Engineering Water into Financial Flows: Drawing lessons from the UK, USA, and Chile

Michael Pryke

Water is not what it used to be. Increasingly, around the world, water is being mixed with private finance and practices often referred to as ‘financialization.’ Such practices, frequently enabled by the privatization of water, have seen the arrival of a range of intermediaries - from financial actors to lawyers - able to turn water and its supply to households into a globally attractive investment opportunity. 

Whilst different models of financialization are applied around the world, given the peculiarities of specific contexts, there are nonetheless overlapping trends that reflect the integration of global financial flows underlying the process of financialization. In this regard, the text will draw lessons from the UK, where the household has been turned into a ‘revenue stream;’ the USA, where a desalination plant was ‘translated’ into a collection of investment assets, made attractive globally; and Chile, which offers an interesting tale of entwining pension payments in the Global North to privatized and financialized water in the Global South. Though the contexts vary, common to each, as this suggests, is the centrality of households or water rate payers; without them, financialized calculations could not be imagined. Sketching these histories and geographies underlying the financialization of water raises important questions, such as who benefits, who pays, and how we can imagine and build alternative water infrastructures.

From the UK: Transforming households into ‘human revenue streams’

1989 was the year when water companies in England and Wales were privatized. For its proponents, not least of whom was the then UK Prime Minister Margaret Thatcher, privatization was thought to wrest water, like many nationalized industries, from the public sector and give free reign to the private sector. As the Guardian journalist Aditya Chakrabortty put it, ‘Margaret Thatcher and her lieutenants pledged a future of dynamic, efficient private managers..." (Chakrabortty, 2014).

The privatization of water utilities in England and Wales took place in years when financialization, as the term is understood today, was arguably in its infancy. Fast forward a few years and the changing pattern of ownership in the English and Welsh water sectors gets financially interesting. Interesting not simply because of the financial practices and techniques employed but also because of the geographies these financial innovations have created and relied upon to extract value locally and distribute it globally.

The financialization of Thames Water and privatized water companies in England and Wales signaled the influx of private finance and a whole host of intermediaries – from banks, to lawyers, through to rating agencies – that have enabled and facilitated the transformation of water provision into an investment opportunity made attractive to investors globally.  In the case of Thames Water, in the hands of its new owners, the Australian investment bank Macquarie, financialization was achieved through the securitization of household water bills. Though specific to Thames Water, this financial tactic speaks to a wider, international generalizable trend underway since the 2000s: the engineering of water for financial gain.

If privatization turned a citizen with rights to water into ‘the customer,’ then the financial engineering that followed transformed customers, that is households, into what the writer James Meek refers to as ‘revenue streams.’

There is much to note, and much that is financially technical about Thames Water’s financialization in the years following Macquarie’s acquisition in 2006.[1] One feature that stands out and lies at the heart of Thame Water’s financial model is the politics of packaging and selling households as captive revenue streams. This model reaches directly into the domestic realm, yet only indirectly reveals itself through the actions of financial intermediaries and global investors who execute the model at one remove from the operational side of the water business (see Allen and Pryke, 2013).

Another highlight is the way that in the hands of financial intermediaries, a guaranteed revenue stream over time can be securitized, that is, turned into a tradable financial product, broken up into separate earnings packages, assigned a risk profile, and sold onto investors seeking long-term real returns as O’Neill (2009) has shown. Crucially, it is not the asset itself – the labyrinth of water pipes and other tangible stuff of domestic water and sewage provision – that is sold but the performance of the asset that, in the case of household water bills, is the anticipated ability to pay inflation plus revenues over the long term. That households have little say over the size of their bills or the ability to switch suppliers - they are faced with private sector monopolies - makes this value promise a novel way for consortia-led funds to extract a reliable income stream from a captive public. It is a promise that households, despite being drawn directly into the ambit of financialization, appear, at best, to have scant knowledge of. There is something of a rift between the roll-out of financialized water provision by consortia-led funds and the water bill that lands on the household mat. The everyday world of water and sewerage that speaks to familiar company names, such as Thames Water, that have been around for generations seems far removed from a world of financial intermediaries, securitizable revenue streams, and institutional investors.

Institutional investors are increasingly global players who, because of the variable rates of return on infrastructure projects across the globe, seek to build relationships with financial intermediaries. These intermediaries, often partnering with actors close to the ground, so to speak, may be better placed to grasp the distributional risks and time horizons of specific geographical projects. In that respect, consortia of institutional investors, infrastructure funds, investment banks and, more recently, sovereign wealth funds, drawn from all parts of the globe, are increasingly a feature of water acquisitions.

