Wednesday, June 20, 2012

Hate profiteering water companies, banks and utilities? Let’s mutualise the lot!

With one shining exception, water companies are making huge profits on the backs of hard-pressed householders, with deteriorating performance and rocketing prices.

There is a better way, it's working right now in this country, and I believe we would be better served if all water companies, and even all banks and utilities were to be run this way.

Why this system doesn't work

There was outrage last week as Thames Water's CEO Martin Baggs, already the best-paid water company boss, was awarded an annual bonus of £418,359 on top of his £425,000 salary. This was despite a fall in profits and ‘deteriorating’ satisfaction rates among its 8.8 million customers. He also took home £1.67m in 2010/11.

Of course, he's paid not so much for the service he gives to customers but for continuing to maintain a good cash flow back to shareholders. Investors like water companies and other utilities, because they provide a cast-iron guarantee of cash flow.

Thames Water is owned by Australian investment bank Macquarie, with 12% owned by Chinese investors. They took £179.5m profit from British householders out of the country last year. That's our cash and it will not be reinvested here.

As I have noted before, Thames Water increased its prices to consumers by 6.7% in April, way above the rate of inflation. Other privatised companies increased prices by 8.8%.

The national officer for the water workers' union, the GMB, slammed Baggs’ bonus since it comes from “the hard-earned income of hard-pressed householders" and said the current hosepipe ban was evidence of a long-term failure of management at the company.

I won't go on. There's been enough about this subject in the mainstream press.

The system that works better

Instead, let's praise success. Over in Wales yesterday, Dwr Cymru (Welsh Water) announced a reduction in cost to its customers, and that it will invest £1 billion over the next three years in infrastructure projects across Wales, Deeside and Herefordshire.

Average household bills will be £30 a year lower (before inflation) by 2015, probably the only area in the country where this will happen.

The business plans to reduce its day-to-day running costs by 20%, while further improving its operational and environmental performance.

Its Chairman, Bob Ayling, said the investment package was possible due to its owner Glas Cymru's unique "not-for-profit" business structure.

He said: "The Glas Cymru model means our first priority is to our customers and looking after Dwr Cymru's extensive infrastructure for future generations.

"At a time when many companies and public bodies are cutting back on investment, this investment programme is employing some 10% of the construction sector in our region with more than 50% of spend going to local companies in the supply chain, supporting some 1,500 jobs."

In its new annual report it says it has invested over £1.5bn during the last five years, equivalent to more than £1,000 for every household in its area.

It was also able to pay a customer dividend of £22 each, bringing the total paid to customers in the last seven years to over £150m, because, like the Co-operative, it gives dividends to all of its customers, who are its members.

It's a genuine, not-for-profit, social enterprise that works, superbly.

The social model pays off

Do you need any more evidence before writing to David Cameron and Vince Cable urging them to implement this model as widely as possible?

Then take the oldest co-op in the book. The Co-operative Banking Group goes back to 1867. It has made a profit doing the whole of the recession so far, with comparatively small write-offs of toxic investments and bad loans.

It is lending to small and medium-sized enterprises at an increasing rate: up 31% during 2010 and 33% last year, and is now about to increase lending.

It attributes this success to the fact that it follows the instincts and values of its members, who own it. “Sustainability is in the DNA of the business," says its acting chief executive Barry Tootell.

In 1974, it was the first bank to offer free banking to those in credit. In 1992, it introduced an ethical policy, refusing to do business with the groups it considered unsavoury like heavy polluters and arms traders. Since 1994, customers have voted to choose the charities their spending should help fund via the Co-op Bank. Since then it has donated £3 million to more than 80 charities.

The bank backs wind and solar power. The CIS Tower in Manchester, the tallest office building outside London in the UK, is decked out in solar panels. “We are investing £1 billion in renewable energy and £700 million has been committed already," Mr. Tootell says.

The Co-op prioritises young people, it offers banking services to prisoners on the basis that if they learn to manage money inside they fare better when they return to the community. And the bank is growing; it wants to buy 630 branches from Lloyds Banking Group.

It works, superbly. It is sustainability in practise.

Let's apply this model more widely

So here you have it: sustainable social enterprises, owned by members, doing better than their counterparts in the fully private sector and, what's more, continuing to recycle their profits back into other UK businesses, as well as providing better value for customers.

Now, imagine all water companies and energy companies run this way. Not to mention banks. It wouldn’t be a case of ‘us’ and ‘them’, but just ‘us’.

Would David Cameron love this? What about Vince Cable?

When the Prime Minister looks at the water companies as a whole, he understandably regards them as a success because of the profits made for their owners, regardless of the fact that most of them are abroad.

He wants to apply this same model to finance other infrastructure, particularly Britain's roads. In March, he said in a speech: "Why is it that other infrastructure — for example, water — is funded by private sector capital through privately owned, independently regulated utilities, but roads in Britain still call on the public finances for funding?"

You know it would be a disaster if British roads were owned by Chinese or Australian investors. Just imagine paying through the nose to get to work after another toll hike, while the potholes aren't getting mended because head office in Beijing hasn't given the go-ahead.

What a potty idea. Yet Mr. Cameron is aware of the value of co-ops and social enterprises. He has even backed a bill, the Co-operatives Bill, that supports this business model. But he is not prioritising it. In January, Number 10 said that it "will be put before parliament before the next election", but currently there is no schedule for it.

The Postal Services Act 2011, which paves the road for the privatisation of the Post Office, does contain provision for the possible mutualisation of the Post Office, i.e., turning it into a co-op. Some individual branches of the Post Office are already owned by mutuals, such as Lincolnshire Co-operative.

Ed Mayo, the secretary general of Co-operatives UK, supports both the Co-operative Bill and the mutualisation of the Post Office, calling it the ideal business structure to best benefit the public.

So come on, David Cameron. If you really want to give value for money to hard-up householders and increase the chances of water and other utility companies and essential services revitalising the British economy, then study and learn from the success of Welsh Water and the Co-operative Bank, and encourage others to follow suit.

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