient to allow the nancing of its functions (Glynn, 1992). The supposed
merit of the system arises from the way in which this
capping of prices encourages eciency. Price caps are
calculated by the regulator every ve years in the Periodic Review process, and set in advance. In order to
calculate the price caps, the regulator employs econometric models and detailed assessments of individual
company performance to identify potential reductions in
operating, capital maintenance, and capital enhancement expenditure (Ofwat, 1998b). Thus, in theory, the
incentive for a water company to increase eciency
arises from the fact that companies can increase prot
by increasing eciency, thereby retaining expenditure in
addition to the revenue allowed by their price cap.

Potential eciency gains are determined not only

through reference to individual companies in isolation,
but also through the relative ranking of company performance. The setting of price caps is thus dependent
upon simulated or comparative competition. Here, efciency targets serve as a proxy for a competitive
market (Ofwat, 1998c, p. 49). With price caps set in
advance, competition amongst companies occurs relative to some eciency yardstick calculated by the regulator, with scorekeeping by the capital markets and
occasional refereeing by the regulator. 3 The prot
motive is, in theory, harnessed by comparative competition-driven price cap regulation to drive eciency
gains and return value to customers. The scope for
strategic behaviour on the part of anyone rm is (in
theory) diminished through the practice of comparative
competition, insofar as allowed prices increases are
calculated not as a function of its own actions, but rather in relation to all other rms performance. Competitionwhether direct or simulatedis assumed to be
a better driver of eciency rather than regulation, legislation, or moral suasion.
Privatization was thus accompanied not by de-regulation but rather by selective re-regulation (Maloney and
Richardson, 1994, 1995). This re-regulation was, at least
in terms of the activities of an economic regulator, intended to be relatively restricted. The architects of the
price-cap model of regulation anticipated the introduction of direct competition in the market in the utility
sector relatively soon after privatization. Market failures
were acknowledged, and the need for regulation accepted; regulation was, however, understood as a necessary, but inevitably distorting intervention in the
market. Economic regulation of utility prices was thus
regarded as necessary, but unsatisfactory. The long-term
solution was to be the introduction of competitionnot

OFWAT uses a variant of this formula, where charges are

controlled by the price limit formula RPI K U, where U is any
price limit not taken up in previous years, and K incorporates the cost
of expenditure on water quality improvements minus an eciency
factor: K Q
X . During the rst two reviews of the industry by the
regulator, jQj > jX j due to high capital expenditure required to meet
increasingly stringent EU water quality legislation. From 1989 to 1999,
RPI Q
X > 0, with prices rising above the rate of ination, unlike
other privatized utilities (Bakker, 2001).

The threat of take-over in case of poor performance was mitigated

by OFWATs publicly stated need for a sucient number of
comparator rms, which was a reason given by the then-Monopolies
and Mergers Commission when turning down bids for company
mergers in the mid 1990s.

K.J. Bakker / Geoforum 34 (2003) 359374

the mitigation of market failures, but their elimination,

wherever possible.

3. Regulatory creep and the failure of light touch

regulation
In its original form, then, price cap regulation was
intended to entail a light regulatory burden, with relatively small information requirements; companies price
limits were to be set by the regulator once every ten
years, and the opportunity to retain prots within the
price limits, backed up by pressure from shareholders
and the City, would provide the incentive for eciency
gains. In theory, the key features of the British system
are: little regulatory interference; a relatively long time
frame between regulatory interventions; the capping of
prices, rather than dividends; and the creation of a
system of indicators, or yardsticks which allows simulated competition amongst companies, thus providing
incentives to increase eciency via comparative competition in which the regulator acts as a proxy for the
market. Eciency incentives arise because companies
are allowed to retain any prot made after price caps
have been set, with the prot motive ensured by City
scrutiny; comparative competition enables, in theory,
realistic price caps to be set.
Only a few years into privatization, however, regulatory creep set in. Key variables upon which the forecasts underlying the price limits had originally been
based had changed substantially; the regulator decided
that an interim price review should be held, in order to
readjust price limits. The decision to carry out Periodic
Reviews at ve-year intervals was in part a response to
the diculty of accurate forecasting over even a relatively short period of time; actual input costs in the
period 19901995 were signicantly lower than forecast,
resulting in prots above expected levels (Saal and
Parker, 2001). Information requirements have grown
substantially, with the regulator making implicit decisions on the acceptable real rates of return on capital
employed in order to arrive at price limit determinations. Rather than being an end-point of regulation,
price caps have become a means to the end of regulating
rates of return, via intense scrutiny of and negotiation
over the true cost of capital for companies, heralding
pronouncements of the death of price cap regulation by
regulatory economists. The withering away of regulation foreseen prior to privatization has not taken place;
rather, the reverse has occurred, and water companies
are now more tightly regulated than any other of the
privatized industries. In the drive to overcome information asymmetries between the companies and the
regulator in order to assess eciency gains, and to hold
companies to account for capital investment programs,
the economic regulator (the Ofwat) has found it neces-

