The Collapse of Thames Water

The impending collapse of Thames Water, Britain’s largest water company, should serve as an example of the utter moral and political bankruptcy of the privatisation of our utilities. In fact, the only surprise should be that it has taken as long as it has for this to happen.

Thames Water is currently stuck in a quagmire of its own creation: It is £14bn in debt, with rising interest rates making the costs of servicing this colossal debt more and more expensive. A £1.5bn pledge for financial support made by the company’s shareholders a year ago, to tide the company over during this crisis, yielded only a third of this amount, and that cash only turned up last March. The Government is making solid contingency plans for the company’s collapse and, should it default on its debt, they will in all likelihood be taken into temporary public ownership, with the State picking up the bills and the debts, until such time as it can be re-floated for further profiteering by robber barons.

The water boards, the publicly owned and managed services for the provision of water and the treatment of sewerage, were privatised in 1989 by the Thatcher Government. To sweeten the pot for would-be investors, the Government wiped the slate clean of the £5bn in debt that the water boards were carrying. In the almost thirty-four years since privatisation, their collective debt has gone from zero to £60bn. The answer to how this has happened lies in the way these companies operate.

The water industry operates at a profit margin of around 35%, meaning that for every £1 you spend on your water bill, 35p is straight profit to the company. This is extremely high when compared to the average of all industries in this country as a whole, which is currently around 5%. In addition to this, as said earlier, the water companies are carrying a colossal amount of debt, which must be serviced at a rate of roughly 20% of the industry’s income. This means that, for every £1 you spend on your water bill, 35p is profit and another 20p is to service the company’s debts. When we factor in that roughly 15p of that £1 is paid out to shareholders as dividends, that leaves just 30p per £1 you pay in bills to pay its tax, National Insurance and staff pension obligations amongst other things and, critically, maintaining and investing in its infrastructure.

Faced with this wafer-thin margin with which to maintain and invest in its infrastructure, the water companies opted to sweat their assets and, when they were forced by circumstance to replace their ageing sewers, drains and mains, borrowed the money to pay for it. This was made extremely easy by the fact that interest on debt has been practically zero for the better part of fourteen years since the financial crash of 2008, but, with a number of inflationary factors, including central banks printing money and the constriction of the supply of goods and raw materials owing to western Governments’ response to Covid, interest rates have reached 5%, twenty times higher than they have been for much of the post-2008 period.

The failures of the water companies are many and varied, including allowing billions of litres of water to leak from its infrastructure every year while imposing hosepipe bans when there is a shortage of water, employing slipshod methods and a lack of investment, leading to the contamination of our water supplies, our rivers, and, most notably, our beaches. The water companies have taken to dumping raw sewerage into rivers and seas because the infrastructure in this country combines the carriage of rain and waste water in common drains, meaning that treatment facilities become overwhelmed when there is heavy rain, particularly after extended periods of dry weather, when the soil bakes hard and rainwater runs off into drains, combined with the reduction in ground absorbance capacity in residential areas owing to gardens being converted to paved or concreted driveways.

Water companies have been allowed to act with complete impunity by Ofwat, the regulatory body which acts in the interests of the private companies, not water users. As with many Government regulators, working at Ofwat is a career path to future and well-remunerated employment at water companies, provided they did not treat those companies harshly during their tenure at the regulator. In August last year, they were accused of ‘twenty years of regulatory failure’ by The Angling Trust, who used Ofwat’s own data to demonstrate that the regulator gave water companies a “licence to leak” water from its infrastructure.

The Government also has to take their share of responsibility for this situation. In April 2023, they, along with Tory MPs, voted down the Water Quality (Sewage Discharge) Bill. But why? On its face, the provisions contained within the Bill were entirely reasonable: It set targets for reductions in sewerage discharges, imposed heavy fines for failing to meet them and made provisions for water quality monitoring. The reason why the Government whipped their MPs to vote down the Bill, including many Tory MPs who represented regions most adversely affected by the routine discharge of raw sewerage into our rivers and coastal areas, reveals their acute awareness of the state of the water industry as a whole.

In order to meet the standards detailed in the Bill would have required billions of pounds of investment in Britain’s combined rainwater/household waste drainage systems, the upgrade of existing water processing facilities and the construction of new processing facilities. The water companies would not be able to find the money to pay for these huge upgrades in infrastructure without either eroding their profits, sacrificing the dividends to their shareholders (who would then sell their shares) or defaulting on their existing debt. The only way that the water companies would be able to undertake this huge upgrade of its infrastructure would be to borrow even more money, which seems a difficult task when the amount of debt the companies are already in is considered, or, critically, that the Government would have been required to lay out the massive amount of money required for this work and would have been made politically accountable for the cost overruns as well as the delays and failures that would have inevitably occurred in such a huge and complicated project.

In short, the water companies could not have met the requirements of the Bill whilst maintaining their business models, while the Government were not prepared to either nationalise the water companies or pay the substantial costs of upgrading our water infrastructure.

Areas of the country consistently and repeatedly suffer from water shortages year in, year out. Yet despite this, there is no ‘national grid’ for water, where areas where water supply is plentiful can pipe water to areas where there are shortages. This obviously should have happened when the water boards were in public hands, but, with privatised water companies prioritising profit, dividend and debt payments ahead of any and all other considerations, there is absolutely no possibility of this happening without huge state intervention.

The collapse of Thames Water, Britain’s biggest water company under a pile of debt, crumbling infrastructure and sewerage spillages, must be welcomed, but its demise will count for nothing unless it jolts our rulers into action and our water supply is taken back into public ownership, permanently.