What public-private-partnership scandals can tell us about wrongdoing in the water industry

Water bills are going up^[1] in England and Wales, even after the series of scandals around water companies. Last year water firms paid £158 million in fines^[2] following a record-breaking number of sewage dumps^[3] in rivers and seas.

Severn Trent Water and United Utilities alone reportedly made 1,374 illegal sewage spills^[4] over two years. (Both companies took issue with the analysis that led to this figure but acknowledged concerns about sewage discharges.)

There have been other notable incidents. Whistleblowers have told of water companies that fail to treat^[5] legally required amounts of sewage and divert that sewage to public waterways. To add to the disgrace, water companies have generally failed to invest enough in the UK’s water infrastructure^[6].

Research^[7] suggests that governments have been pressured to become more “business-like”. This has given rise to the use of public-private partnerships (PPPs) to run important public services, such as water, transport and even prisons. Water companies in England and Wales are private companies that bid for their contracts, while in Scotland, the water provider^[8] is a public organisation.

While other findings^[9] show that PPPs can support important public service needs, such as public health, research^[10] by my colleagues and I examines a consistent pattern in UK PPP scandals and wrongdoing. Over the past decade and a half, billions of pounds of taxpayers’ funds^[11] are unaccounted for. This appears to be largely because private interests have been prioritised over public needs.

As a researcher^[12] of PPP wrongdoing, the reasons for many of the scandals seem obvious. My colleagues and I studied parliamentary inquiries and reports that have scrutinised PPP wrongdoing. This research^[13] can tell us a great deal about the UK’s predicament with regard to the failings in the water industry.

The first lesson is that, in general, many PPPs are motivated actually to reduce the quality of the services they deliver. One parliamentary inquiry^[14] found that contracting services out from the public to the private sector had become a “transactional process” where cost-cutting is favoured and the “knock-on cost” to users results in a lower-quality public service.

Other findings^[15] showed that companies regularly reduced the quality of a service to maximise profits. One way was to bid for a public service at a low price. A Public Accounts Committee member observed that companies coming in with low quotes for contracts can end up damaging services by under-investing in them.

Another example is Sodexo^[16] – a private prison management provider. It cut employee numbers by around 200 and a subsequent BBC Panorama documentary^[17] detailed escapes and widespread drug use in the prisons they managed and also criticised a lack of safety for both prisoners and prison officers. Sodexo acknowledged^[18] the programme had highlighted problems and said it would investigate, but added that there had been “positive actions and improvements” already.

Similar practices were observed at a children’s prison run by security firm G4S, where an officer was left with brain damage^[19] after an attack by inmates. G4S admitted liability^[20] for the officer’s injuries and agreed a settlement with him.

Pay the fine, it’s cheaper

The second lesson is it can be cost-effective to breach contracts and pay fines. Companies sometimes breach the terms of their public-private contracts because it’s in their economic interest. This even has a name – economists call it “efficiency breach”.

For instance, a parliamentary report found that between 2010 and 2016 G4S was fined 100 times for breaching contracts^[21] – paying out roughly £3 million^[22]. As one MP suggested, these fines compared to its profits are a “slap on the wrist”^[23]. The same has been said^[24] of water companies.

When observing the fines in comparison to the profitable contracts, it’s easy to posit what the motivations of many in the UK’s public service system are. In 2017, despite previous indictments of wrongdoing, G4S won £25 million^[25] of government contracts.

In 2020 the firm won another £300 million contract^[26] to run Wellingborough “mega-prison” in England. Despite some raised eyebrows, G4S said^[27] at the time it aimed to make the site a blueprint for “innovation, rehabilitation and modernisation” in the prison service.

Pay the shareholders, invest later

The third lesson is that shareholders are more important than long-term investments in a service. This is perhaps the most notable feature of the UK’s public service system, where a vast array of shareholders benefit from the profits made by PPPs. In one of the parliamentary reports we analysed, which details the collapse of the facilities management firm Carillion, it was clear that shareholders’ interests^[28] trumped good management and long-term investment.

As was noted in the report, despite Carillion’s collapse, the firm paid out £333 million more to shareholders than it generated in cash between 2012 and 2017. Often, this shareholder primacy can even go against a firm’s own employees rather than just the state and taxpayers. One MP noted^[29] that despite its pension scheme being in deficit, shareholders were still receiving dividends.

Often, shareholders are prioritised because of short-term thinking. These processes can lead to firms passing these bad practices down their supply chains^[30].

The behaviour of water companies is suggestive of these dynamics. Since water companies have been privatised, they have loaded themselves up with debt (£64 billion) but paid out £78 billion to shareholders^[31]. Some 70% of these shareholders^[32] are “foreign investment firms, private equity, pension funds and businesses lodged in tax havens”.