363

sary to steadily increase the degree and breadth of

scrutiny of companies activity.
Regulatory creep was justied, in part, by concern
over consistently high levels of company prots and
dividends. Over the 1990s, returns to shareholders signicantly exceeded the cost of capital, and were signicantly high than those in other countries utility sectors
(Helm, 1994; Defeuilley, 1998). The regulators concerns
stemmed from the divergence between expected and
actual rates of return on regulatory assets earned by
water companies since privatization. The expected rate
of return was 7% (before nancing and corporate taxes);
but the water industrys actual rates of return had not
dropped below 10% since privatization (Miller-Bakewell, 1998, p. 2). Industry observers argued that price
cap regulation worked well for operating expenditure
(creating incentives for eciency gains between periodic
reviews) but was less well for capital expenditure; the
necessary link between K values and forecast capital
expenditure in order to ensure stable returns for companies created an incentive to inate investment programs during the periodic review negotiation process (a
variation of the AverchJohnson eect identied with
respect to rate-of-return regulation) (Averch and Johnson, 1962; Helm and Yarrow, 1988). As a result, the
regulator was drawn more deeply into detailed analyses
of companies forecast investment programs. Simultaneously, political concerns grew, stemming from the
perceived link between large prots and high prices,
which had been rising steeply in real terms since privatization, in contrast to the other privatized utilities. A
dramatic increase in water poverty with well-documented negative public health eects (including a highlypublicized resurgence in dysentery) incited consumers
advocacy groups and municipalities to wage public
campaigns against the water companieswinning signicant court battles against the practices which were
seen to impact most severely on vulnerable consumers
(Bakker, 2001).
In addition to regulatory pressure, greater nancial
pressure was progressively brought to bear on the water
industry. The Windfall Levy imposed by the newly
elected Labour government in the July 1997 budget was
paid by companies in two instalments, in December
1997 and December 1998, the total amounting to 1.65
billion (1998 prices), which represented over 20% of
water industry turnover in the 1997/98 nancial year. 4

4
The stated purpose of the Windfall Tax was to claw back gains
made by shareholders from buying nationalized assets at a discount.
The amount of the levy imposed on each company took into account
the dierence between the asset value at the time of privatization and a
more realistic asset value taking into account prots in the rst four
years since the privatization of each company. The total amount raised
from the Windfall Levy was 5.2 billion, 30% of which was paid by
water companies (Bond et al., 2001).

364

K.J. Bakker / Geoforum 34 (2003) 359374

Tax concessions granted at the time of privatization

began declining in the mid-1990s, as exemptions from
Corporation Tax expired. Less important, but not negligible, were the cumulative nancial impacts of an
increasingly stringent regulatory framework which devolved more of the costs of the core service onto companiesrequiring companies rather than customers to
pay for the installation of water meters, prohibiting
disconnection of domestic properties for non-payment,
and extending the standards schemes under which poor
company performance results in customer rebates.
Under the provisions of the Competition Act 1998,
regulators were provided with stronger powers for forcing companies with excessive rates of return to cut their
prices between Periodic Reviews, backed up by the
Oce of Fair Tradings guidance indicating that prots
consistently exceeding a companys cost of capital may
be taken to indicate that prices are excessive (OFT,
1999). This view was shared by Ofwat, which by 1997
had begun arguing that future prices for water and
sewerage should fall in order to return gains from outperformancearising both from operating and capital
ecienciesto customers (Ofwat, 1997, p. 6). The
underlying logic was twofold: cutting the price cap
would return eciency gains to shareholders through
eliminating the excess returns on regulatory assets
which have been earned (Miller-Bakewell, 1998, p. 3)
and bring companies in line with expected (and politically acceptable) rate of return. 5 In line with predictions, the price limits announced in 1999 for the year
20002001 reduced bills by an average of 12.4% in real
terms, with broadly stable prices until 2005 (Ofwat,
2000a).
The impact of the price cap reduction, and earlier
interventions by the regulator to prevent companies
from taking up their full price cap, called into question
the robustness of the eciency incentives as originally
designed. The regulator noted that the existing. . .model
has led to greater eciency of the water companies. . .the
1999 price review transferred the benet of this increased eciency to customers (Ofwat, 2000d, p. 4).
But the fear of claw-back of prots thereby instilled in
companies undermines the incentive supposedly provided by the prot motive to maximize eciency. The
political unacceptability of higher prots and commercial unacceptability of high losses introduces a contradiction between the safeguarding of the eciency
incentive, and the preservation of stable and politically
acceptable rates of return. This contradiction, in the

view of many regulatory economists, implies that the

current system of price cap regulation will almost inevitably break down. Whether or not price cap regulation
is formally abandoned in the near future, interventions
by the regulator between reviews will undermine the
operation of regulation as anything like pure price cap
(Mayer, 2001). Although other utility network industries
regulated by price cap (gas, electricity, telecommunications) had experienced some degree of regulatory creep
post-privatization, signicant portions of these industries had been opened to competition, with a consequent
reduction of regulatory activityeven the phasing out
of price caps in some cases. This divergence is partly
attributable to the highly capital-intensive nature of the
English and Welsh water companies, in which companies own assets as well as provide operations and
maintenance services to the network (Shaoul, 2000a,b). 6
In water, 2/3 of the total capital expenditure costs
related to distribution; in contrast, distribution and
transmission network costs account for closer to 2/5 of
total costs in gas, and 1/3 in electricity (Consumers
Association, 2000; WSA, 2000). In other words, in
contrast to other utility network industries, a high proportion of total costs for the English and Welsh water
industry relates to the network rather than to the supply
of services.
This capital-intensity is exacerbated by the stagnant
demand that characterizes this mature industry, with
only very small room for expansion in the regulated
domestic market. Given stagnant demand and a legally
dened upper bound to the size of the market (i.e. the
licensed supply boundary), 7 water companies have little
room for growth in the regulated business. Revenue
growth is thus to a larger degree dependent on increases
in prices. 8 Should prices cease to increase, revenues will
in most cases decline, given that signicant technological
changes in the sector are constrained by legislation (e.g.
the Building Code, which requires a certain minimum
volume of water to be used in some household devices).
The cut in price caps announced in 1999 thus implied a
drop in revenues for most water companies, and a
consequent drop in prots, given that a signicant
proportion of water companies prots were due to the
fact that regulated output prices outstripped input costs
over the rst decade following privatization (Saal and
Parker, 2001).
The industrys vulnerability to price limit reductions
was increased by the decrease in dividend cover in many

Ofwat made this clear in its nal determinations report (Ofwat,

1999), in which Fig. 2 (p. 25) provides a breakdown of the proportion
of consumer prices made up of operating costs, operating prot, and
capital charges, with the regulator intervening to reduce operating
prot, and hence the return on capital to both lenders and investors.

