[.green]1[.green] Repairing English Water in the Wake of the Thames Water Crisis

Problems with Privatised Water in England

Water is a human right and water networks are a core public service, but in June 2023 Thames Water was on the brink of insolvency. This illustrates at least three main problems with privatised water in England:

1. Debt-led dividends damage infrastructure: in 2022, Thames Water and other English Water Companies paid £1.4 billion to shareholders, even though Thames Water has accumulated debts of £14 billion, owed mostly to American, German or UK banks, such as JP Morgan, Deutsche, Morgan Stanley or Lloyds. A total of £72 billion was paid to English water company shareholders since 1989, even though the sector has debts over £60 billion, and debts of £15 billion were paid off by the UK government during privatisation. At least £56 billion is needed for infrastructure investment over 25 years.  

2. Governance systematically fails: Thames Water’s major shareholders include the Abu Dhabi Investment Authority, the China Investment Corporation and Canadian and British pension funds. The ex-CEO was paid £1.6 million in 2022 despite a record of leaks, sewage overflows and households without water. All English water companies work to maximise shareholder profit, not good water, because shareholders monopolise governance, and under the Water Industry Act 1991 Ofwat must secure “reasonable returns on their capital” for corporate shareholders. Ofwat may only further the interests of consumers by “promoting effective competition”, even though all water and sewerage companies are monopolies by nature. Water basins give no way for consumers to “vote with their feet” for better prices or quality.  

3. Ofwat is captured: there has been a revolving door for managers of Ofwat to water corporations, making arms-length price or standard control impossible. For example, Ofwat’s former chief executive (2013-17), was hired as director from 2021 by Thames Water, and is now its interim joint-CEO. Other UK regulators are not immune from this issue.

Notably, England is an extreme outlier in the extent to which water has been privatised. As a paper from the University of Greenwich shows, the overwhelming majority of water infrastructure worldwide is held and managed by the public. Less than ten per cent of cities worldwide have some degree of privatisation of water and sewerage.

The CEO of Severn Trent has called for water companies to lobby the Labour Party to promote a supposedly new model of ‘social purpose’ regulation. This is a strategy to evade public accountability, ensuring that water corporations, in the words of Severn Trent's CEO, "remain privately owned, [and] absolutely can (and should) make a profit".

Severn Trent’s shareholders are mainly Wall Street and City asset managers such as Lazard, L&G, BlackRock, Vanguard and Aviva. This CEO took £4 million pay in 2022 despite record sewage dumps and bill rises, has no qualifications in engineering or environmental management, and has worked for Accenture, BT and Openreach. English water company directors, including Severn Trent’s CEO, can prioritise staff, the environment, and communities in England under the Companies Acts already. They do not because directors are hired by each other and fired solely by company members, 70 per cent of which are foreign shareholders. The English water sector, it should be noted, is already part owned by governments worldwide, like Abu Dhabi and China, who like all shareholders tax English bill-payers without representation.  

Solutions: Fair Water Bills, Clean Water and Well-Governed Services

The solutions are to use existing law to hold responsible those who have wrung English water resources dry, and then to change the law’s purpose and water companies’ governance and ownership to put the public interest first. This must go beyond calls to turn water companies into so-called “social purpose” business model, where the companies “remain privately owned, [and] absolutely can (and should) make a profit”. The overriding goal must be to have fairer bills, clean the water and establish well-run services, not to subsidise pointless shareholder profit:  

1. Trigger temporary “special administration” of water: under the Water Industry Act 1991 ss 23-25 and Sch 3, and related Rules, the Secretary of State may petition the High Court for administration of any water company that is “likely to be unable to pay its debts” (without public subsidies), or has seriously breached duties such as “improving” pipes (not allowing leaks), or to “cleanse” sewers and ensure they are “effectively drained” (not dumping sewage into rivers and onto beaches). This can lead to the transfer of the water enterprise to a new entity. Where a company is insolvent, shareholders will usually receive no money. Further, the special administration procedure enables secured debts to creditors to be reduced, subordinated, or removed, where they would not be “consistent with the purposes of the special administration order”. Such an order’s purposes include ensuring a water company’s “functions... may be properly carried out” such as stopping leaks or pollution. This will reduce or eliminate the cost of transfer to public ownership.  

2. Personal responsibility for directors, shareholders and creditors: only once an insolvency procedure, such as special administration, is triggered can directors be held responsible for breaches of duty, for instance, to not be negligent, avoid conflicts, and follow the rules, and may be disqualified. Further, transactions with shareholders or creditors may be invalidated, such as the creation debt security that did not add any new value. Directors, shareholders and creditors who have acted unlawfully, and illegitimately profited at others’ expense, must count upon facing full, public review, to improve future conduct.  

3. A social regulator: Parliament should scrap the Water Industry Act 1991 section 2 rules, that Ofwat must secure investors “reasonable returns on their capital’, and that consumer interests must be advanced by fictitious “competition”. Ofwat’s duty should be that bill-payers have wholesome water and sanitary services, our communities have clean waterways and beaches, and all future surpluses are invested in upgrading infrastructure. No person who works at a regulator should be able to work at a regulated entity again, ever.

4. Long-term public enterprise and ban re-privatisation: England should join Scotland, Wales, Paris and most of the world, and restore public ownership, for instance, by the London, combined authorities, or central governments. Using “special administration”, the upfront public cost will be minimal since water companies are insolvent if made to carry out duties without subsidies. Frivolous debt may be subordinated. UK and other pension funds should no longer bear the risk of failing water firms, or be able to take dividends through taxpayer subsidies or regulatory subsidies by not paying for pollution. England should follow the model of Dutch law and ban re-privatisation of water resources, including sewer networks.

5. Stakeholder governance: directors of English water company boards should be at least one-third elected by utility staff, one-quarter bill-payer representatives, and the balance by public investors (e.g. central government, the GLA, or local authorities); this would ensure representation of both labour and capital and will help resolve the expertise deficit among the incumbent directors, and direct responsibility to those who fund the services. In France, Eau de Paris was made public again in 2008 after a 25 year privatisation, with real stakeholder voice. This approach fixes the shortcomings of old nationalisations and distant, top-down Whitehall control.  

Looking Forward  

Going forward, a critical task for a new public company will be to invest in much needed upgrades of water infrastructure and services. This is particularly urgent in light of the growing pressures climate change will place on the water system. Some commentators have argued that precisely this need — to invest going forward — is a reason to employ a “privately owned for-profit social purpose” model as the solution. Yet this model would be more costly, because the private company would need to compete for financing in international financial markets by offering high returns, which would would ultimately be paid for by higher bills. There is, then, a bind between the imperatives of private owners and the needs of the public. A more effective way to fund necessary infrastructure investment is either via public borrowing — which is cheaper than private financing — or via bills, but this would not have to avoid contributing to extractive forms of debt engineering or be used to pay for dividends. Put together, public ownership is a cheaper and more strategic mechanism to fund the water industry’s future.