Of all the inhabitants of the Little Shop of Horrors that is neoliberalism, surely the most gruesome cohort must be privatization of monopoly public services. And then within this best-worst category, privatization of potable water and wastewater treatment utilities can’t be anything other than an outright winner of this ugly competition.
Where I live in southern England, the Thatcher administration – who else? – privatized the previously state-owned company which has a monopoly, as all water supply and sewage treatment inevitably requires, on providing potable water and treating wastewater which flows into the sewer system and eventually, via treatment plants, back into the watercourses.
The result has been a disaster for consumers, the environment and the condition of the infrastructure which was sold off as a result of the privatization. Wikipedia provides a helpful list of the past history of awful, depressing headlines the company has generated:
In 2007 Southern Water was fined £20.3 million for ‘deliberate misreporting’ and failing to meet guaranteed standards of service to customers. Southern Water Chief Executive Les Dawson said: “Today’s announcement draws a line under a shameful period in the company’s history”.
In 2011 Southern Water Ltd was fined £25,000 when sewage flooded into Southampton water.
The company was ordered to pay £10,000 in fines and costs after sewage seeped into a stream at Beltinge in Kent.
A leak of sewage from Southern Water’s plant at Hurstpierpoint pumping station, West Sussex, lead to fines and costs of £7,200 in 2011.
Southern Water was fined £50,000 in April 2011 for two offences relating to unscreened discharges into Langstone Harbour, Hampshire, between November 2009 and April 2010.
In June 2010 Southern Water was fined £3,000 after it admitted polluting 2 km of a Sussex stream with raw sewage, killing up to a hundred brown trout and devastating the fish population for the second time in five years. Crawley Magistrates’ Court heard that the Environment Agency received calls from members of the public after dead fish were seen in the Sunnyside Stream in East Grinstead on 30 August 2009.
In November 2014 Southern Water were fined £500,000 and agreed to pay costs of £19,224 at Canterbury Crown Court after an Environment Agency investigation found that untreated sewage was discharged into the Swalecliffe Brook, polluting a 1.2 kilometre stretch of the watercourse and killing local wildlife. (www.gov.uk/government/news)
In December 2016 Southern Water was fined a record £2,000,000 for flooding beaches in Kent with raw sewage, leaving them closed to the public for nine days. The Environment Agency called the event “catastrophic”, while the judge at Maidstone crown court said that Southern Water’s repeat offending was “wholly unacceptable”. The company apologised unreservedly, as it did when fined £200,000 in 2013 for similar offences. Due to health concerns, Thanet district council was forced to close beaches for nine consecutive days, including the Queen’s diamond jubilee bank holiday weekend. (The Guardian, 19 December 2016)
You would have thought, perhaps in hope rather than realism, that after this deluge of crap (literally), Southern Water (and their investors) might have, if you’ll forgive the pun, wondered if it wasn’t time to clean up their act. If so, you’d be, uncharacteristically for Naked Capitalism readers, rather naive. Southern Water has made their previous civil violations look like a spot of mustard on a necktie.
Southern Water was fined by the regulators here £126M on June 25th, which sounds a lot but is in reality in slap on the wrists territory in view of their latest misconduct.
Before delving into the details of that, to provide some context, the utility is the usual PE-orchestrated financial-engineering asset-sweating systematical reduction of a former public service to a hollowed out husk.
Here’s the ownership structure, as explained by Southern Water:
Southern Water is owned by a consortium, which came together
Clive again, momentarily interrupting the flow, like a blocked sewer. The use of language there is almost an art form. “came together”. Did they all hook up on Tinder or something? Not a bit of it. The “consortium” was a Private Equity instigated lash up of yield-hungry investors chasing, like everyone else these days, above-average rates of return. Why didn’t they simply buy chunks of the publicly-traded equity tranches of the company to give themselves exposure to this particular asset class (public utilities)? Because this wouldn’t have given them sufficient leverage and control over the institution to do their financial raping and pillaging. Back, reluctantly, to Southern Water…
in 2007 solely for this purpose.
The consortium members are shareholders in Greensands Holdings Limited, the top holding company. […]
The Greensands consortium members comprise a mixture of infrastructure investment funds, pension funds and private equity. The infrastructure funds are managed by JP Morgan Asset Management, UBS Asset Management and Hermes Investment Management.
The pension funds are represented by JP Morgan Asset Management, UBS Asset Management, Hermes Investment Management and Whitehelm Capital or are self-managed. Cheung Kong Infrastructure and The Li Ka Shing Foundation are direct investors.
What have these fine upstanding custodians of our water supply been up to, then? Lying, cheating, bullying and polluting. Ofwat, the UK water industry regulator, started peering more closely at Southern Water in 2018. They didn’t like the look of what they saw.
A board which was asleep at the wheel:
Water resources management plan and market information
What we found
Overall, we had serious concerns in key areas of this assessment such as options costing, Board involvement, assurance and leakage reduction presentation. The draft water resources management plan option costs were not presented clearly and a limited description of assurance was provided for both the plan and market information table. The late provision of the market information and the time taken to update option cost information did not provide confidence in the company’s management of this data. The leakage reduction target, a key plan metric, was not consistently presented in the plan and there was no evidence of Board involvement or sign off.
Our assessment: serious concerns
A company that deliberately obfuscated the regulators:
What we found
[…] We currently have four open cases – an enforcement case, a sewer requisition case and two requests to appoint an arbitrator.
In terms of the enforcement case, we do not consider that the company has met our expectations and we have serious concerns. This is based on Southern Water not responding fully to our requests for information (for example, by providing documents with missing pages and/or text), not responding in a timely manner and providing relevant information that was unclear. This has affected our ability to rely on the information provided and has required us to take steps to seek further clarifications and grant extensions to previous deadlines for responses, impacting our ability to progress the investigation as quickly and efficiently as we would have liked.
