by Kevin Meagher
The water industry, privatised in 1989, was for a long time a chimera.
A public service that happened to be located across the aisle in the private sector. A big lumbering beast that just got on with the job and caused little fuss.
Not anymore.
Thames Water – the largest of the regional water monopolies – appears to be on the brink of collapse, carrying debts of nearly £15 billion.
Furthermore, its parent company, Kemble Water (a consortium that includes a Canadian pension fund, the China Investment Corporation and a subsidiary of the Abu Dhabi sovereign wealth fund), is withholding a cash injection to prop-up it up.
That is unless the industry regulator, Ofwat, allows it to increase average customer bills over the next five years – which would see them rocket by 44% to £627 a year.
Ouch.
It all used to be much simpler.
During the nineties and noughties the water companies got on with the task of implementing EU wastewater regulations, which led to dramatic improvements in the quality of our drinking water, coastlines and urban waterways.
Tens of billions went into ensuring that rivers that had been little more than open sewers since the start of the Industrial Revolution were transformed back into thriving natural habitats, allowing, among other benefits, the advent of city living.
These massive companies, with multi-billion-pound investment programmes that sustained thousands of high-skilled engineering jobs, were usually owed by UK-based institutional investors as a safe, unspectacular stock.
Then, slowly, the ownership profile changed, with foreign banks and multiutilities getting in on the act, milking them as cash-cows, sucking out money as executives instead borrowed to meet their regulatory obligations and fund vital infrastructure spending.
Now the era of cheap borrowing has come to an end, the water industry model is coming apart at the seams.
Thames Water is currently in limbo, waiting for Ofwat to publish its ‘draft determination’ of water prices in June. This sets the amounts companies can charge customers over the next five-year period and what improvements this should finance. A period of haggling takes place before Ofwat makes a ‘final determination’ by the end of the year. If Thames Water doesn’t get what it wants, then it looks like the government will be left to pick up the pieces.
How did thing get so screwed up?
Straightforward, really.
A combination of strategic incompetence by Thames Water’s board, a weak client-regulator in Ofwat and poor political antennae at the Treasury and Defra have conspired to deliver not only a massive disaster for customers, but a gigantic political problem for Rishi Sunak.
Just look at the figures.
Thames Water is enormous – with 16 million customers stretching from Cirencester in Gloucestershire right the way across to Dartford in Kent.
And there are no easy fixes here.
The regulator can’t flatten Thames’ customers’ bills by cross-subsidising them with bill payers in other regions. That’s not how the model we have works. (Also, Thames isn’t on its own, with some of the other water companies facing similar difficulties).
For instance, customers in the South-West have long complained that they suffer the highest bills in the country to pay for wastewater treatment so that sewage isn’t dumped onto the considerable amount of coastline they have down there.
Neither can the government just let Thames Water go bust. Its too big to fail and the risk of a disruption to service really would cap off the sense that the country isn’t working any longer.
If ‘you couldn’t even bury the dead’ became emblematic of the ‘Winter of Discontent’ under Jim Callaghan’s 1970s Labour government, imagine the damage ‘you couldn’t even flush the toilet’ would do for the Tories?
Admittedly, it will be a sight to behold if the last action of a Conservative government is to embark on renationalisation of an industry privatised by Margaret Thatcher. (Perhaps it was always ill-fated with regional monopoly companies making a mockery of the usual advantage of the free market: choice).
Even if ministers stop short of riding to the rescue with the public purse, this episode spells the totemic end of privatisation as a model that can be said to deliver efficient management that does not trouble the public balance sheet.
And as well as the big strategic headache about what to actually do with Thames Water, there are the political ramifications.
Most obviously, customers will see their water bills rise substantially, compounding the cost-of-living crisis and wiping out any benefit from the tax cuts in the last Budget, or even those potentially to come.
Then there’s the sheer scale of the impact.
In terms of parliamentary constituencies, Thames Water’s footprint is comfortably into three-figures covering London and right the way across the south of England, with many of them marginals.
The Times mentioned the other day that Rishi Sunak’s strategists were looking for some sort of unexpected and dramatic ‘black swan’ event that might pivot the outcome of the election back in their favour.
They’ve got half of what they wanted; we are definitely in black swan territory.
But rather than saving them, the Thames Water fiasco is likely to finish them off altogether.
Kevin Meagher is the associate editor of Labour Uncut
Tags: Kevin Meagher, nationalisation, Thames Water, water privatisation
