If you are ever having a bad week, just remember: you could be Thames Water.
Just over a week ago the regulator Ofwat handed the utility provider a record £122.7 million fine to punish it for sewage spills and excessive shareholder payments. More significantly, the firm faces the ongoing problem of having to service upwards of £20 billion in debt.
Attempts to find a buyer have been going on for several months, but hopes have again been dashed. US private equity firm KKR was the preferred candidate to offer a £4 billion rescue deal but walked away from the table, citing concerns over potential political interference with the business over the next decade.
Failure to find a buyer – combined with poor performance and open criticisms from the regulator – will undoubtedly lead to renewed calls from Labour activists, left-wing commentators, and ageing musicians-turned-environmentalists to nationalise Thames Water, and the wider water industry. Sharp increases to customers’ bills last month will hardly have made the firm any more popular.
Such is the public perception of the water industry that few people are willing to stick their head above the parapet and defend privatisation, but someone has to have a go. Because a huge amount of what people think they know about our water sector is simply nonsense.
The first myth that needs dispelling is the idea that, since privatisation, our water companies have systematically under-invested and left what was a perfectly functioning system to degrade as executives line their pockets.
That simply is not true.
Since privatisation, £236 billion has been invested in England and Wales’ water and sewage system, nearly £10,000 for every household. In 2023-24, water companies in England and Wales delivered the highest capital investment ever, £9.2 billion in a single year. In the four years prior to privatisation, the level sat between £3.5 and £4.5 billion (in 2023-24 prices). Investment has outpaced this in every individual year since. The result has been, among other things, a fivefold reduction in supply interruption – and arguably the cleanest and most drinkable water supply in Europe. Alongside the new Thames Tideway tunnel: a super-sewer to rival or even eclipse the Victorians’ efforts.
The next key point is that the privatised water sector is absolutely not a turbo-capitalist Wild West. The privatised water companies are heavily regulated in almost every aspect, including how much they can raise bills by and what profits they can make. In fact, until recently, bills hadn’t risen in real terms in over two decades. Fault for this ultimately lies with Ofwat – and by extension its political masters – which has stubbornly refused to allow prices to rise to account for the cost of investment, repairs and population growth.
Indeed, while it’s true that Thames’s past owners loaded it with debt – due largely to the weakness of the regulators, as well as legal loopholes that have now been closed – they did this precisely because the tight regulatory controls on profits and bills made it the only way to take money out of the business. Indeed, under the current model, water companies actually make more money the more they invest.
A lot of what’s said about the sector is simply false. It’s true that we have high levels of sewage overflows. But since we only installed the relevant monitors in the last few years, we have absolutely no idea what the situation was like in the old days – and in most European countries, and indeed Scotland, they still don’t.
Similarly, one perennial illustration of the greed and selfishness of the water companies is that we haven’t built a reservoir in Britain since 1992 – coincidentally, my entire lifetime – despite population growth of almost 20 per cent. But that isn’t the fault of the water companies. Nimbyism and a failed planning system can hold up reservoirs just as much as houses. Ask the people of Oxfordshire, where Thames Water has been trying and failing to build a reservoir for year after year, in the face of dark warnings from Lib Dem councillors of the dangers of radiative winds, katabatic fogs and pretty much anything else they can think of.
What is true, however, is that more needs to be done. Britain’s water and sewage systems are hamstrung not by the fact that they are privatised – in fact, Britain’s privatised water system out-invests almost all of the publicly owned water networks in Europe, not least because they are not in competition for capital with every other state priority. The core problem – certainly when it comes to sewage overflows, the issue that transfixes most of the media – is that we were one of the first countries to undergo an industrial revolution, pioneering many of the infrastructure developments which are now commonplace across the world.
Just as we find it difficult to improve our railways because tracks and tunnels are designed for the very first smaller, slower trains, our sewage system was at one time world-leading but after a century those tunnels and pipes are, understandably, not as they once were. In particular, we made the core decision to run both rainwater and domestic water through the same pipes – with the result that when heavy rain floods the system, the shit floats. A House of Lords report from 2022 estimated that a complete separation of the two networks – ultimately, the only way to avoid sewage spills – would cost between £350 billion and £600 billion, increasing water bills by up to £999 a year.
Next week, the Chancellor will stand up in the House of Commons and announce the conclusions of her Spending Review. No one is expecting good things. The Institute for Fiscal Studies says tough choices are “unavoidable” while the BBC quotes anonymous Whitehall insiders saying they expect the results to be “ugly”. The unions will be gearing up to attack any public sector pay award they consider too low. The NHS will inevitably suck up even more funding for very little improvement in outcomes. And Rachel Reeves will also be scrabbling to find funding for defence. Oh, and then there’s the U-turn on the winter fuel payment, and maybe something on welfare too.
Now imagine, on top of all that, she was also responsible for solely funding improvements to our water and sewage systems. It’s true that she would have a bit more wiggle room: improvements to sewage count as capital spending, so wouldn’t be traded off against public sector pay or new hospital beds.
But water and sewage projects would still be competing against many, many other capital projects – trams for Leeds, the Lower Thames Crossing, improvements to train connectivity. Many of the projects Reeves will be announcing were committed to by previous Conservative governments and yet failed to materialise. Who can be sure publicly funding water improvements wouldn’t also fall by the wayside?
The Government claims to still support a “market-led solution” for Thames Water. But it can be no coincidence that the company announced KKR was pulling out of its takeover bid on the same day a government-backed review recommended tougher regulation of the water sector. A private company willing to put billions of pounds on the line and commit to turning a company around over the next decade needs reassurance that the government isn’t going to interfere, make its life unnecessarily difficult, or, at the most extreme, seize the business entirely.
It’s easy to understand why Labour would be happy with nationalisation. Public opinion towards the water companies is too hostile, the case for privatisation in a monopolistic industry too counterintuitive, and many activists on the left too ideologically driven to look at the actual facts.
But it is depressing that the Conservatives – having introduced privatisation – have comprehensively failed to defend it, or argue for its merits, not just in water but in other sectors too. If no one is out there making the case for the market, is it any wonder that voters don’t hear it?
