Deep Trouble: Fixing Our Broken Water System
Deep Trouble: Fixing Our Broken Water System
Executive Summary
Our water system is in crisis. Decades of under-investment have left us with infrastructure on the brink of collapse. Thames Water said last month that around £19 billion of its assets are in poor or failed condition, leaving almost 40,000 homes in London at risk of rapid flooding and increasing the threat of waterborne parasites. After taking office, Keir Starmer and Rachel Reeves were briefed by officials that the state of Thames Water’s critical infrastructure was one of the most urgent problems the new government faces.
The public have already paid the price for decades of privatisation as sewage has flowed into our rivers and oceans. And now water companies are asking us to pay all over again in the form of higher bills. Today, Ofwat proposed average bill rises of £94 over the next five years, a smaller increase than requested by companies like Thames Water, likely leaving us in the worst of both worlds. If shareholders — who earlier this year declared Thames Water “uninvestable” — do not see this increase as enough to inject more money into the company, Thames Water will in deep trouble, even as our bills increase. Many of us would be more than willing to pay more for improved infrastructure, but do not want our money to go down the drain as more profits for shareholders of debt-laden companies.
It is abundantly clear that running our water system for profit has failed. The promise of privatisation was that market competition would improve services and that access to private finance would increase investment. The former is impossible: water is a natural monopoly, and consumers have no alternative taps they can turn on for lower prices or a better service. And the latter has failed to materialise to anything like the degree expected by proponents of privatisation. Analysis of levels of investment in England suggest that, though investment increased after privatisation, much of this was due to public subsidies in the form of writing off the debt of public water companies at the point of sale, as well as early tax reliefs on private water companies’ profits. Instead of shareholders putting money into the system, they have been taking it out, with £85 billion worth of payments made to shareholders since privatisation. By contrast, in Scotland, where water is publicly owned, investment has consistently been higher, and if England had seen equivalent rates there would have been £28 billion more going into our infrastructure over the last three decades. Bills in Scotland are also around 10 per cent lower for consumers.
There is also a fundamental tension between attracting private capital and ensuring high regulatory standards. When investors put money into water companies, they do not do this out of the goodness of their hearts, but because they expect a return. The more you fine water companies for failing to meet their statutory obligations and the stricter you make environmental standards, thus requiring additional investment to meet them, the less attractive you make them to investors who are looking to make profits.
Keir Starmer came into office promising an end to “sticking plaster” politics; fixing the water system is the first test of that pledge. To solve the immediate crisis of Thames Water’s debt-laden slide towards insolvency, the government should place the company in special administration for failing in its clean water and sewage duties, refuse to bail out shareholders or banks, and transfer the assets to public ownership. Then, to put water services rather than profit at the heart of the system, Ofwat’s duties should be amended and conflicts of interest resolved. Finally, the government should look to reform the governance of the whole system, giving staff and billpayers a place on company boards, shortening the length of franchises and limiting the payment of dividends while our waters remain polluted.
[.green]1[.green] Take Thames Water into Special Administration
The government already has all the legal powers it needs to deal with the immediate crisis of Thames Water, which has been teetering on the brink of collapse for months. The Water Industry Act 1991 allows the government to take Thames Water into special administration and transfer ownership to a new public entity. This can be done on grounds of insolvency, but even though Thames Water is ridden with debt, creditors may never trigger an insolvency procedure because they want to avoid public control at all costs. Instead, the government can activate this special administration procedure on the grounds that Thames Water has breached its statutory duties to ensure clean water and infrastructure investment.
It is crucial that this process not be a bailout for investors or creditors. Unlike ordinary administration procedures, special administration allows for the reduction of the company’s debts if the High Court is persuaded that this is necessary for the statutory duties to provide clean water and infrastructure to be fulfilled. The previous government’s "Project Timber" plan for Thames Water was reported to involve the government taking on the entire Thames Water group’s £16 billion debts with up to a 40 per cent haircut only. The public should not have to shoulder this burden. Instead, the government should take on only the debts of Thames Water Utilities Ltd., which is the sole regulated company within the wider Thames Water group. These should be reduced by at least 50 per cent to reflect the costs already imposed on the public by the hundreds of sewage leaks, with the remaining 50 per cent of debts repaid to creditors only after statutory duties to provide clean water are fulfilled.