Financialization, in this view, is about developing novel ways to extract value through innovative financial devices and mechanisms that almost magically transform, in this case, the everyday stuff of infrastructure, from toll roads to water utilities, into financial assets with investment qualities comparable to more traditional investments such as government bonds and equities - a process sometimes termed ‘commensuration’ (Bryan and Rafferty, 2006; Erturk et al., 2008). Geography is an integral part of this process, in so far as differences in legal structures, regulatory regimes, and operational requirements all come into the financial equation. The ability to mobilize and manage funds across the network of investors in this way is a process whereby local investment opportunities are ‘lifted out’ and tailored to meet the needs of investors located in different parts of the globe (Allen, 2010).

Mediating professionals draw upon organizational resources to fold in others distant in space and time by enrolling them into arrangements that offer the potential of gains for all those financially involved. The lifting out of investment opportunities from one context to another is made possible not only using real-time technologies to create simultaneous presence but also through an extended network of brokering arrangements. Such opportunities, however, amount to more than simply identifying suitable asset classes for a variety of dispersed investors. Behind the financialization of water infrastructure, for instance, is not only the power to mobilize funds at a distance (Allen 2010) but also the ability to securitize revenue streams to channel funds to investors and refinance existing debts. Nonetheless, such financial engineering is rarely considered as part of the domestic realm of household water in the UK.

From the USA: Disassembling and reassembling a desalination plant to distribute local value globally

The extraction of value from urban infrastructure – how financial intermediaries are able to identify and capture embedded value in a toll road or desalination plant – requires a physical asset to be transformed into liquid form. After all, it might not be an easy task to sell something like a desalination plant to investors, not just ‘locally’ but globally.

New types of liquidity such as the securitization of revenue streams or the refinancing of infrastructure debt through derivatives have illustrated the novel ways in which that transformation has taken place. Such eye-catching financial techniques can nonetheless obscure the more mundane, but no less innovative, means by which the value of infrastructure is being captured. In the case of the Carlsbad desalination plant in California, USA, the transformation of a piece of drinking water infrastructure into a liquid financial asset through the restructuring of bond and equity returns over the lifetime of the project, coupled with the various fee-earning opportunities generated by the activities of fund managers, financial advisors and an investment bank, points to the skills with which long term infrastructure deals can now be financially structured to create and extract value (see Pryke and Allen, 2019).

It may not be what conventionally passes for financial engineering, but the construction of the deal, or the translation of Carlsbad into an investment opportunity that generates value for bond and equity investors in the USA and further afield, required that the plant first be broken down into its financial qualities and then put together as a series of interest payments, dividends, and capital gains built into the price of water for San Diego households over the next thirty years.

The thirty-year fixed-term water price agreement is essentially a ‘value promise’. It is a promise made by lead financial players and other financial intermediaries to project and translate Carlsbad’s desalination plant into investment qualities attractive to pension funds, insurance companies, and public investment bodies alike. Just as with the case of Thames Water, left outside of that value promise, however, are the San Diego households who must meet the cost of the introduction of private finance into the provision of their future water needs. Rather than the beneficiary of the new financing arrangements, they are effectively funding a local capital arrangement that globally benefits others elsewhere.

The circulation of local value and its distribution to investors globally points to the importance of institutional actors and intermediaries being able to put together local infrastructure deals that span the globe. The different actors and intermediaries are in a sense able to ‘lift out’ and disassemble infrastructure from places such as California, pass them through global financial centers such as New York, and re-assemble their investment qualities into bond and equity markets in different parts of the world - from the USA to the UK, Malaysia to the Netherlands. The geography of value capture and circulation evoked here is not one that is easily mapped in terms of scale but arguably is better described in terms of an emerging financial topology drawn by a host of financial intermediaries, able to exercise their influence and reach over places and actors widely distributed in both space and time.

From Chile: Turning water into pensions - Channeling financial flows from ‘South’ to ‘North’

Writing in 2017, the academic and activist Meera Karunananthan (2017) observed that in the midst of a freshwater crisis:

“Chile is facing the consequences of Pinochet-era policies that have left nearly all the country’s freshwater supplies and water-related services in the hands of multinational corporations. But the solution to this worsening crisis lies in the hands of some unlikely suspects: Canadian teachers.

In 1981, Pinochet’s water code redefined water as a tradable good. Since then, corporations have been able to bid for water usage rights from the state and resell them through a market-based allocation system, with little public oversight. Only a handful of countries have attempted such a drastic retrenchment of state control over water resources.”

The Canadian teachers referred to are the Canadian pension fund OTPP (Ontario Teachers’ Pension Plan). But why might a Canadian teachers’ pension fund find investing in Chilean water attractive? Well, as the above quote captures well, the answer has its roots in the Chilean ‘Water Code’ and the part that private sector companies play in the regulation of the water sector.

