UK Water Privatisation Is Broken: Sewage, Debt and Profit

By Ken Long

Sir Jon Cunliffe’s exhaustive review has discovered that fragmented regulation, weak enforcement and profit-driven monopolies may not be the ideal way to provide an essential public service

After nine months of investigation, more than 50,000 submissions and enough paperwork to dam the Thames, Sir Jon Cunliffe has delivered his verdict on the water industry in England and Wales: the system is broken.

Sir Jon, a former deputy governor of the Bank of England, was appointed by the Labour government to chair the Independent Water Commission. His final report produced no fewer than 88 recommendations, including abolishing Ofwat, creating a powerful new regulator, establishing regional water authorities and giving consumers a proper ombudsman.

In other words, the industry requires a new regulator to regulate the companies that the old regulator failed to regulate, while another body watches the new regulator to ensure it regulates properly.

This is called “fundamental reform”. In most workplaces, it would be called replacing the manager after discovering that the building has burned down.

The report concludes that the present system is fragmented, poorly coordinated and incapable of planning properly for the future. Responsibility is scattered among Ofwat, the Environment Agency, the Drinking Water Inspectorate and Natural England. Each organisation owns a different portion of the problem, ensuring that nobody owns enough of it to be blamed.

Sir Jon described the industry as facing its “Great Stink” moment, recalling the sewage crisis that overwhelmed Victorian London in 1858.

The principal difference is that the Victorians responded by building an extraordinary public sewer system, while modern Britain responded by paying dividends, awarding executive bonuses and commissioning a review.

A remarkable discovery floats to the surface

The commission has discovered that water companies need to invest more in pipes, reservoirs, treatment works and sewage infrastructure. It also found that regulators require stronger powers, company finances must become more resilient and environmental responsibilities need to be taken seriously.

No shit Sherlock.

That is one of the many problems of privatising something like water, where profits are essential, treating sewage not so much.

A private water monopoly does not operate like a normal business. Customers cannot decide that Thames Water’s sewage service has been disappointing and ask Severn Trent to connect a different set of pipes by Tuesday.

There is no meaningful consumer choice. There is no competitive market. There is only a captive population receiving bills from whichever regional monopoly owns the pipes beneath its feet.

Profit is therefore not earned by winning customers from a competitor. It can be increased by raising charges, reducing expenditure, postponing maintenance, borrowing money or persuading the regulator that another dividend is absolutely vital for “investor confidence”.

Clean rivers, unfortunately, do not pay dividends. Sewage treatment works do not collect bonuses. Replacing an ageing pipe is considerably less exciting to an investment fund than extracting a reliable, inflation-linked return from millions of households that cannot take their custom elsewhere.

Ofwat goes down with the ship

Labour accepted the recommendation to abolish Ofwat, which has regulated the industry since privatisation in 1989.

This is politically convenient. Ofwat undoubtedly failed, but regulators do not exist in a vacuum. They operate within rules written by governments and under financial and political pressures created by governments.

For decades, ministers wanted three incompatible things:

• Low water bills.
• Generous returns to attract private investors.
• Massive long-term infrastructure investment.

The companies found a solution. Bills rose, investors received their returns and much of the difficult infrastructure work was left for another day.

That day has now arrived, accompanied by polluted rivers, leaking pipes, enormous corporate debts and demands for customers to finance the repairs through still higher bills.

Estimates vary according to the period and accounting method used, but analysis cited by campaigners suggests that water companies have paid tens of billions of pounds in dividends since privatisation while accumulating comparable levels of debt. A 2022 ownership analysis found that roughly 72% of England’s water industry was in foreign hands, including overseas pension funds, sovereign wealth funds, private-equity interests and investment vehicles based in tax havens.

The new Cunliffe model proposes stronger control over changes of ownership and improved financial resilience. Yet the commission was not permitted to conduct a full examination of public ownership as an alternative.

The doctor was asked to examine the patient, diagnose the disease and recommend treatment—provided the treatment did not involve removing the parasite.

Bills rise while responsibility evaporates

Sir Jon warned that restoring the system will require substantial investment and that customers are likely to pay more.

This produces the most remarkable achievement of the entire privatisation experiment.

The public originally paid to build the infrastructure. The infrastructure was then sold. Customers paid bills to its new owners. The owners extracted dividends while companies accumulated debt. Now customers are expected to pay again to repair and replace what deteriorated under private ownership.

It is less an economic model than a subscription service in which the public buys the same water system every generation but never gets to own it.

Labour argues that renationalisation would cost more than £100 billion. That figure is heavily disputed because the cost would depend upon how companies were valued, how debt was treated and whether shareholders received the price they wanted rather than the value of the businesses they had helped create.

Even if the government’s estimate were accepted, it raises an awkward question: if these companies are so indebted, inefficient and environmentally disastrous, why are they supposedly worth such an astronomical sum?

Apparently, private ownership is a tremendous failure when explaining sewage pollution but a glittering success when calculating shareholder compensation.

Why did Britain permit it?

Strictly speaking, it is England, rather than the whole United Kingdom, that stands virtually alone in having completely privatised its regional water and sewerage system. Scotland retained publicly owned Scottish Water. Northern Ireland’s system remains publicly owned, while Wales has a not-for-shareholder model operated by Dŵr Cymru.

Most countries recognise that water is a natural monopoly and an essential public service. They may involve private contractors, but ultimate ownership and responsibility usually remain with public authorities, municipalities, cooperatives or not-for-profit bodies.

England took a different course for several reasons.

First came the ideological enthusiasm of the Thatcher government, which treated privatisation as an end in itself. Water authorities were sold in 1989 with their debts removed and the new companies given what amounted to regional monopolies.

Second was the political desire to keep public borrowing off the government’s balance sheet. Investment financed through corporate borrowing appeared to be private-sector efficiency, even though customers ultimately had to repay it through their bills.

Third was regulatory weakness. Ofwat was required to keep bills affordable, encourage investment and ensure the companies remained attractive to investors. When these aims conflicted, protecting “investability” repeatedly took precedence over protecting rivers.

Fourth was the revolving door between government, regulators, consultancy firms and the industries being regulated. The result was a culture in which the requirements of investors were treated as economic realities while the public’s demand not to have faeces in its rivers was treated as an aspiration.

Finally, successive Conservative, Labour and coalition governments accepted the structure. Renationalisation was portrayed as too radical, too complicated or too expensive, while allowing overseas investors to extract billions from a captive public was presented as sensible financial management.

That is how England became the international exception: not through one mistake, but through 37 years of political cowardice, financial engineering and devotion to the belief that private profit must be protected even when the public interest is drowning in sewage.

Sir Jon Cunliffe has provided a detailed map of the wreckage. Labour must now decide whether it genuinely intends to rebuild the water system—or merely appoint a better-qualified lifeguard to supervise its sinking.

Sources: Independent Water Commission final report, government summary of the commission’s recommendations, Parliament’s Public Accounts Committee on water regulation, and analysis of ownership, debt and dividends.