A Critical Financial Analysis of the Performance of Privatised Insustries: The Case of the Water Industry in England and Wales

Abstract The water industry was one of a number of publicly run enterprises and assets which were sold into private ownership during the 1980s in the UK. The Government justified its privatisation programme on a number of grounds. In particular it believed that privatisation would improve industrial performance by subjecting the nationalised industries to the discipline of the market and yield benefits, via greater efficiency, to the industry, customers and the nation. This paper uses a case study approach and presents the financial and accounting data as it relates to the privatised water industry. It analyses costs and outputs, and the distribution of the surplus created by the industry in order to evaluate the Government’s claims that (i) increased efficiency would result and (ii) that all would benefit. The evidence did not substantiate the Govermnent’s claims. First, the study found that greater efficiency, meaning lower costs relative to output, did not occur. Significant increases in efficiency had occurred prior to privatisation leaving little room to improve efficiency without jeopardising levels of service and future service provision. Secondly, the distribution of the surplus, which is publicly seen as a conflict between consumers and shareholders, is in fact much wider than this. It has not only substantially advantaged the shareholders at the expense of other stakeholders, but also has created the conditions whereby the other stakeholders will be disadvantaged in the future. The real beneficiaries were largely invisible in the Government’s case for privatisation. The efficiency rhetoric was a device to legitimise privatisation whose essence was the transfer of wealth from the public at large to a relatively few individuals and corporate entities. The accounting framework and evidence suggests that the conflict between the stakeholders is set to increase, an outcome far removed from the Government’s promise of the best of all possible worlds.