Although Chile set up formally semi-independent agencies to regulate the delivery of its privatized water services, institutional investors and asset managers like OTPP have significantly influenced and indirectly helped shape the terms on which global investment funds have entered the sector. As Bauer (2004: 2) has commented, the standout feature of the Chilean model is that, almost uniquely, its Water Code ‘’is so laissez-faire that the overall legal and institutional framework has been built in the image of the free market, with strong private property rights, broad private economic freedoms, and weak government regulation.” Whilst the 1981 Water Code has been subject to continual and heated debate, and some reform, overall, the Chilean neoliberal approach has enabled water to be managed as an ‘economic good’ with the Chilean water rights model legally enforcing private property rights to encourage private investment in water. On that basis, Chile fast became “the textbook case of treating water rights not merely as private property but also as a fully marketable commodity” (Bauer, 2004, p. 1). As such, water sector regulation rendered the calculative criteria of the investor, particularly the international investor, central to its formation.

Such a regulatory framework offers an investor the relative predictability of income flows and the promise of matching these flows to future pension payments to Canadian teachers. The example of OTPP’s investment in Chile’s water sector is also suggestive of the financialized water relations between the Global North and the Global South.

OTPP was able to undertake a financial restructuring of the two main Chilean water companies it acquired, Esval and Essbio, geared around first, enabling, and then, second, moving revenue streams through the subsidiaries and ultimately to itself, the parent company. It is through such carefully nurtured financial links that dividends traveled both within the company group and, significantly, from the Global South to the Global North.

For the Chilean people and their access to drinking water, the advantages of privatization and financialization are perhaps less clear-cut, given that their water tariffs are among the highest in Latin America. Although the near-universality of water provision in Chile is often claimed as one of the benefits of privatization, much of this was achieved, as Karunananthan (2017) points out, before the sector was privatized, with latecomer investors reaping the benefits.

Discussion

‘Who benefits?’ and ‘Who Pays?’  are simple enough questions. As the supply of household water in countries across the Global North and South becomes more and more entangled in the financial calculations of private sector finance, such questions need to be kept at the forefront, and answers to them demanded. Those calculations are, after all, dependent ultimately on households’ ability to pay water bills, now and in the future.

And how that future plays out is open to question and to challenges from a variety of contexts across the Global South and North. Running through just these three examples is the clear need to delve into detail to figure out how the financialized linkages between households — as liquid financial assets — and investors globally work, and for whom. Yet, once exposed, the practices and actors at the core of the financialization of water can be employed to establish counter-narratives and alternative water futures. Futures that begin and end with the citizen who has rights to water, rather than with a citizen transformed into a source of value subject to the skimming practices of financialization and the consequences that all too surely follow. Rather than being confined to a future shaped only by the self-serving calculations of financialization, far better, inclusive water futures can be reclaimed.   

Literature

Allen, J. (2010). Powerful city networks: More than connections, less than domination and control.
Urban Studies, 47, 2895–2911.

Allen, J. & Pryke M. (2013). Financialising household water: Thames Water, MEIF,
and ‘ring-fenced’ politics. Cambridge Journal of Regions, Economy and Society, 6, 419–439.

Bauer, C.J. (2004). Results of Chilean water markets: Empirical research since 1990. Water Resources
Research, 40(9).

Bryan, D. & Rafferty, M. (2006). Capitalism with derivatives. Palgrave, Macmillan.

Chakrabortty, A. (2014, June 15).  Thames Water: The drip, drip, drip of discontent. https://www.theguardian.com/commentisfree/2014/jun/15/thames-water-discontent-privatisation 

Erturk, I., Froud, J., Sukhdev, J., Leaver, A., & Williams, K. (Eds.). (2008). Financialization at work: Key texts and commentary. Routledge.

Karunananthan, M. (2017, June 12). A group of Canadian teachers could decide the future of Chile's water supply. https://www.theguardian.com/global-development-professionals-network/2017/jun/12/chile-water-privatisation-canada-teachers

Meek, J. (2012). Human revenue. London Review of Books, 34(7).

O’Neill, P. (2009). Infrastructure investment and the management of risk. In G. L. Clark, A. D. Dixon,
& A. H. B. Monk (Eds.), Managing financial risks (pp.163–168). Oxford University Press.

Pryke, M. & Allen J. (2019). Financialising urban water infrastructure: Extracting local value, distributing value globally. Urban Studies, 56(7), 1326–1346.

Pryke, M & Allen J. (2022). The everyday construction of value: A Canadian investment fund, Chilean water infrastructure, and financial subordination. Finance and Society, 8(2), 189–208.

Notes

[1]Macquarie sold its stake in Thames Water in 2017. 

Acknowledgement

In this contribution I draw on work completed over the years with my colleague Emeritus Professor John Allen exploring the integration of private finance and water.

Michael Pryke is a Professor of Economic Geography in the School of Social Sciences and Global Studies, in the Faculty of Arts and Social Sciences, The Open University, England. He joined the Open University in 1994 and was previously Head of Geography and was the founding Head of the School of Social Sciences and Global Studies.