Our assessment: serious concerns
These failings led the regulator to conduct a much wider-reaching inquiry. The full regulatory report has to be read in its entirety to convey the awfulness that went on. But edited highlights, or maybe that should be low-lights, were:
・Falsification of regulatory reporting for effluent discharge quality to avoid fines:
In summary, as a consequence of now restating past WwTW performance data, we have calculated that Southern Water has avoided price review penalties in past years amounting to a total of £75 million (in 2017-18 prices). This has arisen as a direct consequence of the practices in place within the company to implement ANFs at its WwTW (Clive: Waste-water Treatment Works) over 2010 to 2017. The total amount of avoided price review penalties reflects the restated figures that Southern Water has now provided about the numbers of WwTW that were potentially non-compliant with permit conditions relating to final effluent quality.
・Deliberate attempts at evasion — government agencies monitor water treatment plants but the operator predicted when the inspections and sampling was due and intentionally halted to flow from treatment plants (“Artificial No Flow or ANF” events) so there was no output to sample:
The Sampling Compliance Report provides evidence (mostly in the form of email extracts between employees of Southern Water between 2010 and 2017), of staff anticipating the timing of planned OSM (Clive: On Site Monitoring) samples across numerous WwTW, in order to ensure that no effluent was available for sampling purposes. This deliberate practice (which took place through a number of different methods) of creating an artificial “no flow” event (described as an “Artificial No Flow or ANF”) meant that a sample under the OSM regime could not be taken thus ensuring that the sample (and as a consequence the relevant WwTW) would be deemed as being compliant with permit conditions. As a result of this manipulation, a false picture of Southern Water’s WwTW performance (and how this was being achieved) was provided internally within the company, to the Environment Agency (Clive: the UK’s equivalent of the EPA, similarly gutted, but that’s another story for another time…) and to Ofwat
・They even took waste water discharges away by tanker so nothing could be measured at the outfall pipes.
Staff then used the knowledge about sample dates to put in place ANFs. This included, for example, through the improper use of tankering (i.e. by tankering wastewater from one WwTW to another to cause an ANF). Another method included ‘recirculating’ effluent within a WwTW again to ensure there was no final effluent available for sampling.
・Senior management hassled and pressured employees to obfuscate performance measures.
The report also highlighted occasions where employees felt pressured by senior managers to create ANFs.
・The whistleblowing policy for employees actually started with a big red frightener threatening dismissal for using the wrongdoing reporting mechanisms:
Southern Water has acknowledged in its Action Plan that there were deficiencies in its organisational culture which prevented employees from being comfortable with speaking out about inappropriate or non-compliant behaviours. This included having in place ineffective whistleblowing processes which resulted in no staff coming forward to report their concerns despite certain staff being obviously uncomfortable about the implementation of ANFs and feeling pressured to act in an improper manner (as evidenced by emails we have seen that are referenced in the Sampling Compliance Report).
The whistleblower policy Southern Water had in place at the time included on its first page and highlighted in bold the following text: “Should any investigation conclude that the disclosure was designed to discredit another individual or group, prove to be malicious or misleading then that worker concerned would become the subject of the Disciplinary Procedure or even action from the aggrieved individual.”
By pretending that waste water being discharged into watercourses was of a higher quality than it was, the investors pocketed profits that should have gone on infrastructure improvements and staffing to enable treatment plants to be safely operated and checked effectively.
Criminal investigations are pending. But we’ve seen this movie many times before. Protected by the best corporate lawyers money (public consumers’ money, that is) can buy, a defence shield of auditors, layers of management on whom the blame can be pinned and a complex legal argument which has to be constructed to a high evidence threshold allowing jurors to be thrown off the scent to a degree that a reasonable doubt emerges, we shouldn’t hold our breaths.
So we’re left with the penalties imposed. Unfortunately there’s less here than meets the eye initially from the headline figure. From the regulatory report:
This is a notice of Ofwat’s intention to issue Southern Water with a financial penalty amounting to £37.7 million reduced exceptionally to £3 million for significant breaches of its licence conditions and its statutory duties. This is on the basis that Southern Water has undertaken to pay customers about £123 million over the next five years, some of which is a payment of price review underperformance penalties the company avoided paying in the period 2010 to 2017 and some of which is a payment to customers for the failures set out in this notice, paid in lieu of a penalty.
This means the regulator reduced the up-front cost (which would have come out of the profits for fiscal 2019-20 in one hit) for an arrangement which allows Southern Water eee-zee payment terms and to spread the cost over five years through a customer rebate initiative. And some of the rebate is itself merely penalties which would have been levied if the wrongdoing — environmental pollution and missed targets for waste processing quality — had been identified at the time. They are trying to bribe me with my own money.
The whole sorry saga shows how the entire publicly-overseen but privately-owned regulated utility model is completely broken. The system is a sitting-duck for gaming and, at best, the issues are uncovered well after the fact. If ever.
There is, however, a final failsafe currently still in place. Water quality standards in the EU are mandated by EU Directive with redress available through the Court of Justice of the European Union (CJEU). A Member State government can be fined and ordered to implement better oversight and governance of the utilities. Thus, any temptation which the U.K. government might succumb to, to “fix” problems like those entrenched in Southern Water by slackening off the potable and wastewater standards, are prohibited by the threat of EU / CJEU referral.
The U.K. government has promised that, post-Brexit, environmental protections will be “equivalent or better than” those specified in the EU Directive. I — and similarly cynical readers — might well harbour a few doubts about that.