It’s all about how privatised utilities are regulated – the UK can learn from Hong Kong

The UK water industry, notably?Severn – Trent , is the latest example of unacceptable delivery standards – in the case of water, its overflowing storm drains and polluted beaches – alongside fat shareholder returns and high senior management pay arising out of having privatised much of its infrastructure some time ago. Ongoing high Non Revenue Water (perhaps 20% in?England & Wales ?compared to, just to pick an example,?Cambodia ‘s 6%) barely rates a mention.?Philip Stevens ?argues in the FT that more public sector involvement is needed but doesn’t explore what this might entail. Let Logie Group do it for him.

The problems in the UK have largely derived from too little regulation of what are, after all, local monopolies. You can’t blame the likes of MacQuarie who have a mandate to make money for their investors, for taking advantage of opportunities presented to them.

Since 1964 here in HK, the two power companies, CLP and HK Electric, have operated vertically integrated generation / transmission / distribution businesses under Schemes of Control (SoCs, CLP?here , HKE?here ) whereby (broadly), so long as they meet various performance criteria, they may earn an 8% rate of return on average net fixed assets (fuel cost is a pass through); the govt periodically approves an investment plan for those fixed assets, i.e. a?Regulated Asset Base ?(RAB) model. The result is a World class delivery to consumers.

It probably helps that both utilities, although listed, are controlled by local families (CLP by the Kadoories, HKE by Li K Shing), both of whom are already rich, have some political influence and who can therefore take a long term view.

Curiously, in HK responsibility for the two types of water has remained in the public sector, split between the?Drainage Dept ?and the?Water Supplies Dept . Service is also World class although inefficiencies have arisen.

Having long ago installed Schemes of Control in its then colony, the UK should apply comparable regulation closer to home, namely:

• Change the regulatory regime so as to incentivise investment along the lines of the HK SoC / RAB models;
• Whilst at it, jack up the penalties for missing performance targets;
• And impose a high level restriction on the gearing / leverage in utilities’ balance sheets.

If the shareholders squeal a bit, the govt will know that it’s got it about right.