WILL NEW RULES FIX THE WATER INDUSTRY?
It can’t have slipped your notice: the East of England is the most water-stressed region in the UK. We don’t have enough, our rivers are depleted and polluted, and what rain we get these days arrives in torrents that mostly flows out to sea. Oh, and sewage systems overflow at frequent intervals. Chronic under-investment is taking its toll, while the water companies ignore pollution regulations and their directors pay themselves handsome bonuses.
The failure of England’s water sector is writ large; so bad that it probably contributed to the rout of the Conservative Party at the 2024 elections.
Step forward Labour to talk tough about the water companies. The Government says reforms proposed in the White Paper A New Vision for Water will deliver “Once-in-a-generation reforms, tough oversight, real accountability, no more excuses.” Really?
Observers of the water industry are less convinced, pointing out that yet again the Government chooses to ignore a simple truth: Water is not optional, it is essential to life. It should not be a commodity appropriated and exploited – and even deliberately polluted – for profit.
Tragedy number one in many people’s eyes occurred in 1989 when the Municipal (state-owned) water companies were turned into publicly-listed companies.
England is unusual in being the only country in Europe to have fully sold its entire water infrastructure – including pipes, reservoirs, boreholes and treatment plants – to private owners. Welsh Water operates as a not-for-profit and Scotland’s water remains largely in public ownership.
It’s fair to say that the water network then – as now – was desperately in need of investment. Privatisation was seen as achieving two goals: attracting investment and at the same time taking 50,000 people off the public payroll.
At first, there were improvements. Drinking-water quality improved, while leakages fell. However, without competition and the benefits of a genuine market, the industry regulator (Ofwat) was overly fixated on keeping prices down and lacked long-term vision.
Rather than increasing, investment was stifled. Despite population growth of 20% and warnings of climate change dating back nearly 50 years, not a single reservoir of any significance was created for 34 years. Several of the water companies put forward reservoir projects, all were rejected by the regulator. One was finally started in Hampshire in 2024.
Tragedy number two started in 2003, when the assets and revenue streams of essential public services became a favoured target for private equity-leveraged acquisitions. England’s water co.s have been easy pickings.
Loaded with debt and overseen by rapaciously profit-driven owners, the water co.s priorities changed. The focus switched to paying for the debt used to buy the companies + dividends for the owners + profit for the portfolio managers + handsome bonuses for directors. All but three water co.s have succumbed to private equity-leveraged buyouts.
Successive governments have been asleep at the wheel, deaf to the shortcomings of the regulatory structure and unwilling to recognise the harm caused by predatory acquisition of the water co.s until it was too late.
Sir Dieter Helm, professor of economic policy at Oxford University and long-time observer of the water industry’s financial malaise, says nobody supports the original privatisation model. But he also says the government did not explore re-nationalisation because its self-imposed spending rules are stretched to the limit and there is little confidence the government would do a decent job of managing such a complex and capital-intensive business.
Instead, the White Paper is heavy with reassurances for the city and investors. It talks about attracting long-term investors who “take a low-return, low-risk approach” and are willing to accept “steadier, bond-like returns”. This will mean the days of earning high equity returns through leverage or financial engineering are numbered. But is this achievable, or simply naive?
The first task, says the white paper, is to abolish the existing regulator by merging responsibilities currently held by the Environment Agency, Natural England and the Drinking Water Inspectorate with those of Ofwat to create a single integrated super regulator. It may seem logical, but seasoned observers of the regulatory landscape have their doubts that this will be the silver bullet the Government is hoping for.
Campaigners are pointing to the White Paper’s soft touch approach to pollution. Fines imposed on the water co.s could in future be deferred, “managed” – whatever that means – or replaced by a turnaround regime to enable companies to fix their problems faster, in other words, ‘ keep the fine to pay for improvements.’ A Government spokesperson said this would “give stability to investors.”
So clearly much rests on investors, present and future. However, if the White Paper is to deliver genuine change, the Government will have to face off against what is likely to be extreme lobbying pressure from those ( investors and lenders) who stand to lose.
Meanwhile, there is an increasingly audible campaign for (re)nationalisation, led by Feargal Sharkey. He makes a good case, and public sentiment is undoubtedly on his side; but it is not an option Govt is prepared to entertain for as long as a private sector solution is in reach. However, that solution may require so many compromises that very little real change is achieved.
Is a third tragedy about to be written? One where a government, faced with the opportunity to make real change and with public sentiment firmly on the side of progressive thinking, simply repackages the status quo?
COMMENT BY PRESSURE GROUPS
Wildfish Trust: Whether facing the negative impacts of aquaculture or water supply and pollution pressures, wild fish populations remain under threat, and they are certainly not getting enough help from the government. The Water White Paper fails to provide a key ingredient to their protection: action. We have, more or less, all the rules and regulations we need. We need the government to act now, not waffle about the future.
SAS Surfers Against Sewage: With public awareness at an all-time high and water industry action at an all-time low, the Government has never had a stronger mandate to fix the water system. But unfortunately, the Government’s ‘New Vision For Water’, has fallen rather flat. It’s a total whitewash.
USEFUL LINKS
Dirty Business: Channel 4’s powerful docum-drama about the water scandal
The world is entering an era of water bankruptcy