How has Thames Water ended up shit creek without a paddle?
Financial crises in several UK water companies are increasing calls to nationalise them.
Few things are as important to human health and sanitation as our water and wastewater facilities. In England and Wales, these services are provided by several regional water companies. Unfortunately, they aren’t doing very well at the moment. The sector has debts of £60 billion. Leaky pipes lead to water loss that is the equivalent of 426,875 Olympic swimming pools a year. And the raw sewage that keeps being dumped into British rivers and beaches has led almost a quarter of British sea-swimmers to swear off the hobby. Problems abound across the sector, but are particularly acute at Thames Water, which serves about a quarter of the population, including everyone in London. It says it needs about £1.5 billion, pronto, in order to fix its problems. The government is now exploring taking it into temporary ownership.
When analysing what went wrong, many people point to the way the water industry is set up. In 1989, the Thatcherite administration privatised the English and Welsh water companies, i.e. handed control of them to businesses whose primary motivation is to make a profit. (Scotland and Northern Ireland kept their waterworks under the control of the state.) But unlike in many other private sectors, there are major restrictions placed on water businesses. These rules are set by the industry regulators, of which the most important is the economic regulator, Ofwat. It sets caps on how much the water companies can spend and how much they can charge customers.
The reason water and wastewater, like most utilities, are so heavily regulated is because they are what economists call a natural monopoly. This is a term for markets which lend themselves to just having just one firm supplying a good or service in a specific area. After all, it would be ridiculously expensive and inefficient to build lots of different pipes and sewers under a single city's streets. But when a profit-seeking company doesn’t have any business competitors, economic logic dictates they will set their prices really high, because customers have no choice but to pay them or go without their product. It would obviously be pretty awful to have a situation where lots of people couldn’t afford clean water or a sewage system, so the government uses regulations and regulators as a tool to limit what the water companies can do.
The problem is that many people consider this regulation of the water industry to be insufficient. A 2022 YouGov poll revealed that two-thirds of UK adults want to see the water companies renationalised, including a plurality of people across all gender, age, income, region and political brackets.
One of the reasons a lot of people are angry about privatisation is that at the same time the water companies were getting £60 billion into debt and scrimping on infrastructure investment they were paying out £65.9 billion to their shareholders. Shares are a type of financial investment, where your money buys a piece of ownership of a company. That ownership entitles you to a part of the profits, called a dividend. The logic is that you can only entice someone to invest their money in your company by offering them something in return. However, many water and sewage companies appear to given away almost all of their profits as dividends, rather than holding some back to invest in improving the company. The National Infrastructure Commission says the industry now needs to spend £20 billon before 2050 to keep water flowing properly.
That £20 billion bill isn't just because of historical underinvestment: population growth and climate change are also putting extra pressure on the water supply. But the financial decisions taken by many water companies (decisions that were signed off by Ofwat) have made the situation much worse. It is not uncommon knowledge that debt can easily end up spiralling upwards because borrowers must continually pay interest - an additional fee - on the debt they carry. But the water industry seems to have kept loading up on loans without an exit plan for if interest rates started rising, as they have done with a vengeance since early 2022. A common pro-privatisation argument is that it puts the financial burden for providing a good or service on private investors, not governments, both in the case of stumping up the cash required for business needs and in swallowing the losses when things go badly. In theory, that frees government revenues up for other useful things. But in practice companies like Thames Water are failing to raise all the money they need from investors and asking the government to step in (to the tune of £1 billion, in Thames Water's case). Nobody thinks the government will refuse to help - water and wastewater services are far too important to let fail. Nationalisation would make this government guarantee the default rather than the last resort.
If the water companies were renationalised, there would still be difficult decisions to make. A key one would be how to trade off the affordability of water bills with improved water quality and environmental protection. For example, a report by the Storm Overflow Taskforce suggested that completely stopping those sewage overflows would be so expensive that it probably isn’t worth it. Not everyone will agree with that call. But spending lots of money on this would mean accepting higher water bills, or the government spending less on other priorities, or taking out more debt or raising taxes. Another looming issue is that people in the UK are currently not very conservative with their water use. The average person uses 142 litres of water a day, while countries of comparable wealth get by with less. Germans use 121 litres a day, for example. For reference, the World Health Organisation says the daily amount required to meet basic needs is 50-100 litres. Cutting back on consumption would mitigate costs, although the price of that would be things like shorter showers or less lush lawns.
