Britain’s unhealthy appetite for financial risk in essential services

Bulb is a company that you’ve probably never thought much about, unless you happen to buy your electricity or gas through it.

But it’s a business whose present fortunes tell you something about why the game of buying energy and selling it on to consumers has been so hard hit by the pandemic, and why the UK energy regulator might now have to bail out some of the participants. 

Founded in 2015, Bulb set out to “disrupt” the gas and electricity market using the same sort of land-grab tactics as tech ventures such as Deliveroo and Uber.

It did so by offering its services to households and businesses at below cost, funded by slugs of venture capital money. The venture capitalists involved weren’t afraid of start-up losses. They included DST Global, run by Yuri Milner, the Russian Facebook investor. 

It all worked — sort of — in the pre-virus economy. Bulb picked up around 1.6m customers, while also running up staggering losses (£160m to date). Incumbents had to respond to avoid seeing their customer bases picked clean, leading to wider losses and restructuring.

The net result was that customers got a great deal, while investors took a hammering. Centrica, the sector’s largest quoted company, has seen its share price tank by almost 90 per cent since 2015.

What is not to like here, you might ask. What’s wrong with investors subsidising consumers? 

Well, one problem is that electricity supply isn’t quite the same as an app that brings your pizza. No one really suffers should Uber or Deliveroo go out of business. But when bad debts build up in an essential service like the electricity supply system, it is problematic. 

The regulator can’t take the risk of customers being disrupted. That’s why it has been talking about offering financial assistance to certain unnamed players, whose own high-risk strategies have potentially left them in the soup. There is no reason, it should be said, to think that Bulb itself is among their number.

Now, of course, electricity supply is hardly unique. It is just one area where owners of companies supplying essential services have been taking risks with finance.

Take Britain’s airports for instance, another important cog in the economy. Most are owned by financial investors that have leveraged them massively to magnify their equity returns. London’s Heathrow, for instance, has almost £16bn of debt balanced on just £973m of loss-bearing equity. With the decline in air traffic, it has been little surprise to find the airports pitching for state help.

Or care homes, which sit at the centre of the crisis and where, tragically, many lives have been lost. Consolidation there has come at the cost of financial engineering by private equity investors. Britain’s largest chain, HC-One, which paid a dividend last year, noted in its accounts that the crisis could prove so severe that it would “cast a doubt on its ability to continue as a going concern”.

In theory, of course, this is a private business whose investors are free to dispose of assets as they choose. In practice, the government would rightly never permit an action that threw vulnerable people into the street.

Now no one objects to risk-taking when entrepreneurs bear the consequences of their actions. Even if the pay-off isn’t truly symmetrical, because limited liability does in practice offer some downside shield. 

But in certain essential sectors of the economy, squaring this public-private balance gets more tricky. The public rightly balks at entrepreneurs being invited to play financial games, knowing always that the taxpayer might have to pick up any resulting mess.

Policymakers do acknowledge this issue. But in Britain, they have long downplayed it, arguing there is a virtue in encouraging entrepreneurs to invest in essential services on the grounds that this leads to substantial gains in efficiency. 

Yet how significant are those gains exactly? Two decades of privatisation — now being rolled back — has not changed the fact that the cost of running the UK’s railway network is 40 per cent higher than in Europe, according to a 2011 report from Sir Roy McNulty.

Many of the returns that private owners have attributed to “efficiencies” in sectors such as airports and water have had more to do with high debt than quantum leaps in reducing operating costs. In others cases, such as Britain’s thousands of individual care homes, efficiencies can turn out to be a synonym for scrimping on what in crises turn out to be vital necessities.

Policymakers need to think more carefully about this public-private boundary and ask themselves, for instance, whether it’s really possible to reconcile an Uber business model with a utility-style activity. Is the volatility conferred by high leverage appropriate in functions essential to people’s daily lives?

If they don’t, what’s likely is that the changing public mood will move that boundary massively. It may already be too late to stop it shifting a very long way.