The following analysis applies only to asset-owning utilities, not to

other types of water providers (such as operations and maintenance
services companies, like the French companies Ondeo and Vivendi).
7
Excluding inset appointments, which are insignicant in revenue
terms.
8
I am indebted to Jean Shaouls detailed work on the water supply
industry for this insight.

K.J. Bakker / Geoforum 34 (2003) 359374

companies in the late 1990s. As Ofwat noted in his June

1997 comments on the forthcoming Periodic Review:
The Director has consistently set out his view. . .that
real dividend growth of between 0% and 2% p.a. is
consistent with the cost of equity for water companies. . .Dividends in the rst ve years [following privatization] rose in line with higher prots, but more
recently there have been signicantly higher dividends
paid which have been nanced from higher borrowings
rather than prots (Ofwat, 1997, p. 43). Yet water
utilities were simultaneously under pressure from
shareholders to sustain high dividends in an environment characterized by what one City nancial analyst
terms Dividend Machismocompetition between
companies to maintain dividends at high levels (MillerBakewell, 1998). The management of the utility parent
companies thus those to source the windfall levy, in
large part, from the regulated utility, thus increasing the
debt loads carried by the water supply and sewerage
companies. As Miller-Bakewell notes, sustained premium dividend growth has been the most signicant
single factor behind the returnsan average of 20% pa
over the past ve yearsachieved by investors. Indeed,
in a UK equity market context, these have been exception (Miller-Bakewell, 1998, p. 5). As Miller-Bakewell
notes, a key contribution to these high returns has been
the erosion of dividend cover 9 during the late 1990s.
Sustained dividend growth entailed a weakened position
for shareholders in the event of a drop in revenue
streamsas resulted from the Price Review of 1999.

4. Vagabond capital? Multi-utilities, global utilities and

virtual utilities
Following the announcement of the nal Periodic
Review determinations in mid-1999, share prices fell
roughly 50% across the water industry (Fig. 2). In some
cases, shares have continued to trade well below their
regulatory asset value, reecting companies exposed
position to the combination of rising nancing and
taxation costs and falling revenues and prots. Many of
the water and sewerage companies were faced with a
shortfall in cash to nance investment, given that prices
were set for most companies so that they more or less
cover the capital expenditure, but not dividends or interest as well (Shaoul, 2000a, p. 11). Opportunities for
new sources of revenue within the regulated business are
limited: demand is likely to remain stagnant as the industry is mature; and water utilities cannot increase
market share (except a negligible proportion via inset

9
Dividend cover is dened as the ratio of total prots of a business
to its dividend payments.

365

Fig. 2. Share pricesUK Water Sector and FTSE All Share.

appointments). 10 Moreover, future eciency gains were

believed by company managers to be limited. Market
analysts concurred: as a result, by 2000, many water
companies were having greater diculty in sourcing
nance.
Immediately following the price limit announcement,
several companies announced job cuts. Two years after
the review, industry analysts were continuing to predict
lower dividend growth, and a drop in earnings per share
on the part of all but one of the water companies
(Miller-Bakewell, 2001). This is in part because the
forward investment program is largely non-negotiable,
stemming from commitments to Ofwat, backed up in
most cases by legislative requirements to meet specic
water quality or environmental standards.
Given the diculty of sourcing nance to meet future
investment requirements (which had been anticipated
well before the 1999 price limits were announced),
and perceived future low-growth opportunities in the
domestic market, water and sewerage companies in
England and Wales have opted to intensify three restructuring strategies, all designed to refocus activity
outside of the core, regulated business: diversication
remaining vertically integrated and growing through
takeovers and mergers and/or expanding into non-regulated businesses and other utility sectors; internationalizationbecoming an international water business,

10
Inset appointments permit customers within the boundaries of
one water companys licensed area to be supplied by another company,
subject to criteria which eectively restrict this option to large-scale
industrial users (Ofwat, 2002).

366

K.J. Bakker / Geoforum 34 (2003) 359374

which may or may not entail vertical de-integration; and

vertical de-integration, hiving o the regulated business
altogether. Each of these three options entails a radical
restructuring of the water and sewerage business, in a
search for growth in non-regulated sectors.
4.1. Multi-utilities, global utilities: Diversication and
internationalization
Key to understanding the retreat of the companies
from the core business of water supply is an appreciation of the cash-rich, secure nature of their domestic
operations. Water and sewerage companies supply an
essential commodity continuously. English and Welsh
water companies have predictable cash ows, given that
65% of turnover is based on charges that are not
volume-related 11 (WSA, 1998), charges are set in advance for the year, and the likelihood of another clawback of utility prots is perceived to be low.
As the utilities operate largely as regional monopolies, there is little risk to cash ows from competitors. 12 The water industry (particularly with relatively
low levels of gearing 13 in the early 1990s) is relatively
cash-rich and secure, with a licensed monopoly over a
large stream of revenues. Water managers are well
aware of this situation; as an author in one of the industry periodicals noted:
The consumers have a captive requirement for
water and sewerage services. . .the cash generative
capacities over many years are vast while long-term
capital and debt are relatively cheap (Water Briefing, 1995, p. 10).
Water companies in the period following privatization were cash-rich, with secure revenue streams, but in
a core business that was mature, regulated, and whose
future returns to shareholders seemed under threat from
an anticipated tighter regulatory review (McGuinness
and Thomas, 1997, p. 328). Management accordingly
justied diversication in terms of a need to secure
alternative sources of income and prot (McGuinness
and Thomas, 1997, p. 328). Under the current regulatory regime, where prices are capped and little if any
expansion of the consumer base is possible, the main
sources for increased prot arise from cost cutting or
increasing prices. Improving eciency is one means of
growth, which water companies attempted with varying

Acquisitions and Diversifications by Water and Sewerage Companies,

1989 - 1995
infrastructure
telecommunications
1%
generation
(small- scale)
1%
finance
3%
property development
4%

1%

Other
7%

water and sewerage

17%

engineering
8%

consultancy
7%

waste management
26%

utility services
8%
equipment and
technology
10%

contracting
8%

Fig. 3. Aquisitions and diversications by water and sewerage companies, 19891995.

degrees of success, through outsourcing 14 and reductions in the labour force.

