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Bit to say I fully agree with the author’s viewpoint, but this article is a good, non-sensational, explanation of the current Thames Water situation. Worth a read if you’re interested in what’s actually going on.
If owners want to load their companies with debt (and they did), equity and debt holders should know they are gaining higher potential returns at the price of greater risk. These are decisions the private sector is well placed to make.
I love the FT, they are so absolutely blinded by capitalism being the only possible method. This is a crisis literally created by capitalist greed and assets stripping / debt loading, demonstrating that risk is not taken seriously because of limited liability. Get the money and get out, simple.
If you think this is the behaviour of entities well placed to make these decisions then I have a bridge to sell you.
A natural monopoly is one of the most basic forms of market failure, and to suggest otherwise is a laughabe level of economic illiteracy.
One of the points made quite astutely in the FT comments section mentioned that ofwat was also strongly responsible for this.
Apparently the regulatory model is set up in the following way - in order to encourage investment in infrastructure, the calculated amount that customers are charged is based on a ratio of how much money is invested into infrastructure. Supposedly Thames Water and other water companies in England wanted to invest more in infrastructure, however ofwat did not allow it as they wanted to protect customers from price increases. Furthermore because of the silly shell game of holding companies that were set up to move the debt around, ofwat didn’t understand just how much debt was being racked up and didn’t make any moves to stop it.
However what this all shows is that the regulatory model is absolutely broken. So not only is ofwat toothless in allowing a ridiculous corporate structure to be set up to obfuscate the silly financial leveraging going on, they are also operating on an entirely faulty premise.
What it all shows is that trying to set up a functional privatised system for water companies that incentivises investment and works for citizens is extremely difficult, is prone to regulatory capture, is still under pressure from meddling ministers and ultimately costs more for customers and the government than servicing the government debt that would be used to pay for investment under a nationalised system.
Just bloody nationalised it.
Oh absolutely, Ofwat are also unbelievably shit. The point is however is that fundamental market failures like natural monopolies cannot be solved by regulatory bodies.
That’s not to give Ofwat an out, they have utterly fucked this and can be argue to have been captured, but even if they were perfect a privatised water system would still fail.
I would have so much more respect for the FT - and The Economist - if they actually acknowledged market failure rather than pretending it’s always regulatory or government.