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Financialisation, rentierism and everyday forms of extraction��

Tom Archer, Ian Cole Rich Crisp, Ian Wilson

(Sheffield Hallam University

PPP conference, Sheffield

21 June 2023

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Our contribution

Conceptualise the mechanisms and situations through which processes of extraction play out at the everyday level

Explore the aggregate impacts of processes of financialisation and rentierism at the household level - ‘everyday extraction’

(Tentatively) suggest a method for quantifying the financial impacts of these processes

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Conceptualising extraction

Financialisation

“a pattern of accumulation in which profits accrue through financial channels rather than through trade and commodity production” (Krippner, 2005)

Rentierism

Rentier capitalism = broad-based shift towards economic activities structured around the control of, and generation of income (‘rents’)

Rent = “income derived from the ownership, possession or control of scarce assets and under conditions of limited or no competition” (Christophers, 2019)

Not limited to financial assets – also includes land, digital platforms, intellectual property and natural monopolies/infrastructure

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Utilities – macro level dynamics

Infrastructure rentierism (Christophers, 2019, 2020):

transfer to private ownership of state-owned enterprises with substantial asset bases (e.g. energy, water/sewerage, telephony, transport)
infrastructure = “the core asset, control of which engenders rental payments”
ownership dominated by major financial institutions around the world
natural monopoly encourages a “certain indolence”

UK water industry

unique ownership structure in England
no option to switch
annual dividends of £1.6bn 2010-21 (Hall, 2022)
rising debt/interest + declining investment

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UK outlier in terms of the number of state-owned enterprises it has privatised

Water industry – at least 72 per cent of water industry is in foreign ownership (Guardian 2022)

(Foreign investment firms, private equity, pension funds and businesses lodged in tax havens) (Guardian, 2022)

No need to invest - utility providers sweat assets rather then improve or upgrade them.

Nine water and sewerage companies in England – three are on stock exchange, 6 privately listed

No other country in the world has adopted the English system of private companies owning and

running water and sanitation systems.

Pay annual dividends – periodic payments made to holders of equities (shares), usually as distribution of profits (£18.9bn)

Revenue from customers covers operating costs and capital expenditure of water companies

Hall – extra borrowing (i.e. debt) finances dividends (not investment)

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A licence to print money?* Or an ATM for investors?**

Investors have long prized England’s listed water companies for their predictable, bond-like dividend yields and resilience in the face of economic turmoil. Consumers aren’t going to stop using water in the event of a recession. What’s more, because the country’s 17 water companies operate as regional monopolies, it’s not possible for a disgruntled householder to change provider. On paper, there are very few stocks as safe as an English water company.

https://www.investorschronicle.co.uk/ideas/2023/04/27/the-dividend-is-on-the-line-at-this-risk-laden-utility/

...millions of customers who have no choice of supplier, no choice but to take the water and no choice but to pay for it. Millions of captive monthly payments in perpetuity: an investor’s dream.

Meek (2014: 105)

*Martin Wolf, Financial Times, https://www.ft.com/content/e7e5525a-3896-11dd-8aed-0000779fd2ac

**Yearwood (2018)

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Utilities (water) – micro level experiences

Consumers:

Debt, dividends and directors’ pay put upward pressure on prices (Bayliss and Hall, n.d.)

Dividends increased costs by estimated £69 per household per year over the last 12 years – over £1.30 per week from every household in England (Hall 2022)
CMA estimate = £80 (20%) of water bill goes towards servicing debt and rewarding shareholders

Poor service – leaky/ruptured pipes, sewage flooding homes, water shortages

Taxpayers:

“Gross undervaluation” when privatised (Christophers, 2020) - average gain on the first day of trading was 40% (Portes, 2022)
Low or no corporation tax payments

Residents and communities

Increasing discharge of sewage through storm overflows into seas and rivers
School closures (South East Water) due to lack of water

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Circuits of everyday extraction

Systems of provision
Housing
Water
Gas/electricity
Transport
Care

Payment for goods and services + investment

% extracted as excess profits or dividends

How do extractive practices impact households as....?

Consumers

Workers

Taxpayers

Caregivers or receivers

Residents

Investors

+ weak regulation and monopoly control

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Composition of household expenditure 2021/22

Housing purchase and rent 22%

Living Costs and Food Survey, 2023

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Composition of expenditure: bottom v top 10% of households by income

Housing purchase and rent 36%

Housing purchase and rent 21%

Bottom 10% of households

Top 10% of households

Living Costs and Food Survey, 2023

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Housing rent, maintenance, water, fuel and power as a proportion of total household expenditure 2001-2022

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Housing – macro level dynamics

Credit has flowed into UK housing as result of banking reforms, taxation rules, and other factors.
The housing and finance cycle (Ryan-Collins, 2019). Cheap debt creates new cohorts of mortgagees, mortgage terms lengthened at a higher loan to value. This fuels prices rises and more demand for debt. Increases in profits and capital for lending.

Profits surge in housebuilding. The price of new homes increases faster than average house prices (Archer & Cole, 2021).
These leads to historically unprecedented levels of dividends

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Housing – micro-level experiences and impacts

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A Barratts home would have cost (on average) £183k in 2008. In 2022 this would cost £300k as housebuilders have prioritised ‘margin over output’.
Purchasing the average Barratts home in 2022 the household would pay £170k more over the life of the mortgage than they would have if they had bought on 25-year mortgage at the 2009 price (assuming fixed 4% interest, 75% LTV).
Through these price changes significant value created and then extracted in the form of dividends
If we look at median household incomes (UK) and the likely month costs to purchase new homes by our big builders, we can assess affordability. The blue line shows that new build monthly costs (assuming a fixed interests and 75% LTV) have risen markedly from 22% of incomes, to 34% in 2022. And we can establish the effects of dividends on this. If dividends were instead used to reduce sales prices, new homes would constitute on average 32% of household incomes. We stand at a point in time when dividends have essentially tipped average prices right up to the established affordability threshold of 35% of incomes.

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Final reflections

Basic goods services making a bigger call on household finances. Supports higher profitmaking by companies operating increasingly financialised models, extracting excessive economic rent in monopoly/oligopoly markets.

How this profitmaking percolates down to the household level is opaque. Distorts understanding of the causes of squeeze on household incomes (e.g. housing as a planning/supply problem).

How can this relationship be revealed in the real-world costs for households? And how might this support changes in how companies are owned, controlled and financed, and how they are regulated and taxed?

Stronger methods are required to reveal relationships. Critical financial analysis is part of this, but methodological advancements needed to show aggregate extraction from the household from multiple sources.

Advancements are also needed to help trace processes and connections, alongside powerful explanatory theories that help us generalise across sectors and industries.

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