Water, water everywhere, but where did all of the money go?

Privatisation in 1989 by Margaret Thatcher generated £7.6bn – but many dispute that the capital raised by the sell-off has been spent wisely, writes

Aqueue stretched 750ft out the door of NatWest’s main branch in the City of London in early December 1989 as the public patiently waited to get their hands on water company shares.

‘’It is a reaffirmation of popular capitalism,’’ said Michael Howard, the then environment minister, who was responsible for the £7.6bn sell-off of Britain’s 10 water authorities. ‘’It is obviously a very enthusiastic response.’’

Labour’s then shadow minister Bryan Gould said the privatisation was a “rip-off ” as shares began trading. Water stocks, he said, would be flipped to unaccountable overseas investors “within a matter of weeks”. “Water has been sold at a scandalously low price, and it is the taxpayer and the water consumer who will have to pay,” he said.

Gould’s remarks look prophetic. Britain’s water sector has become synonymous with what some argue are the evils of capitalism. While shareholders basked in an estimated £66bn in dividends after privatisation (in part by injecting vast sums of debt through complex financial manoeuvrings) the country was left with leaky pipes and overflowing drains.

With the water system regularly overwhelmed, bosses have resorted to dumping sewage in rivers and seas, resulting in multimillion-pound fines.

Had the dividends been invested rather than doled out to shareholders, things could have been different, campaigners say. Outrage has reached fever pitch, with regulator Ofwat now stepping in to tighten rules on dividends. The Government demanded companies spend billions upgrading Britain’s pipes.

However, executives warn that overly punitive measures will scare off investors and risk forcing renationalisation by the back door.

Water companies say that more than £160bn has been invested in the sector since 1989. However, industry leaders concede privately that questions remain as to how wisely the money was spent.

The UK has not built a new water supply reservoir since 1991, for instance. During this time the population has swelled by 10 million. Feargal Sharkey has established himself as the de facto leader of a movement determined to force change. Sharkey, famous in the 1970s and 1980s as lead singer of punk band the Undertones, says: “The water companies have made off with billions of pounds worth of our money and the money’s gone.”

Public anger is so heightened that comparisons have been drawn to the Great Stink of 1858, when a heatwave intensified the smell of untreated human waste in the River Thames. Then, the smell was so acute it prompted Parliament to approve Sir Joseph Bazalgette’s new London sewer system.

Today, the Government is demanding investment on a similar scale. Between now and 2050, water companies have been told to spend £56bn to prevent sewage being dumped in rivers and streams. Some £20bn has been earmarked to fix leaks.

But analysts from Barclays reckon £100bn in total is needed to bring the sector up to scratch. So who will pay? Asking consumers will be difficult. Bills would need to rise by an estimated £700 per household, a rise of some 60pc.

Campaigners say that, having leeched billions out of the industry since privatisation, it should be the water companies that cough up.

But industry leaders warn of unintended consequences.

“The fundamental debate is, who pays for the investment? And how?” says a source at one of Britain’s biggest water sector investors. “You can either fight the last war, or the one we are in now.”

The source says Ofwat’s approach “has been to try and drive down water bills over the last 10 years,” which has left little spare to invest. Insiders point out the investors that benefited may no longer be on the share register.

If the Government comes down too hard on the industry, it will struggle to attract investors. Raising money will become more expensive and push up costs in the long run regardless.

Mandating that companies inject huge sums without being able to recoup the money through increased bills will also disrupt the careful equilibrium of companies’ highly leveraged finance models. Investors’ equity could be wiped out. In a doomsday scenario this would leave them with little choice but to hand back the keys to the Government, forcing parts of the industry into nationalisation. Ofwat, the regulator, has signalled that there will be no let up to the adversarial approach it has recently taken towards bosses and their investors.

Announcing “new powers” last month, the regulator said it would block dividends from being paid by water companies that could not afford them - a move designed to prevent investment money being diverted to shareholders.

The regulator said: “If the company falls short, Ofwat will be able to step in and take enforcement action.”

The crackdown has sparked alarm among investors in the sector, who accuse Ofwat of “moving the goalposts within a regulatory period”, according to one an investor in one of the UK’s biggest water companies.

“Introducing something from 2025 realistically means companies have to de-lever now, but Ofwat is not providing any funding for such de-leverage,” a source says. “De-leveraging and increased cost of equity comes at the same time Ofwat, the Environment Agency and Government are trying to drive a step-change in the level of investment, which will require new equity into the sector. This risks making the sector less attractive and more expensive for investors. Bills are already likely to increase given the above investment and higher interest rates, with Ofwat only exacerbating the situation with additional costs.”

The sector crackdown has already had implications for Thames Water, Britain’s biggest supplier. With 15 million customers, the company risks being unable to pay interest on its debts, analysts from Fitch said last week as it downgraded its credit rating. It came just weeks after it emerged that Thames Water had hired investment bank Rothschild and legal firm Slaughter & May ahead of crunch talks with lenders over a £14bn debt pile.

The sector has other problems to deal with. The impact of soaring inflation and another winter of challenging weather was laid bare by United Utilities, the FTSE 100-owner of North West water, last week. A cold snap in December led to a slew of burst pipes, while soaring prices means the company’s inflationlinked interests will quadruple.

That pain will manifest a further drain on already squeezed household budgets, the chief executive admits.

Sharkey says: “I’m not blaming the water companies. For me, where the blame lies, it’s clearly about the lack of political oversight, and a regulatory system that has failed to properly monitor and intervene. What Ofwat needs to do, what the Government needs to do, is to sit down and come up with a genuinely clearly laid out strategy and policy. We know this is going to take 10 or 15 years to fix. We know that we’re going to have to share the pain.”

Michael Howard remains defiant. He said: “Privatisation, certainly in the early years, was a great success. It led to a very substantial increase in investment in the water industry and a substantial improvement in standards. The original legislation did provide for the regulatory regime to be reviewed from time to time. And I am not sure whether that was ever done. Regulators slightly took their eye off the ball, allowed the water companies to pile up a lot of debt, and perhaps were not as rigorous as they should have been in maintaining high standards.”

A spokesman for Ofwat said: “We are clear that companies need to improve their performance for customers and the environment. Recently, we secured commitments from companies to take urgent action to reduce sewage discharges, brought in new powers on dividends and unearned or risky pay-outs, and have set ambitious target to cut leaks.”

‘The water companies have made off with billions of pounds worth of our money’

‘Who pays for the investment? You can either fight in the last war or the one we are in now’