The diculty of sustaining of prots in a mature,
regulated, low-growth industry is a strong incentive for
diversication into higher-growth sectors.The drive to
diversify began immediately after privatization. The ten
water companies spent 1.274bn on acquisitions by
March 1994 (Schoeld and Shaoul, 1996). Some utilities
have pursued a strategy of horizontal integration, creating multi-utilities spanning the electricity, gas, water,
and telecommunications sectors (e.g. United Utilities and
Scottish Power). Others have pursued joint ventures
and pure diversication into unrelated sectors, such as
land and property development; shopping malls, process
engineering, and the hotel trade (Fig. 3) (OXERA, 1994,
1995, 1996). The compulsory competitive tendering requirements placed by national government upon local
authorities for various services (Patterson and Pinch,
1995) have also enlarged the potential market for water
and sewerage companies, most notably in the waste
services sector (Curwen, 1994); waste management has
been a common feature of diversication by all Water
companies.
This diversication is spurred by pressure from the
City and capital markets. Only those companies who
have already established a secure base of unregulated
earnings were perceived, in the rst decade following
privatization, to be likely to remain good investments. A
second incentive for diversication is thus the threat of

11

In 1997/98, 90% of household customers had unmeasured

supplies, whereas 80% of industrial customers were metered (Ofwat,
1998a).
12
Current initiatives to introduce competition to the industry focus
on industrial customers, and have had little impact on the industry as a
whole as yet (Cowan, 1997).
13
Gearing is a term used to refer to a companys debt/equity ratio.

14

Outsourcing has occurred in two ways: spinning o companies

from the regulated businesses that, staed by former employees, render
the same services on a consultancy basis; or sub-contracting non-core
(e.g. cleaning, computer programming), and even core functions (e.g.
pipe maintenance).

K.J. Bakker / Geoforum 34 (2003) 359374

367

Table 2
Takeovers and diversication of water and sewerage companies, 19892001
Company
a

Anglian
Dwr Cymru (Welsh Water)

North West Watera

Northumbrian Water
Severn Trent Watera
Southern Water
South West Watera
Thames Water
Wessex Water
Yorkshire Watera

Status

Domicile of parent company

Major activities

Now trading as AWG

Takes over South Wales Electricity to form Hyder, which was then
acquired by Western Power; water
assets later sold to non-prot
management company
Takes over Norweb to form United Utilities
Acquired by Lyonnaise des Eaux
(ONDEO)
Independently listed
Acquired by Scottish Power
Now trading as Pennon Group
Acquired by RWE
Acquired by Enron subsidiary
Azurix
Now trading as Kelda Group

England
USA

Water, environmental services, construction

Multi-utility (electricity, gas, water); now
water-only

England
France

Multi-utility (water, electricity, telecommunications)

Water, environmental services

England
Scotland
England
Germany
USA

Water, waste management

Multi-utility (water, electricity)
Water, waste management
Water, environmental services, construction
Multi-utility (water, electricity)

England

Water, environmental services

Source: water companies annual reports, various years.

a
Independently listed on the stock exchange.

take-over, no idle threat given that ve of the ten original water and sewerage companies have been taken
over, and the number of regional water supply companies has been reduced from 29 to 13 through mergers
and acquisitions (Table 2). Foreign companies have taken
over three water and sewerage companies 15 (EnronWessex, Thames-RWE, Lyonnaise des Eaux/Northumbrian, Western Power-Welsh Water) and 16 of the
original 28 water supply companies. Diversication is
thus both a response to and a driver of consolidation of
the industry. Further consolidation of the industry may
be limited: rationalization within the industry is thought
to be one means of producing cost-savings for merger
counterparts (Water Brieng, 1996), but mergers have
been limited by the regulators insistence on the need for
a sucient number of independent water companies to
ensure healthy comparative competition. Because of
this requirement, the economic regulator made clear his
opposition to mergers between licensed water and sewerage companies (in distinction from the smaller water
supply companies). Although successive governments
have made proposals for increased competition in the
water industry, competition in the market remains extremely limited to date (DETR, 2000a,b; Fletcher, 2001).
Prevented from pursuing an acquisitions strategy in
the domestic market, many water companies attempted
expansion overseas, particularly in the build-operate-

15

Enron, an American-based energy multinational, took over

Wessex Water in September 1998 (BBC, 1998). Northumbrian merged
with a water only company in the same region (North East Water)
when it became part of the French Lyonnaise des Eaux group in 1994,
the rst major take-over of a private water and sewerage company.
Approximately half of the 13 smaller water companies are now
foreign-owned.

transfer (BOT) and operation and management concession markets overseas (Bakker, 1999a). Yet the water
companies early overseas acquisitions are widely regarded as failures by the City, shareholders, and regulators alike (Dale, 1995). The vagabond capital
strategiesin particular overseas investmentshave
been widely criticized. The parent companies subsidiaries and acquisitions have not been very protable: in
1994 the core businesses accounted for 85% of sales but
101% of prots of the parent companies, and this trend
has continued (Schoeld and Shaoul, 1996, p. 13). In
1995, operating prots for the water industrys non-core
businesses represented less than 3% of total, (Martinson,
1996). Since the mid-1990s, many water companies have
sold their poorest-performing companies. Only two of the
major water utilitiesThames (now owned by German
multinational RWE) and United Utilitieshave retained
a strong commitment to internationalization.
4.2. Vertical de-integration: Virtual utilities
Privatization, diversication and internationalization
of the water industry did not entail liberalization; postprivatization, the water companies remained vertically
integrated monopolies. The companies own and operate
the assets that are employed to deliver services, and are
thus responsible for network maintenance as well as
service delivery. Soon after the 1999 Periodic Review,
various water companies put forward proposals for the
vertical de-integration of the industryseparating
ownership from operation. Vertical de-integration
would allow the asset owners to contract out the supply
of services on the basis of competitive bids from water
operator companiessimilar to the system in France, in
which the owners of water networks (almost always

