ownership-matters-black

Democratic public ownership for the 21st century

Anna Birley Policy Officer

A summary essay introducing the Co-operative Party's 'Democratic Public Ownership for the 21st Century' Report.

Introduction

Five years ago, one of the ‘Big Six’ energy companies, SSE, was fined a record £10.5 million. The crime? Mis-selling gas and electricity to customers. The same year saw Thames Water handed the biggest regulatory fine for any water company in history for pumping sewage into rivers after failing to maintain key equipment.

Corporate behaviour deserving of the biggest fines in their sectors’ history should surely have been the moment to reflect on the way our public utilities and transport are owned and run.

Ed Miliband in the 2015 election suggested ways to curb corporate excess through price caps and renewed transparency in the energy market. Indeed, public ownership seemed on the up - the newly nationalised East Coast main line railway was performing well, making a profit of £208.7 million which was handed back to the taxpayer to be reinvested in the railways.

Between 2009 and 2012, public ownership and management of the East Coast operation saw more returned to the taxpayer in real terms than any other previous franchisee.

Nonetheless, SSE’s “remarkable track record” for dividend pay-outs remained undiminished. Payments to their shareholders have increased every year since 1992 and 2013 was no different.

Since their record fine, they have been fined a further four times in the past five years -  for failures in the way they run their distribution and generation businesses, for failing to achieve carbon emissions reductions, and for leaving customers disconnected for longer than they should have done.

Thames Water, meanwhile has gone from strength to strength, or rather their profits have. At the time of the fine, Thames Water was owned by a complicated string of holding companies and offshore businesses, all ultimately owned by Macquarie Bank.

Over the 11 years that Macquarie controlled Thames Water, the Australian bank received returns of between 15.5 and 19 per cent annually according to an analysis by the BBC. Research by the Financial Times suggests that between 2006 and 2016, Macquarie and its fellow investors paid themselves £1.6bn in dividends, while Thames Water was loaded with £10.6bn of debt and ran up a pension deficit of £260m. Research by the Open University suggests that investors took more in dividends from Thames Water than it raised in post-tax profits between 2007 and 2012.

In railways, public ownership took a backwards step. East Coast’s spell in the public sector was short-lived – the Conservative Government reprivatised the line and awarded the franchise to a Virgin/ Stagecoach joint venture two years later in 2015.

Case study: the richest man in Hong Kong

Li Ka Shing isn’t your typical billionaire – from high school dropout and refugee, he has become the self-made richest man in Hong Kong.

While not a household name in the UK, his investments in regulated industries here mean he touches hundreds of thousands of homes. When the taps are turned on or the cooker lit, there is a good chance that the water, gas and electricity is delivered in pipes and wires owned by Li Ka Shing or one of his subsidiaries.

Through his various investment companies, including Cheung Kong Infrastructure and Hutchison Whampoa, he has spent about £450bn on UK assets and companies since 1995 - mostly regulated utilities and assets. These provide him with healthy margins at little risk.

His UK investments include:

  • Around a third of passenger and freight rolling stock in the UK, through ownership of Eversholt Rail. Eversholt is a ROSCO which leases trains to operating companies for a significant margin;
  • Northumbrian Water, bought in 2011 for £2.4bn and reportedly making a profit of £630m in just two years despite paying less than 10% tax because of legal loopholes- plus other water assets including Cambridge Water and a strategic stake in Southern Water;
  • Electricity and gas distribution networks, including Wales and West Utilities, 40% of UK Power Networks and 88.4% of Northern Gas Networks;
  • Seabank Power, a gas power station near Bristol, three UK ports - Harwich, Felixstowe and London Thamesport, and the Three mobile phone network

SSE, Thames Water and East Coast are by no means unique.

Rail, water and energy regularly make the headlines, and rarely for the right reasons. The debate about public ownership has finally caught up in terms of newsworthiness, with strong commitments in the Labour Party’s manifesto last summer to return these, and other key industries, into public ownership.

