England and Wales are the only countries in the world with a fully privatised water system. More than 70% of shares in English water companies are owned by foreign investors, including private equity and companies registered in tax havens.
As value is extracted from this national resource, the service provided is threadbare with sewage regularly and illegally discharged into rivers, little maintenance or upgrading of the system — and more stories about waterborne disease hitting water supplies in communities across the country.
How did we get into this situation?
Privatised water
The Water Act of 1989 created protected private monopolies, giving the new private owners exclusive concessions to provide water and sanitation services for a 25-year period.
To attract private investors the government sweetened the sale in a number of ways. While the new private owners of the water and sewerage companies paid a total of £7.6 billion for their acquisitions, the government wrote off as much as £5 billion of debt that the regional water boards then owed and provided an additional cash infusion totalling £1.5 billion, known as the ‘green dowry’. Private owners, who paid a net of around £6 billion, began with a clean financial slate and with substantial freedom to re-price their services.
Privatisation was supposed to lead to investment, improved services and lower bills. However, in fact the opposite has happened:
- The UK’s National Audit Office estimated that in the first 15 years after privatisation, the average household bill for water and sewerage rose by 40 per cent in real terms.
- Infrastructure investment has collapsed since privatisation. Despite an increase in demand for water, not a single new reservoir has been built since 1992.
- Shareholders in water companies have received £85 billion in dividends from 10 water and sewage firms since privatisation.
- Water companies have been loaded with a collective £60 billion of debts. Customers are now paying almost 30p in every pound to service debts.
None of this is surprising. With customers who have no alternative to using their services and investors looking for the maximum return on the money they put in to buy the infrastructure, the system will inevitably reward and encourage companies who invest the minimum they can get away with, charge the most they can get away with.
In this system, success doesn’t mean developing a water system that provides affordable clean water to people and disposes of wastewater safely. Success means being very good at persuading the water regulators that the company is being run as well as it possibly can, while at the same time extracting as much money as possible for shareholders.
People are often surprised at at the huge salaries paid to water executives – for example the CEO of Thames Water, Chris Weston, earns approximately £2.3m every year. It’s a mistake to view this as being rewarded for incompetence. From the perspective of the shareholders who decide their salaries, the water company executives have done an excellent job.
The debt model
After the financial crisis in 2007, governments cut interest rates to historically low levels, making borrowing money extremely cheap. This would have a huge consequences for water in England and Wales.
After this, the amount of debt owed by water companies exploded. Between 2007 and 2012 Thames Water’s debt went from approximately £3 billion to £7 billion. This increase in debt wasn’t because it suddenly became harder to run a water company. With little immediate cost to taking on debt, the most profitable way of running a water company was to borrow to pay for maintenance while using customer bills to pay shareholders.
Key to establishing this model are infrastructure banks like the Australian company Macquarie. Macquarie bought Thames Water in 2006 and established a consortium of investors to run it. Having tripled the company’s debts and generated £2.8 billion in dividends, Macquarie sold its share in Thames Water in 2017. It then moved on to acquire a majority stake in Southern Water in 2021.
In 2022, interest rates suddenly rose. Having been loaded with debt, water companies suddenly faced huge increases in their repayments. At the same time, the consequences of decades of underinvestment started to hit, with billions needed to restore the crumbling infrastructure and receiving multiple fines piling up due to the failure of this infrastructure.
What does the government want to do?
In 2023, the government started contingency planning for the failure of Thames Water. The plan was dubbed ‘Project Timber’ due to fears the collapse of Britain’s largest water company would have far-reaching consequences.
Under these plans, drawn up across the Treasury and Defra, the bulk of Thames Water’s debts would end up on the government’s balance sheet. Thames Water would be managed by an arms-length company — while the government attempts to sell it back to the private market. The cycle repeats.
Regulators and water company executives spent the first half of 2024 locked in negotiations to prop up the companies. Shareholders took a hard line, demanding that they be allowed to increase bills and ultimately being given permission to raise bills by 21%. Given the indebtedness of the companies and the scale of investment needed, this won’t be enough. Unless bills are raised further, or some other source of money is found, their collapse is a question of when, not if.
On 17 May, a representative from the Thames Water’s largest shareholder resigned from its board and the Canadian pension fund wrote down the value of its holdings to zero — effectively signalling that Thames Water is worthless. As the water companies fail to keep up with their debt repayments, they are less able to pay dividends to their shareholders, meaning that they have no incentive to invest and may even collapse themselves.
After hitting the headlines, Project Timber is no more. The negative connotations of ‘timber’ doesn’t play well – so officials have renamed the project and moved to the next phase of planning. As one person close to the situation told the BBC, “we will be having this same conversation in a year’s time”.
The solution to this is clear: do what almost every other country in the world does and run water as a publicly service for the benefit of the country. Given that the companies are effectively worthless, there would be no need to compensate the shareholders if they were taken into public ownership.
The Labour government has signalled that it has no desire do this. Other than some vague words about “cracking down” on sewage releases, it has said nothing about how it plans to deal with the water companies running out of money. If anything, fining them would only accelerate that process.
What can we do about it?
We’re building a mass non-payment campaign to target the financial model of private ownership. Many water firms — Thames Water the prime example — are desperate for investors to pump in more cash to keep them afloat.
Their pitch largely hinges on the near-guaranteed income from millions of customers. Don’t forget these firms are monopolies with no competition. Our job is to make that income look as shaky as possible.
We can put these firms out of business by disrupting their income — and follow it up by scaring off any potential investors who’d come into to bail them out.
The private ownership experiment has failed. It’s up to us to put it out of its misery.