368

K.J. Bakker / Geoforum 34 (2003) 359374

municipalities) award long-term contracts through a

process of competitive tender (albeit marred by corruption in recent years (Hall and Lobina, 2001)) to
private companies to operate water and sewerage networks. Vertical de-integration would thus represent the
most signicant structural change to the industry since
privatization.
One motivation to restructure stems from the diculty experienced by some companies in sourcing nance for future capital expenditure programs. The
capital program for the 20002005 period has been reduced in comparison with the 1990s, but at 6.4 billion
is still signicant (House of Commons Environmental
Audit Committee, 2000, Para 188). Restructuring, it is
thought, would allow for cheaper nancing than the
current equity-intensive model, through allowing companies to achieve a lower cost of capital due to a
changed risk prole. Simply put, the ownership and
provision of assets is viewed as a low-risk activity that
can be funded by cheaper, long-term debt; operations
and customer service are riskier, and would be appropriately funded by more expensive risk capital.
Some companies, it should be noted, have sought
alternative modes of nancing without proposing to
vertically de-integrate. Sutton & East Surrey, for example, has chosen to increase its gearing to 75% thereby
renancing existing debt, and to fund future capital
expenditure with an innovative index-linked sterling
bond, allowing the company to raise debt at a lower cost
of capital (Utilities Journal, 2001a). Yet lack of access to
suciently cheap nancing is not the sole motivation for
companies interested in mutualization. The assumption
that the return on capital for services companies is more
attractive than for asset owners under the more stringent
price caps now imposed by the regulator is another
motivating factor. While facilities management companies typically have low prot margins, they are able to
generate a respectable rate of return on capital employed because they have few assets; the move to restructure, in other words, should be viewed in the same
terms as the broader trend in industrialized economies
towards service provision over the past three decades
(Shaoul, 2000a). Another explanatory factor is that the
City has a vested interest in mutualization, which has
been spurred on by consultants who hope to make
considerable sums from inventing and facilitating the
necessary arrangements (Summerton, 2001). In the
long-term, however, the declining status of water and
sewerage infrastructure may be the key factor in companies desire to exit the asset ownership side of the
business. Little of the asset stock in England and Wales
is less than three decades old; much of it is older than
fty years, and in cities, older stillin London, one in
three kilometers of pipes is more than 100 years old
(Perera et al., 1985). The large discrepancies between
Ofwat and industry estimates of necessary levels of

funding for capital maintenance to maintain infrastructure, much of which may be up for renewal at the
same time given large historical variations in asset installation activity, was interpreted as evidence of Ofwats
intellectual neglect of the problem of long-term asset
deterioration (House of Commons Environmental
Audit Committee, 2000, Para 208). The Competition
Commission concurred with the Committees analysis,
criticizing Ofwats heavy reliance on the serviceability
criteria and voicing its view is that more needs to be
done to understand the relationship between asset condition and serviceability (Utilities Journal, 2000, p. 32).
If correct, this argument lends weight to the charge that
water companies are under-investing in asset maintenance, leading some observers to argue that, in anticipation of a future rapid decrease in service levels due to
declining infrastructure quality, water companies may
be opportunistically seeking to dispose of assets.
In pursuing vertical de-integration, companies have
put forward a variety of restructuring proposals (Ofwat,
2000c). A number of companies are considering the
separation of ownership of the water utility assets from
operations and the introduction of a competitive outsourcing strategy for service provision (Ofwat, 2000d).
In its most radical form, the asset-owning rm would be
entirely debt-nanced, contracting out operations to
independent service providers. In addition, some companies are considering whether a new structure of
ownership might be appropriate for the asset-owning
business, which would be owned not by shareholders,
but by its customers (or a selection of them) or members
in the form of a mutual or company limited by guarantee (or other not-for-prot vehicle). The two formal
proposals put to Ofwat to date have entailed two distinct strategies, of mutualization and securitization. 16
4.3. The Kelda mutual
In the rst case, Yorkshire Waters parent company
proposed, in mid-2000, to mutualize its core business.
In doing so, the company appealed to a long tradition
of mutual ownership in Britain, in proposing to register
the new company with the Registrar of Friendly
Societies. 17 Kelda portrayed the proposed modelan
16
Another model that has been suggested is that of thin equity
companies with a thin layer of participating shares, but not ordinary
shares.
17
A mutual is a not-for-prot corporate body set up for the benet
of members, who hold shares in the mutual. These shares are dierent
to those issued by a company capped by shares, as the maximum value
permitted to be held by any one member is limited, but there is no
requirement for the total number of shares to be limited (it is usual that
no limit is set). Prot is used in the manner prescribed by the rules of
the mutualtypically, either reinvested or distributed among members. In Britain, the Registrar for Friendly Societies registers mutuals
and cooperatives with the Financial Services Authority.