The arguments about profits being put back into the public purse rather than private pockets are valid. For example, research from the Financial Times suggests that water prices are, on average, £113 higher per household each year under private ownership thanks to shareholder dividends and the higher interest rates faced by the private sector.

However, it would be a waste of an historic opportunity to reshape our economy if profit was the extent of the conversation about how our energy, water and railways are run. Along with the scandal of profit extracted from our system, there is an accountability deficit at the heart of the way these services are owned and run. Workers and customers are disempowered - with no mechanism to have their say on the utilities and transport that they rely on every day – leaving our economy with a democratic deficit.

Democratic Public Ownership for the 21st century challenges the assumption that public ownership means a distant department in Whitehall.

In rail and utility markets characterised by monopolistic structures, there is an accountable approach fit for modern, 21st Century industry: organisations where ownership and decision-making sits with the ordinary billpayers, employees and passengers.

These aren’t new ideas. Co-operative principles laid down more than 150 years ago codify these democratic approaches. The earliest co-operative societies were publicly owned - by the ordinary men and women who shopped or worked in them. These co-operative societies were a grassroots response to an unfair and exploitative system.

Co-operative Principles

Voluntary and Open Membership

Co-operatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

Democratic Member Control

Co-operatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives members have equal voting rights (one member, one vote) and co-operatives at other levels are also organised in a democratic manner.

Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership.

Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

Autonomy and Independence

Co-operatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.

Education, Training and Information

Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of co-operation.

Concern for Community

Co-operatives work for the sustainable development of their communities through policies approved by their members.

The Co-operative Party was created in 1917 to champion the wider application of these values and principles – beyond the shop floor to the national political stage. They provide a powerful lens through which to approach policy debates and reimagine a fairer society where wealth and power are shared. If the starting point is to measure institutions in part by the extent to which ordinary people have a voice, public ownership must be judged by the extent to which it gives economic suffrage to ordinary citizens too. Modern energy, water and rail sectors where where consumers and workers have a stake and a say would democratise key aspects of our economy.

As well as creating a democratic, responsive system, models which put decision-making in the hands of consumers, communities and employees have further benefits. Workplaces in which workers have a real stake and say are more productive. And importantly it means an irreversible shift to publicly owned rail, energy and water industries. By virtue of the collective strength of the customers, workers and communities having a powerful and meaningful voice, their interests cannot be side-lined so easily in the future, protecting them from underinvestment or reprivatisation.

Democratic public ownership doesn’t mean a one-size-fits-all approach. These industries are complex and our approach to public ownership should reflect that. Historic Co-operative Party pamphlets identify distinct forms of ownership – an approach which has relevance today too.

Types of ownership identified in 1952 Co-operative Party pamphlet

Co-operative Ownership

Democratic ownership control by consumers and/or employees

National Ownership

Central control by government department or other national public body

Municipal Ownership

Control by local council or by other devolved government body

Democratic Ownership Postcard

Energy

The energy industry is particularly complex, covering a wide number of functions.

The sector can be broken down into generation, transmission, distribution and supply of electricity and gas. Generation is where our energy comes from, whether it’s a community-owned wind turbine or a vast nuclear power station. Transmission networks are the high-voltage wires and high-pressure pipes that send electricity and gas around the country. These networks connect to regional distribution networks – lower voltage and lower pressure systems which take the energy from the transmission grid and into homes and businesses in their region.

However, none of these parts of the energy ecosystem directly receive money from consumers. Customers interact with these parts of the sector via energy suppliers, who buy wholesale energy from generators, pay fees to the transmission and distribution grids for their role, and sell it to their customers. In theory, this is a competitive market and consumers can shop around for the best tariffs or customer service.

Unpicking this is difficult. Thatcher’s government went further than other countries by selling all of the infrastructure, not simply privatising the right to run it like a rail franchise. The supply market doesn’t function well, with a seemingly intractable incumbency advantage for the ‘Big Six’ energy companies, a lack of transparency, and what the Competition and Markets Authority describe as ‘tacit collusion’ whereby similar tariffs and near-identical price rises render much of the apparent choice meaningless.