[.green]2[.green] Put Clean Water at the Heart of Regulation
As well as dealing with the immediate crisis, the government should take steps to reform the water system as a whole, starting with the way it is regulated. Since privatisation, the industry regulator Ofwat has had a statutory duty to provide a return for investors. To better serve the public interest, the duties of Ofwat should be reformed to focus on providing clean drinking water and good quality bathing water, conserving water resources, and keeping bills reasonable.
Conflicts of interest have also been a problem within the industry, such as when the former chief executive of Ofwat went on to become a director at Thames Water. This “revolving door” incentivises lighter touch regulation, if staff at Ofwat want to maintain good relations with companies that might become their employers. Instead, the government should prohibit Ofwat staff from being able to take future employment or other significant transactional relationships with any regulated water company.
Finally, proper regulatory enforcement will require adequate funding. The Environment Agency’s money ringfenced for environment protection has been cut by 80 per cent since 2010, leading to a fall in prosecutions for sewage spills. The government must avoid further real-terms cuts to enforcement agencies’ resource spending in future budgets if regulation is to hold sewage-spilling water companies to account.
[.green]3[.green] Design a More Accountable Water System, Free from Profiteering
Along with changes to regulation, the government should make changes to the way water companies are governed, to protect the system from future profiteering. Where private companies continue to run services, they should be prohibited from paying dividends until England’s bathing waters are rated as excellent. This means shareholders cannot profit from the failure to meet basic statutory duties; they only make money when the system is working as it should.
The government should also reform the length of water franchises, setting the length of current and any future licences to three years. Since 2002, water companies have been given a 25-year notice period before licences can be terminated, and these licences do not expire automatically. This contrasts sharply with other utilities, such as rail, where franchises are typically shorter, giving the government the chance to bring failing services back into public hands sooner.
As the failures of privatisation continue to ripple through the system, we should expect to see companies other than Thames Water brought into public ownership, whether through special administration or the elapsing of their franchises. Where this occurs, it is important that the public money invested in taking back control of these assets does not go to waste, with the government selling them off again further down the line. New legislation should prohibit the future sale of water company assets to a private buyer, as is the case in the Netherlands.
Finally, the governance of private and public water companies should be properly accountable to staff and billpayers. At minimum, one-third of water company boards should be elected by staff, one-sixth by billpayers and the rest by investors, whether central or local government or private entities. These governance arrangements ensure that water companies draw from the expertise of staff who understand their work best, as well as being accountable to billpayers who would otherwise have no other recourse such as moving to a competitor.
[.green]4[.green] Conclusion
So far, the Labour Party have been reluctant to accept the need for public ownership, even as Thames Water has headed for collapse. Just before the election, Jonathan Reynolds, now Business Secretary, opposed nationalisation on the grounds that “people should not expect the state to bail out bad investments.” However, the time for action, and the full use of special administration powers, has come. The public are bailing out investors anyway through higher bills — our money going towards a system that leaves these assets in private hands to continue to be run for profit. As outlined above, the legal means exist for the government to bring Thames Water and other failing companies back into public ownership without this amounting to a handout to investors and creditors. This is vastly preferable to making consumers pay more for these companies’ financial recklessness, all the while trying to achieve the impossible of keeping investors onside at the same time as strengthening regulation and oversight.
England is an extreme outlier in running our water system for private gain: less than ten per cent of cities worldwide have some degree of privatisation in their water and sewage systems. Bringing water back into public ownership would bring us into line with the vast majority of the world and is the only way out of the crisis. For the sake of clean, safe water for all, it is time to call an end to the failed experiment of privatisation.