K.J. Bakker / Geoforum 34 (2003) 359374

RCAM (Registered Community Asset Model)as a

stakeholder business, whereby assets would be returned
to consumers, and consumers would benet not only
from increased control but also because the cheaper cost
of capital may result in lower water prices. However, the
Kelda mutual diered substantially from traditional
mutualsnot least because membership was obligatory
rather than optional for Yorkshire Waters existing
customers.
The RCAM would have been a new company, owned
by customers and operated on a not-for-prot basis,
which would have acquired the assets and debts of
Yorkshire Water, and taken over its water supply license. Wholly nanced by debt, the RCAM would have
outsourced the management of the supply of water and
sewerage services to a Kelda subsidiary for an initial
period of ve years, following which competitive bids
from other water and sewerage companies for subsequent ve-year contracts would have been sought.
Under Keldas proposal, any prots would be reinvested
in the business or returned to consumers.
Some proponents of the RCAM model suggested that
ownership of a regulated utility in this form would
align the interests of the owners of the regulated businesses with those of its customers and in doing so would
minimize political and regulatory risk (Ofwat, 2000b,
Para 56). Others argued that the RCAM model represented a failed attempt to pass the assets and liabilities
of an unsuccessful private business back to consumers
(Social Enterprise Institute, 2001, p. 2). Given that
Kelda was proposing the RCAM purchase Yorkshire
Waters assets at what many industry observers judged
to be an inated price, and that the RCAM members
Yorkshire Waters current customerswould be
responsible for the companys debt, the regulator commented that, although there appear to be clear benets
in the short-term for Keldas shareholders from the
proposals, in its current form, the benets for customers
have still be to demonstrated (Ofwat, 2000d, p. 4).
While maintaining that the separation of asset ownership from operations and the outsourcing of operations
could oer opportunities for greater eciency resulting
from the introduction of competition for the operations
market (Ofwat, 2000d, p. 5), the regulator acknowledged the danger of Kelda continuing to win the operations contracts by virtue of superior knowledge of the
network, and argued that the potential benets to
customers of greater outsourcing and a reduction in the
cost of capital are not dependent on the introduction of
a new ownership structure and could proceed under
the existing equity model (Ofwat, 2000d, p. 5). The
apparent inability of the proposed company structure
to cope with unexpected cost shocks in the absence of
an equity buer, and the lack of incentives to drive
further eciency gains in management, were other decisive factors in the regulators decision to reject the

369

restructuring proposal (Ofwat, 2000d). Customer and

media reaction tended to be negative, stemming in
part from negative public opinion of the company
based on its performance during a serious drought in
the mid-1990s (Bakker, 1999b, 2000; Haughton, 1998,
1999).

4.4. The Glas Cymru proposalsecuritization

In rejecting the Kelda proposal, the regulator made
clear that he was not opposed, in principle, to the idea of
separating ownership and operation or new forms of
ownership if this was seen to benet the consumer,
where benet was understood to mean an increase in
competition and/or a lowering of prices. The second
proposal for a vertically de-integrated water supply
business, put forward by Dwr Cymru (formerly Welsh
Water) some months after Keldas proposal, was judged
to meet these criteria, and was approved in January
2001. In contrast to the Kelda proposal, the Dwr Cymru
proposal entailed securitization rather than mutualization, 18 creating a not-for-prot company owned by its
members and limited by guarantee (a classic management form for charities in Britain), rather than a customer-owned mutual. Glas Cymru, a new company
limited by guarantee under the Companies Act 1985,
and wholly nanced by debt, was formed for the sole
purpose of purchasing the assets from Welsh Water, in
May 2001. The members of Glas Cymru, who have no
nancial interest in the company and do not receive
dividends, represent a cross-section of Welsh interests.
Indeed, the strong support of the Welsh Assembly was a
key factor in the regulators favourable decision, which
was viewed as a key test of Welsh devolution (Utilities
Journal, 2001b, p. 28), as was the fact that Western
Power, the new owner of Hyder Utilities, the parent
company of Welsh Water, wanted to exit the water
business and was willing to sell the assets at a discount
to their regulatory asset value.
Another key factor in the regulators favourable decision was Glas Cymrus proposed nancing program,
which promised to signicantly lower consumers
bills. 19 As the company noted, the water industry is
very capital intensive and the cost of paying a return on

18
Securitization is the nancing process whereby assets are sold to a
new company, in order to be repackaged as marketable securities for
sale to investors.
19
Although Ofwat did approve, in an interim determination, an
increase in the price limits originally assigned at the 1999 Periodic
Review, with a negative price limit only in 2000/2001, and with prices
rising above ination every year after that (letter to MD of Dwr
Cymru/Welsh Water, 19 December 2000, available on http://www.
ofwat.gov.uk/interims/nal_interims/interim_wsh_nal_19dec.html,
accessed 29 October 2001).

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K.J. Bakker / Geoforum 34 (2003) 359374

money raised to nance assets is Welsh Waters single

biggest cost, currently absorbing nearly a third of Welsh
Waters annual revenues [i.e. customers bills]. 20 The
switch to 100% debt nancing, through investment
grade bonds, entails not only a lower cost of capital, but
also a greater surplus that can be invested in the network
and in environmental protection, used to build nancial
reserves, or returned to customers. The advantages of
Glas Cymrus lower risk prole, particularly given its
commitment to remaining a non-diversied company
operating strictly as a regulated water business, 21 were
conrmed by Standard & Poors AAA rating of the
companys bond issue.
Following the approval of the Glas Cymru securitization, many companies expressed an interest in restructuring. Water companies have justied plans to
restructure their regulated water businesses by arguing
that equity was an expensive source of nance, and that
other sources of nancein particular debt nance
were more viable in the long-term. Supporters of privatization have argued that sourcing investment from
equity, although more expensive than government debt,
creates pressure on managers to make eciency gains
which oset the increased cost of capital. Opponents of
privatization argue that debt, and in particular government debt, is so much cheaper than equity that any
eciency gains under private ownership would not be
outweighed by an increase in the cost of capital. Twelve
years after privatization of the water industry, many
water companies appear to have taken the latter view,
bringing into question one of the key justications for
privatizationthat equity markets, because of the
scrutiny to which they would subject managerswere
preferred sources of nance. However, Ofwat has
warned that it does not see the [Glas Cymru model] as
a model for the industry as a whole (Fletcher, 2001).
Given that pressure for water industry restructuring is
not coming from consumers, but from factors lying
largely within the expert communities responsible for or
concerned with the industry (Summerton, 2001, p. 1),
the regulator is not likely to approve other restructuring
proposals in the near future. This serves merely to delay
the drive to restructure, rather than resolve the contradictions of the post-privatization regulatory framework besetting Englands regulated private water
companies.