In energy supply, there is great opportunity for co-operatives, communities and councils to replace the private monoliths that are providing poor value to billpayers. There is no case for ‘buying back’ energy suppliers, which, without their incumbency advantages, are little more than a call centre and a website.

Instead, the unfair advantages enjoyed by the ‘Big Six’ should be reversed and support given to the community and co-operative sector to grow and take their place. This would include a cap on profit margins, a new transparent trading pool so that price rises were visible to consumers, making all tariffs fixed term to encourage switching, more meaningful penalties for exploiting market positions, and breaking up vertical integration of big private companies.

However, improving the ‘market’ for energy won’t solve the problem unless the more hidden costs of generation, transmission and distribution are tackled. The Co-operative Party’s ‘Ownership Matters’ report puts forward a new Energy Security Board, overseen by and accountable to an advisory board of consumers, workers and other stakeholders. The Energy Security Board would be the system operator, responsible for balancing the grid and keeping the light on, and the ultimate owner of the national transmission grid.

Currently, the transmission and distribution costs are passed onto consumers via a charge on their energy bill. Last year, this accounted for 28% of a typical household bill. While a central model for transmission, thanks to its national footprint and distance from the customer, is recommended, regional distribution grids are a different story.

Electricity and gas networks have an important role to play in communities in preventing and fixing local blackouts, supporting vulnerable local residents, minimising disruption when maintaining local infrastructure, and as significant local employers. Their regional structure lends them to locally accountable structures, owned by and accountable to consumers and employees through new democratic Consumer and Employee Trusts.

Case study: New Zealand

EA Networks is a co-operatively owned energy network. The district council owns some shares, and the rest are owned by customers, each of whom holds 100 shares. Consumer shareholders can elect executive committee members on a one member one vote basis.

Vector have a similar approach but a slightly different model. It is 75.1% owned by a consumer trust, which all customers can be a member of, which provides the company with two of its seven board members. All consumers receive dividends – in 2009 each received USD 203.

Large scale power generation with a long operational life ahead would be brought into public ownership as part of a new publicly owned and accountable power generation company. Some power stations may not be of sufficient strategic importance to own centrally, or may only have a few years left to operate, so there may be no case for bringing these into public ownership at all – although rules can be tightened to prevent asset stripping and prevent excessive profit leaving the system. Whether public or private, power stations should all be more accountable to their workforce with, as a minimum, employee representation on their boards.

It is important to bear in mind that our electricity won’t come from these big power stations forever. We must transition to a lower carbon, renewable system, and technological advances mean future power generation will be increasingly distributed. The growth in the community energy sector has demonstrated people’s appetites for a greater stake and say in where their energy comes from, and this transition presents an opportunity to enable this co-operative, community and municipal energy sector to grow significantly.

Water

The sector needs to transition from a commodity bought and sold in on global markets, to regional industries at the heart of the communities they serve.

The UK is the only country in the world to have fully privatised its water and sewerage systems. Not only did Thatcher’s Government put the management of the water networks into private hands, but they sold off the physical assets too. The result is a system which is expensive, unaccountable and unfair, where the consumer voice is secondary to the interests of distant investors.

Household bills have risen steadily – as have dividends and debt. Some of the worst offending companies don’t pay taxes either, as they are owned by a complicated pyramid of offshore holding companies. For example, Thames Water regularly paid no corporation tax on their £1.8bn turnover, and parts of their company structure are based in tax havens like the Cayman Islands.

Our proposals are for local water companies owned by their billpayers and workers through democratic Employee and Consumer Trusts which play an active role in decision-making. Any surplus income would be reinvested in improving the service, redistributed to customers, or spent on social or environmental outcomes.

This could be achieved by changing water companies from being private businesses limited by shareholders into organisations limited by guarantee – a similar corporate form to Welsh Water. However, our proposals go further than the Welsh Water model and drawing on lessons from New Zealand’s energy grids, which are majority owned by consumer trusts.

