The toilets flush, and the taps supply us with water. The water industry in England and Wales functions in this way. It’s a mess in almost every other way.
After the toilets have flushed, the mess is most obvious. More than twice as much raw sewage was released by privatized water companies in England the previous year (3.6 million hours).
Feargal Sharkey, a former pop star, has been praising the industry as a “chaotic shambles” for years, and now millions of customers, surfers, and bathers agree.
Not just our coastlines, lakes, and rivers. Some communities have had their water supplies cut off for days or even weeks, while others have been instructed to boil tap water to ensure its safety.
According to Environment Secretary Steve Reed, plans to construct new homes have been put in jeopardy by issues with the country’s water supply, and some regions of the nation may experience a shortage of potable water by the 2030s.
It’s easy to see why people have less faith in these businesses than they have in the past.
Listen to Simon read this article. The independent commission, which will be led by Sir Jon Cunliffe, a former Deputy Governor of the Bank of England, will issue a report in June with recommendations. The main regulator, Ofwat, could be reformed or eliminated entirely.
It is an admission that the privatization of essential monopolies has been unsuccessful for critics like Sharkey, the former lead singer of the Undertones who is now vocal about the state of the UK’s rivers. “Maybe the greatest organized ripoff perpetrated on the British people,” he said recently.
So, how did we get here, what might be done to fix it, and what will that mean for customers’ bills?
In her memoirs, Margaret Thatcher reflected on water privatization and wrote, “The rain may come from the Almighty, but he did not send the pipes, plumbing, and engineering to go with it.”
The water companies were debt-free when her government privatized them in the late 1980s. Together, they owe £60 billion today.
Debt does not have any inherent problems. It can be a cost-effective method of financing investment in a sector for which lenders have been eager to lend.
It’s clear why they’ve been so eager to lend money to it. Customers, who can’t go anywhere else for something they’ll always need, provide water companies with guaranteed and growing revenue. Always regarded as a safe bet, regional monopolies of a crucial service that guarantees revenue.
Like other investors, shareholders in water companies also like the fact that the cost of repaying loans can be taken out of earnings to lower reported profit and, as a result, their tax bill.
This has gone too far and burdened water companies with an excessive amount of debt, but not all shareholders have done so. When the cost of that debt starts to rise, as it has in the past two years as interest rates have increased to deal with the rise in inflation since 2022, that can backfire.
For instance, the debt of Thames Water rose from £2 billion to £11 billion during the ten years that Macquarie, an Australian investment firm, was the largest shareholder, from 2007 to 2017. During this time, Macquarie and the other investors did not add any additional cash or equity.
A graph depicting Thames Water’s total debt from 2006 to the present, organized by year. By 2023, it will be close to £15 billion, up from about £2 billion in 2006. From 2007 to 2017, Macquarie was the primary shareholder.
In five of the ten years that Macquarie was a major shareholder in Thames Water, investors withdrew more money from the company’s dividends than it made in profits. The company made up the difference by borrowing a lot and letting debt levels rise.