20

Glas Cymru, 2001, Brieng on Membership, http://www.glascymru.com/english/pdfenglish/members/BriengMem.pdf, accessed 16

10 2001.
21
Glas Cymru is prohibited from diversifying into other activities,
both by its Constitution and by an undertaking to Ofwat that it will
not change the constitution without rst consulting with the regulator
(Utilities Journal, 2001a).

5. A mutual future?
The current wave of restructuring in the water supply
industry should not simplistically be read as a retreat
from the market. First, these proposals leave unchallenged the distributive theory of justice implicit in the
privatized, commercialized model of service provision
implemented in Britain, which prioritizes access to material goods as a means of need-fullment. The commercialization of the industry began in the early 1980s,
when the 1983 Water Act and supporting legislation
initiated and formalized the transformation of the water
industry in Britain from a public service to a business
organization (Penning-Rowsell and Parker, 1983, p.
170). By the late 1980s, the nationalized industries were
best characterized as publicly regulated private monopolies operating on modied market principles
(Hay, 1996, p. 53). Privatization and the implementation
of a price cap regulatory framework consolidated this
transformation. This commercialized service stands in
distinct contrast to that of the nationalized era, during
which access to a water service was regarded as a precondition of participation in collective social activity; an
entitlement, extended to all. Privatization and commercialization formalized an important transformation
in the underlying conceptions of justice in the welfare
state, through dismantling what Walzer (1983) would
term the separate sphere of justice for utility network
services and re-classifying their products as commodities
(Bakker, 2001).
None of the restructuring proposals to date challenge
the progressive commercialization of the industry, initiated with the 1983 Water Act and entrenched by
privatization, positioning water as a business rather
than a service, with the goal of prot maximization rather than service provision (Bakker, 1999a). Water remains classed in a category with other utility network
commodities, for which the eciencies generated by
private ownership and exposure to the discipline of
competition must be balanced by a restricted sphere of
regulation by quasi-autonomous government agencies.
Commercialization and subsequent privatization
thrust [water companies] into a more commercially
orientated world, wherein the organization was under
pressure rst to show, and then to continually expand, a
return on capital employed (OConnell-Davidson,
1993, p. 191). The impact of commercialization on labour was to reduce the overall size of the workforce, and
also to decrease the proportion of employees holding
standard direct contractsallowing them full-time,
unionized, stable employment with good fringe benets
(OConnell-Davidson, 1993). The increase in part-time
and informal contracts has allowed management, in
general, to force concessions from labourin terms of
working hours, working practices, and work intensity
(OConnell-Davidson, 1990). This in turn has aected

K.J. Bakker / Geoforum 34 (2003) 359374

work patterns and practices. Prior to commercialization

(i.e. prior to the early- to mid-1980s), companies were
often organized on geographical lines, reecting the
highly localized nature of the infrastructure systems
inherited in previous phases of rationalization of the
industry and amalgamation of water providers. With
commercialization, companies were often reorganized
along functional lines, with a resulting loss of local
knowledge:
Gone are the lovely days when I rst started, when
yes, I knew exactly what was happening on my little
meter patch (water company employee, cited in
Strang (2001, p. 60))
The process of commercialization, and its impacts of
this delocalization of companies on resources management and responsiveness to users (Page, 2002), are
unaected by the restructuring proposals. On the contrary, the commercialization of the core business has
been further entrenched by the progressive diversication of the water companies into non-core, non-regulated activities.
Nor do the restructuring proposals substantively roll
back the commercialization of relations between water
users. Commercialization implied the rescripting of
consumers as customers rather than citizens, a deliberate
de-politicization of water regulation through the creation of arms-length regulators, and a shift from social
equity to economic equity in water pricing and hence
consideration of willingness but not ability to paywith
the burden of increasing water bills falling disproportionately (in terms of income and access) on most vulnerable consumers (Bakker, 2001). The substantive
participation of consumers in water policy-making has
not been signicantly altered by water industry restructuring (Page, 2002). The resistance of consumers
and politicians to commercialization, which was articulated with a change in policy (and also government) at
the national level (Leys, 2001), drove the re-regulation
of the industry, which was an enabling condition for,
rather than result of restructuring.
Nor, nally, do the restructuring proposals substantively transform the transformation of users entitlements entrenched by the post-privatization regulatory
framework. The contested politics of redistribution
post-privatization hinges upon a double discursive
move: reconguring citizens as consumers, and reconguring the environment as a legitimate user whose
interests are to be balanced with those of consumers.
Post-privatization, decision-making on capital investment in the industry balances the interests of consumers
willingness to pay against environmental protection
and rehabilitation requirementsa cost-benet exercise
which minimizes the participation of labour and attempts to exclude questions of ability-to-pay, in distinct

371

contrast to the nationalized era (Bakker, 2001). The

majority of increases in domestic water users bills postprivatization have gone towards the cost of improving
not only drinking water quality but also beaches and
bathing waters through investment in wastewater
treatment facilities, mandated by EU directives and
backed up by local pressure from campaigning NGOs
such as Surfers Against Sewage (Ward, 1996). River
water quality in England and Wales appears to be at its
highest level since the Industrial Revolution (EA, 2001;
DEFRA, 2001). However, the implications of continuing environmental improvement for water prices are
highly contested. The reduction in prices at the 1999
Periodic Review implied a sharp reduction in the size of
the investment program, as Ofwat rejected most of the
companies plans for increased environmental spend,
citing the need to reduce the cost burden on consumers.
Distributive struggles over water continue to be articulated through a governance model which prioritizes
market-based (or market-simulating) adjudication of the
interests of customers, investors, and the environment,
in contrast to a public policy approach to the interests of
citizens, state, and labour triad which characterized the
nationalized industries. Unlike more radical calls made
internationally for a consumerlabour-environment alliance in restructuring water supply management (such
as the Water Supply and Sanitation Collaborative
Councils Vision 21, 22 the Cochabamba Declaration, 23 the Group of Lisbons Water Manifesto, 24 and
the Declaration of the P7 25 at their 4th Summit in
2000), current proposals for mutualization and customer
corporations for the water industry in England would
not signicantly disrupt the commercial governance
model underlying privatization. This does not imply that
the restructuring proposals pursued to date in the water
supply industry will be unsuccessful, but contests interpretations of these models as a radical reworking of
public services governance in Britain.