DCWW-Timecapsule-3

Case study: Welsh Water

Closer to home in Wales, Welsh Water also has a not-for-profit model, organised along mutual lines.

As a company limited by guarantee rather than shares, it has no shareholders. Welsh Water’s not-for-profit owner, Glas Cymru, is governed by members drawn from across the supply area and with a range of backgrounds, skills and experiences. There is an AGM to appoint the directors and auditors, and to challenge the company on remuneration and governance.

Welsh Water now have the strongest credit ratings in the water industry, reducing their financing costs and enabling them to spend money on improving infrastructure and services, or reducing customer bills.

In the report’s proposals, every water company would be owned and accountable to two trusts, one for consumers and one for workers. Every customer has equal membership of a regional Consumer Trust, and every employee of that water company has equal membership of an Employee Trust.

Every member would have an equal say and vote, and participation would be encouraged and enabled so that their voice can be heard by voting for board members, having their say on remuneration, agreeing the company’s audit, and choosing how profits are invested or redistributed as customer dividends, employee profit sharing and support for vulnerable customers.

Rail

Rail privatisation was promoted in the early 1990s with promises of a better, cheaper service for rail users requiring less subsidy by tax payers.

Private rail companies would bring in capital and their business expertise which would transform the sector’s performance. The competition for franchises would allow for increased innovation and performance which would benefit the passenger.

In reality, this pipedream has not been played out. Genuine competition is at an all-time low, with fewer and fewer companies competing for franchises.

%
Passengers believe their rail fare is value for money

And they’re right – Britain’s railways don’t add up. Ticket prices have been rising, as has the subsidy paid by the taxpayer. Private investment in the industry has been minimal. The Office of Rail and Road (ORR) estimate that something shy of £7bn has been invested in the UK’s railways by private companies over ten years.

Compare this to the £9.7bn of rail funding from passenger fares and the £3.4bn from government funding in 2016-17 alone, as detailed in the ORR’s own financial analyses. On top of this are the loans made to Network Rail, which totalled £5.7bn in 2016-17. Reported profits returned by train operators to the treasury are a trick of accounting achieved through indirect subsidy.

UK passenger rail, total public subsidy1985-2017 £0 £1bn £2bn £3bn £4bn £5bn £6bn £8bn £7bn 1985-86 1989-90 1993-94 1997-98 2001-02 2005-06 2009-10 2013-14 2016-17 £4.2bn British Rail Sectorisation (1982-1994) Privatisation (1984-1997) Railtrack Administration and creation of Network Rail (2001-2002) Crossrail funding (2009 to 2016) HS2 funding (2011 to current)

Instead, the report proposes rail services run by accountable not-for-profit train service providers replacing the private train operating companies, and a new democratic ‘Guiding Mind’ for the railways to take over from Network Rail.

For routes outside devolved structures, this would mean withdrawing new franchise opportunities from the existing train operating companies as the contracts expire – at zero cost. Instead, regional franchises and intercity routes would be operated by new, publicly owned, accountable Train Service Providers (TSPs) with strong farepayer, local authority and employee voice within their governance, and regulated by the ORR.

Rail assets, such as track and land, and Network Rail’s borrowing powers should be transferred into a new Guiding Mind, which would play a strategic role in developing investment and expenditure plans alongside the Secretary of State and the DfT. This new body would be democratic through passenger and employee voice on its stakeholder board, which would have a say on issues from remuneration and executive appointments to longer term strategic priorities and scrutiny of performance.

ownership-matters

Building on this report, in coming months the Co-operative Party will be making the case for democratic public ownership of key national assets including railways, energy and water.

Campaign with us to make the plans a reality.

ownership-matters

Today's report publication marks the start of our new 'Ownership Matters' campaign, which, which your help, we'll be building in the weeks and months ahead.

Campaign with us to make the plans a reality.

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