Predatory Practices

Professor Prem Sikka, Lord Sikka writes:

The UK’s regulatory structures provide a window for assessing power, politics, and public accountability. With the full approval of the state, too many industries are dominated by organisations of dubious practices, if not downright criminal activities. The privatised water industry in England provides such a window.

Since privatisation in 1989, water company shareholders have extracted at least £85bn in dividends and unknown billions in returns through intragroup transactions. Customer bills have been hiked and investment in infrastructure has been neglected. Last year over a trillion litres of water was lost to leaks. Raw sewage was dumped into rivers, lakes and seas for 3.6m hours. Meaningless, star ratings are awarded by regulators to promote and protect industry. Last year, United Utilities and Severn Trent Water secured four-star rating from the Environment Agency even though the companies were responsible for 1,374 illegal sewage spills. United Utilities didn’t report that between 2021 and 2023 it dumped 140m litres of waste, mostly illegally, into Lake Windemere, a major tourist attraction. Such practices boost corporate profits, dividends and executive pay, and neglect people’s welfare. The UN special rapporteur on the human right to clean water said that behind a wall of secrecy England’s water companies put the interests of shareholders ahead of the public’s right to clean water.

Puny fines by regulators are just another cost of doing business, and failed to check predatory practices. The state guaranteed monopoly of water and wastewater disposal in England and Wales is controlled by ten companies with criminal convictions. Since 1989, water companies have had 1,109 criminal convictions for dumping sewage. The roll-call of abusive practices is led by United Utilities with 205 separate convictions. Thames Water has 187 convictions; South West Water 174; Anglia Water, 128; Yorkshire Water, 125; and Southern Water has 119 convictions. Their abusive practices have created health hazards and harmed biodiversity and marine life. Yet their licence to operate has not been cancelled. Ofwat, the water regulator for England and Wales, is considering lower or no financial penalties on companies for unplugged leaks and sewage dumping in case it increases financial pressures on them. Ofwat can’t protect customers because it is simultaneously responsible for promoting growth of the industry.

On 4th November 2024, during the parliamentary passage of the Water (Special Measures) Bill, I proposed that any water company with more than two criminal convictions in a five-year period should be placed under “special administration” giving them a chance to mend their ways or lose licence to operate. The government and the Conservative party opposed the amendment. Criminals will continue to control the vital water industry.

Imagine what might have happened to a manufacturer of aircrafts, auto, food and medicines for identical number of criminal convictions. Their licence to operate may have been cancelled and customers would sue them. But such things do not happen to the water industry. Ofwat has authorised water companies to hike prices by 44% for the period 2025-2030. Companies are pushing for rises of up to 84%. Companies say that they may be able to invest in infrastructure and remove dangerous lead pipes by the year 3273 (yes, you read that right), despite a previous commitment to replace them by 2050.

In crony capitalism, regulators are too close to companies and there is regulatory merry-round. Conflicts of interest abound and cognitive capture is normalised. At least 27 former Ofwat directors, managers and consultants have taken-up senior positions in water companies. Individuals from regulatory bodies are in demand by water companies because they can open doors and help to secure favours, and enable water companies to game the regulatory system. Due to never-ending austerity and cuts in public spending, many regulatory staff are poorly paid. Whilst in regulatory positions they begin to look for greener pastures or are targeted by water companies. Every interaction with a water company becomes a potential job interview. There is always a temptation to go easy and be extra helpful to a potential employer as that can help to land a better paid job. No one wants to sour the potential for a better paid job by being tough or awkward with a potential employer. Despite questions in parliament, Ministers are content with the current state of affairs.

Ofwat director Seema Kennedy, former Conservative Minister, is campaigning to make it harder for consumers to sue water companies that breach legal sewage limits. She is also a paid senior adviser to the lobbying firm which works for the industry body that represents big water companies. The current Environment Secretary has accepted donations from a water company convicted of illegally dumping sewage. Ministers have been having secret meetings with water companies and declared that “some stricter options that had been proposed were now off the table”. These include bringing the water industry into public ownership. Strangely, in response to my question in parliament, the government defended privatisation of water by citing a 2018 report funded and commissioned by the water companies, and published by right-wing Social Market Foundation. A former government adviser said that the report had “virtually no intellectual substance” and was “wrong”. He added that renationalisation would be “relatively easy, as with the revenues from the water bills, the government would have sufficient income to pay for the assets it acquired”.

Predatory practices can be checked by having customer and employee representations on their boards with power to vote on executive pay. Such amendments have been tabled during the parliamentary passage of the Water (Special Measures) Bill by myself and Baroness Jones of Moulsecoomb. Stakeholder representation would empower people whose daily life is affected by water companies. More than 90% of water companies are owned by overseas investors. We also want the normal laws of capitalism to apply to water companies i.e. no bailout of shareholders and debtholders. They have all been opposed by the Labour government and Conservative opposition. They are content for the industry to be controlled by organisations with criminal convictions.

The Water (Special Measures) Bill enables the government to restructure failing water companies and push them back into the private sector, with customers and the public purse bearing the cost of restructuring. The government has launched what it claims is an Independent Commission to examine the water sector and its regulation. The Commission’s terms of reference require it to “focus on reforms that improve the privatised regulated model”. So it cannot consider alternatives to private ownership. Issues such profiteering, exploitation and democratisation of the water industry are beyond its remit. 

Water isn’t the only industry controlled by organisations of dubious practices. The finance industry has a long history of mis-selling numerous financial products, including car loans, pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest-rate swaps, mini-bonds and payment protection insurance and more. The aim is always to rip-off customers. The eventual compensation, when caught, is paid by levying higher charges on other customers. Banks have a long history of money laundering, sanctions busting and tax dodges. UK governments and regulators cover-up their predatory practices. The City of London Police fraud investigation unit is funded by Lloyds Bank. There is little urgency about investigating frauds by banks.

Consider the case of frauds by HBOS officials which go back to 2002. The victims were the taxpayers, small business customers of the bank, and HBOS shareholders. HBOS was acquired by Lloyds Banking Group in 2008. Despite the overwhelming evidence, Lloyds Banking Group, the Serious Fraud Office, regulators and the Treasury refused to investigate. In 2017, Anthony Stansfeld, Thames Valley Police and Crime Commissioner, prosecuted and secured six criminal convictions. There has been no investigation by the Financial Conduct Authority (FCA) or compensation for the victims of fraud. The government and the regulators deemed it to be a matter for Lloyds Bank. Eventually in 2017, it appointed former high court judge Dame Linda Dobbs to investigate and publish a report by 2018. To date, no report has been published into the £1bn scandal, and it may never see the light of the day.

This article has only referred to the water and finance industry but predatory practices are prevalent all across the UK economy. Too many sectors are dominated by companies with dubious reputations. It is hard to name any major company that is pristine. Predatory practices flourish because governments are disconnected from the people and thereby erode confidence in institutions of governance.