SPECTAT THE OR
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TAKING A BATH
Last week's announcement of the method of privatising the ten regional water authorities contained the most shocking pricing policy ever to be attemp- ted by a utility in peacetime. Yet the Opposition barely protested, while the Conservative Party united behind statistics which they can scarcely have compre- hended. Such opposition as was attempted has concentrated on the gift to the author- ities of £4.5 billion in the shape of debt write-offs and £1 billion in the form of a so called 'green dowry'. In fact this was just presentational hype: what was announced amounts to a simple gift of £5.5 billion, without which the water authorities would not necessarily be insolvent, but also with- out which the City will not throw their Pennies into the water.
But no one, apart from the Government and the authorities, that is, appears to have looked at the consequences of the so-called K Factor', that is, the amount by which the water companies can increase their Prices, over the rate of inflation. It didn't sound too bad: typically it is about five per cent over inflation for each of the next ten years. It didn't sound too bad, that is, unless one is familiar with the peculiar viciousness of compounding interest. Assuming (cynically) that the inflation rate averages about eight per cent over the next ten years, it means that, for example, Thames Water's water will increase in Price by 335 per cent, and by 120 per cent in real terms. Meanwhile the poor custom- ers of the Welsh water authority will face an increase over ten years of 390 per cent, a real increase of no less than 175 per cent. If one assumes, more charitably, that inflation over the next decade will hover around five per cent, then the Thames's customers — when their supplies are not affected by unexpectedly hot summers Will have to swallow increases of 250 per Cent, 90 per cent in real terms, while the Welsh will experience a rise of 'only' 290 per cent, or 130 per cent real. To top it all, the ten authorities will be able to pass on to their customers any other additional costs arising from 'unforeseeable events' (what- ever they are). They will not even have to apply to their new regulator, the Director of Water Services, for permission to pass
on such costs.
While it is probably the case that the underscrutinised 'K Factors' might be necessary to enable these inefficient and antiquated companies to comply with the latest EEC directives on the environment and water purity, it is clear that the 'unforeseable cost' pass-through is the price we consumers will have to pay for the Government to persuade the City under- writers, still bitter after the British Pet- roleum fiasco, to fill their boots with Water. The day that the first privatised water company spends cash on a diversi- fication (into, say, a jacuzzi manufacturer) is the day we will know for sure that this crew was given more money than they needed. It should not take long. For all that, it is not clear that the individual consumer should be angry. For what is happening, albeit in a violent fashion, is that all the costs of the business are being transferred to the price of the product, rather than being partly swal- lowed up in general taxation. The same process is taking place under the privatisa- tion of the electricity supply industry. No more will it be possible for the Govern- ment to use its general revenue-raising powers as a means of meeting the costs of an uneconomic energy policy, whether nuclear or nuclear/oil in the event of a miners' strike. It will all be in the electricity bills.
What this means is that the individual consumer is, relatively, the gainer in the privatisation of water and electricity, at the expense of the industrial user. Because, for as long as the cost of such industries was partly recovered through general taxation, the general public, rather than industry (relative to its use of water and power a tiny contributor to the Exchequer) were the fall guys.
This effect of water and electricity priva- tisation has gone completely unnoticed. Doubtless the Government would like to brag about it — but it would also like to keep industry on its side during the debates on these privatisations. Afterwards the Government can let the electorate into the secret, and tell the Confederation of Brit- ish Industry to jump in a (fully cleaned up, EEC-compatible) reservoir.
A second effect, also unremarked, is to benefit the higher rate taxpayer at the expense of the less well off. Clearly, if the Exchequer bears none of the capital and running costs of utilities, it means an end to the days when the better off pay prop- ortionately more of those costs, through income tax. It is entirely consonant with the traditional methods of Mrs Thatcher's administrations — remember the early Howe Budgets, combining reductions in income tax with massive increases in Value Added Tax. The policy is clear and well- conceived. But it is remarkable that such a fundamental — if not entirely irreversible — shift in the balance of wealth has not met with greater public outcry, or political opposition.
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