How could England’s water system be fixed?
A debt-ridden, leaking, polluting industry, owned largely by foreign investment firms, private equity and pension funds who have presided over decades of underinvestment most shockingly illustrated by the scale of raw sewage dumping into rivers: that is the privatised English water industry in 2024.
It is a global anomaly. Over the last three decades it has evolved into a notoriously complex system of shadow ownership that has loaded debt on to the balance sheet, while providing rich dividends for investors.
Today, water as an industry is in varying levels of crisis. In the south-east, Thames Water, the biggest company, is riddled with debts of £18bn and struggling to extract the millions it needs from shareholders while its value plummets. At South East Water, the cost of servicing its debt has risen in six months by £7.4m to £54.8m as inflation and higher interest rates bite.
Water companies across England are under criminal investigation into suspicions thousands of treatment works have been illegally dumping sewage into rivers for many years.
Total dividends paid since 1989 have reached £83.7bn at today’s prices. Meanwhile, customers are being asked, via bill increases of up to 40%, to pay for required new investment of £96bn.
Is there a solution for the water industry that will protect the environment, build in better accountability, provide clean drinking water and build resilience to climate change? We asked experts for their views.
Ownership
Dr Ewan McGaughey, a professor of law at King’s College London, argues England should join Scotland, Wales, Paris and most of the world, and restore public ownership using the legal framework of special administration that already exists.
This can be triggered if companies are unlikely to be able to pay their debts without public subsidies or have seriously breached their duties, for example by failing to improve their pipes to stop leaks or failing to drain and clean sewers to stop pollution.
Once in special administration, the companies can be transferred to a new publicly owned entity. Responding to the criticism that paying off shareholders and debts would cost too much, he argues the current law allows for debts to be reduced or even removed if they infringe on the water company’s ability to properly carry out its legal duties.
Richard Murphy, of the Corporate Accountability Network and Sheffield University, argues the water companies are in effect environmentally insolvent because they do not have the financial means to raise the £260bn needed to stop their sewage dumping, according to a House of Lords assessment. Therefore no compensation is due to shareholders, or to those who lent money to the companies.
But Murphy said in order to be pragmatic, a small offer to shareholders and a reasonable offer to secured creditors would be required to take the companies back into public control using the special administration rules.
The cost of nationalisation would run into billions – all of which could be paid for by the issue of government bonds.
To raise capital for the future of the publicly owned industry, the public could be offered the chance to buy a bond paying 4% or more in the long term to last for at least 70 years. For the first 15 years the return would be guaranteed by the government, encouraging the public to buy the bonds at scale and fund much of the required investment the industry needs over time.
Dieter Helm, a professor of economic policy at Oxford University, says the privatised industry has “run into the sands” and what is required is systemic change focusing on sustainability, water conservation and a catchment system of regulation to tackle pollution at its source.
Helm does not support re-nationalisation, but he does dismiss the often-repeated view that to take water back into public control would cost too much.
“The one objection to nationalisation which has little merit is that it would cost the government a lot. This is nonsense,” says Helm. Re-nationalisation, he argues, would involve swapping the regulatory asset-based debt (RAB) for government bonds. “The government would gain the assets and the RABs and swap utility debt for Treasury debt,” he says.
Regulation
McGaughey says the rules that say the regulator, Ofwat, must secure reasonable returns for investors on their capital must be scrapped. Instead, a new social regulator should be set up with duties to ensure bill payers have clean water and sanitary services, communities have clean waterways and beaches, and all future surpluses are invested in upgrading infrastructure.
Cat Hobbs, of campaign group We Own It, says the current regulatory system is consistently biased towards investors and the regulator is caught in an impossible bind to meet contradictory and contested interests of investors, end users and the state. The current law says companies need 25 years’ notice for the removal of their licence.
“If you were starting from scratch, there’s no way you would start with the privatised system we have in England, geared towards shareholders with our rivers and seas coming as an afterthought. It’s simply not a sensible way to deliver what we need,” she said.
What is required are publicly owned water companies with a duty to work with communities to clean up and protect our rivers and seas, she said. Governance structures and regulatory mechanisms must hold them accountable as in countries like Scotland and France.
Sustainability
Population increases, climate change-induced droughts and increases in water demand from data centres mean the pressure on the water system will only rise over the coming decades.
A large facility might use anywhere between 4m and 19m litres of water a day for cooling.
Without further action there is a one in four chance over the next 30 years that large numbers of households will have their water supply cut off for an extended period because of a severe drought, according to the National Infrastructure Commission.
There is a need for more water, but also to reduce water use – currently the average person in England and Wales used 146 litres of water a day. The government wants to cut this to 110 litres a day by 2030.
In that context, using drinking water to flush toilets and wash our faces is seen as costly and unsustainable. Helm argues for separation of the system of drinking and wastewater, something dismissed by the government as too expensive – an argument Helm rejects. He argues instead that separation can be done gradually and grey water can be recycled at the household level with localised urban networks built into the system.
“At the moment, everyone has access to drinking-water-quality supplies for everything, including watering the garden, cleaning the car and to cool [computing] data hubs,” says Helm.
“Imagine if drinking water was for drinking and related uses only, and its use was metered with volume-related charges.
“Imagine a world where drinking water was separated from grey water … [and] new houses [had] a water efficiency requirement to store water … [There would be] strong incentives [for] all houses to store water and recycle for gardening and other non-drinking water use because the metered price was high and reflected scarcity over different periods.
“It could eventually be real-time pricing … in this imaginary world there would not be a scarcity of water supplies.”