22

The Water Supply and Sanitation Collaborative Council, located

in Geneva, is a non-prot organization with funding from governments and multi-lateral agencies that acts as an international policy
think tank on water management.
23
The Cochabamba declaration followed a meeting of several
hundred people in this Bolivian city concerned about the involvement
of private sector corporations in water supply management. See http://
www.canadians.org/blueplanet/cochabamba-e.html.
24
The Group of Lisbon is a group of distinguished scholars from
around the world which analyzes globalization, calls for new economic
governance models, and has identied new forms of social contracts.
See R Petrella. The Water Manifesto (London: Zed Books, 2001).
25
The P7 (now P8) annual conference was convened for the rst
time in June 1997 by the Green Group in the European Parliament, as
an alternative Summit to the G7 (now G8). Representatives from
the worlds poorest countries attend the conferences, which focus on the
structural causes of and solutions to poverty. The declaration of the
2000 meeting countered the Inter-Ministerial Hague declaration earlier
that year, and spelled out four principles for water democracy.

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K.J. Bakker / Geoforum 34 (2003) 359374

6. Discussion
If you can privatize the water industry, you can
privatize anything. The government reckons it can
(at least in England and Wales). The Economist,
8 February 1986
For many observers, the decision to privatize the
water supply industry was a seminal moment in the
governments privatization program. Earlier privatizations had concentrated on those industries which were
clearly protable, some of which even had private
competitors. To a greater degree than any of the industries privatized before it, water lay at the frontier of
the marketso much so that new regulatory institutions
had to be designed and regulatory bodies created (an
environmental and drinking water regulator in addition
to the economic regulator) in order to enable the market
to function. This regulatory framework embodied contradictionsbetween the need for stable returns and
eciency incentives, between consumers as citizens and
as customers, between nature as resource and as environmentwhich progressively undermined the British
model of vertically-integrated, comparative-competition
controlled-monopolist, equity-nanced, price-capped,
asset-owning and operating private water companies.
The failure to balance these contradictions resulted in
signicant re-regulation, and led to signicant restructuring of the water industry.
This paper has situated recent restructuring in the
water supply industry in England and Wales within an
analysis of the re-regulation of the water supply industry, deploying regulation theory as politico-economic
method to explore the contradictions of the post-privatization regulatory model. Industry proposals to mutualize would likely not have occurred had Ofwat not
reduced price caps at the 1999 Periodic Review. The
reduction in price limits had an economic logic (delivering eciency gains to consumers, which had up until
1999 had been delivered disproportionately to shareholders), and a political inevitability, given public pressure to reduce prices in the industry, after a decade of
increasing prices and high prots, during which water
companies consistently outperformed the stock market.
Failure to reduce the price caps would have further
deepened the crisis of political legitimacy of the water
industry. Yet the price cap reductions have seriously
threatened the economic viability of some of the private
water companies.
In the longer-term, the nancial viability of the vertically integrated, equity-nanced private monopoly
water supplier is in doubt in England and Wales. The
majority of the remaining independently listed companies will either continue to diversify and/or interna-

tionalize into non-core activities or employ another

model of vertical de-integration; alternatively, some
parent companies may choose to load debt onto the core
water supply company, weakening the balance sheet,
and raising the likelihood of bankruptcy of the regulated
business. In so doing, water companies are responding
to the dilemma faced by all of the remaining assetowning water supply companies: generating sucient
revenues from the regulated business, in a capitalintensive industry with stagnant demand and limited
market growth potential, is predicated upon a growth in
prices which, for a partially non-substitutable resource
essential for life, raises questions of equity and access
and results in public and political pressure to keep
(monopoly) prices down. Restructuring proposals to
date have evaded rather than resolved this dilemma.
The relevance of this case is two-fold. First, given the
controversial expansion of privatization and private
sector participation in the water supply sector overseas
(see, for example, Bond, 1998a,b, 1999), the evolution of
the British model of regulation (increasingly applied to
concession contracts in the South) merits close attention. In particular, the original assumptions of the
British model of regulationthat water is suciently
similar to other network utilities such that a standardized price-cap model of regulation can be applied, and
that light-touch regulation is both feasible and politically acceptabledeserve careful scrutiny. Second,
within Britain, the water supply industry provides a
concrete case through which to interrogate the attraction of the mutual alternative, in a political context in
which mutualization is actively being explored by senior
government Ministers as a means of implementing Labours Third Way and providing consumers more
control over service provision of public services such as
health, education and utilities. In contrast to analyses
which depict restructuring as a retreat of the market,
the analysis presented in this paper emphasizes the
continuity of the commercial governance model applied
in the water supply industry in 1989; in interpreting restructuring as an industry response to re-regulation of
services provision, the paper interrogates the incentive
structure underpinning current moves towards a mutual future for public services in Britain.

Acknowledgements
Erik Swyngedouw, David Lloyd Owen, Neil Summerton, Ben Page, Melanie Feakins, Gordon Clark, Jody
Emel, Steven Renzetti, Andrew Leyshon and three
anonymous reviewers provided helpful comments. The
arguments were rened through discussions with Bernard Barraque, Olivier Coutard, and Dominique Lor-

K.J. Bakker / Geoforum 34 (2003) 359374

rain, and discussions following the presentation at the

LATTs laboratory (ENPC, 2002) and the PRINWASS
conference (St Antonys College, Oxford 2002). Funding
from the Rhodes Trust and the University of Oxford for
eldwork costs is gratefully acknowledged. The usual
disclaimers apply.

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