Public ownership is the only way to save the water industry

Public ownership is the only viable alternative but is opposed by the government

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The Water Commission’s final report has been published and doesn’t provide a new beginning for the industry or any relief for beleaguered customers.

The Commission was handicapped as its terms of reference precluded it from considering public ownership of the water industry in England. So, it had to come up with fixes to make the current private ownership model work. It hasn’t worked for the last 36 years and it is hard to see how it can. The failures are obvious.

Due to lack of investment 1 trillion litres of water a year are lost in leaks. Despite population and industry growth no new reservoirs have been built since privatisation in 1989. In 2024, companies dumped raw sewage into rivers, seas and lakes for 3.62m hours. Companies have more than 1,135 criminal convictions. Inflation-busting price rises have been used to pay £85bn in dividends and billions more in debt interest. Companies have accumulated debt of around £70bn and around one- third of the customer bills cover debt servicing. Water companies have a gearing/leverage ratio of up to 85% and are highly risky entities. They are sustained by high charges to captive customers. There is no competition.

Against the above background, the report makes a number of recommendations. These include mandatory water metering, a social tariff for vulnerable customers, new regional water system planning authorities in England and one national authority in Wales, greater consumer protections, a new Ombudsman, stronger environmental regulation, tighter oversight of water company ownership and governance and public health reforms. This at a time when the government is intoxicated with deregulation, and regulators are required to promote growth of industries

The government has accepted the Commission’s recommendation to replace Ofwat, the Environment Agency, and the Drinking Water Inspectorate with a single new regulator. There is silence of revolving doors, prevention of cognitive capture, and putting worker and customer elected directors on board or giving workers and customers a vote on executive remuneration.

The report makes no mention of illegal practices of companies or their criminal convictions. It is muddled over the financial architecture of the industry. For example the report looks at gearing/leverage ratios of companies, which is normally measured by debt to equity ratio. But a chart on page 330 of the report shows debt/asset ratios instead, which is Ofwat’s distorted version of gearing. In its pricing calculations Ofwat assumes that water company capital structure is underpinned by 55% debt finance and 45% equity. No water company meets this benchmark. Consequently, they are allowed to earn higher returns. The Commission makes no comments.

The Commission accedes to the lobbying by industry and recommends (page 343) discretion for regulator “in defined circumstances, allowing them to defer or waive fines and penalties where it is in the broader interest of customers. This may include, for example, circumstances where additional fines are likely to hinder the ability of the company to invest in infrastructure improvement …”.

Water companies are already indulged. To manage public opinion fines are announced but not immediately collected. Here are a couple of examples. On 19 December 2024, Ofwat announced a fine of £18.2m on Thames Water for breach of dividend rules. When questioned in parliament, the Minister said that the company “has until 20 August 2025 to pay the fine”. On 6 August 2024, Ofwat fined Thames Water, £104m; Yorkshire Water, £47m; and Northumbrian Water, £17m for dumping sewage. When questioned in parliament the Minister said, “Thames Water should pay the fine by 20 August [2025]”. No dates were provided for payment by other companies. The government has no plan to prevent organisations with criminal convictions from controlling the industry.

Companies are able and willing to circumvent rules. For example, the government took powers to ban executive performance bonuses at failing companies, but Thames Water circumvented the rules by reclassifying bonuses as ‘retention payments’. Such cat-and-mouse games are inevitable under private ownership.

Besotted with Privatisation

None of the Commission’s recommendations can end the crisis, which is primarily due to the profit motive. Public ownership is the only viable alternative but is opposed by the government.
To frighten people, the Environment Secretary Steve Reed claims that nationalisation would cost £100bn. Ministers have not shown their calculations and have been unable to provide answers in parliament. They appear to be using Ofwat’s bizarre calculation of Recognised Capital Value (RCV), which cannot show market value of companies or their assets.

RCV is calculated by taking the value of companies at the time of privatisation in 1989/90. This is multiplied by the annual rate of inflation (RPI). To this, the cost of the year’s new investment is added. Annual depreciation is deducted. Water companies routinely inflate the investment amount through aggressive accounting practices such as capitalisation of part of interest payments and repair and maintenance costs. The sum total is the RCV at the end of the year forms the baseline for the next year when the same process is repeated again and again. After 35 years of privatisation this has given rise to a number of £100bn, which does not represent any measure capital or value.

The folly can be shown by a simple illustration. Suppose someone bought a car for £10,000 in 1989, and over the years paid loan interest, annual servicing fees, new tyres, brake pads, headlights, batteries, gearbox, radiator, engine and sundry. By using the Ofwat formula, the car could have a RCV of around £50,000. Would you be able to sell your 36 year old jalopy for £50,000? No, RCV is a random number and does not represent any kind of market value.

At 31 March 2025, Ofwat assigned RCV of £21bn to Thames Water whilst its annual accounts show the company to be technically insolvent as its liabilities exceed assets. Its shareholders have already written-off their investment. Some of its debt has traded at 5.8 pence in the Pound and the company struggled to secure new loans at interest rate of 9.75%, more than double the bank base rate. Thames shareholders and lenders have milked customers. In 1990, Thames had net assets, represented by shareholders funds, of £1.3bn. Hardly any shareholder investment has been made since but over £10.4bn has been taken in dividends. Since 1989, lenders have extracted £13.68bn in interest payments. £23bn is needed to repair failing infrastructure. It is the same story across other water companies. No shareholder or lender deserves any compensation for destroying essential infrastructure. Previously, governments have nationalised Railtrack and Northern Rock without compensation because due to insolvency they were worthless.

Public Ownership

Water companies are financially, morally and environmentally bankrupt. The People’s Commission on the Water Sector has estimated the cost of bringing the water industry into public ownership would be close to zero. Whatever the cost, it can be funded by issuing bonds to the people.
Public ownership isn’t a magic wand for correcting 36 years of failures. But it can make a start towards sanity by ending the looting and protecting vital services at affordable prices. Otherwise a grim future awaits.

In 2023, it was estimated that water infrastructure needs £290bn investment over the next 25 years. The UK is poor at forecasting infrastructure investment. In 2009 HS2, the high speed rail network, was assumed to cost £37.5bn. It was later estimated to be between £72-98 billion (2019 prices). If the HS2 forecasting accuracy is anything to go by, the eventual cash needed for the water industry is likely to exceed £600bn.

Shareholders will not invest that as companies have been permitted to raise capital from customers even though they don’t get the services. By 2050, customers will pay £600bn. This is in addition to annual bills, which in 2023-24 were £14bn and are scheduled to rise exponentially each year. Even if they remain unchanged in real terms until 2050 that would be a cost of £350bn (£14bn X 25 years). This will be supplemented by the annual cost of servicing debt and returns to shareholders. People would be expected to pay well over £1,000bn and will not own anything in return.

In contrast, under public ownership, there will be no dividends and interest costs would be less than 50% of the private sector’s as the government’s cost of borrowing is always less than that of the private sector. To illustrate, If Thames Water had been in public ownership it would not have paid £10.4bn in dividends. Instead of paying £13.68bn in interest payments, it would have paid less than half. It would not be paying £200m a year to lawyers, bankers, accountants and sundry advisers for advice on financial engineering and staving off bankruptcy. These measures alone would have generated billions for investment. Lower water bills under public ownership would mean lower household and business costs, inflation rates and poverty.

The government is desperately trying to appease corporations by clinging on to private ownership of water when all the evidence shows that privatisations has been disastrous. Public ownership is affordable and will cut household and business costs.