Britain’s water woes: Tories’ failure to fix infrastructure plunges nation into chaos – Martin Ivens

The failure of Britain’s Conservative Party to address the nation’s crumbling infrastructure, specifically in the water industry, is causing widespread discontent. One of England’s largest water companies, Thames Water, is on the verge of bankruptcy, while environmental concerns arise from massive water leaks. Privatisation of state-owned industries, once hailed as a success, now faces criticism as calls for re-nationalisation grow. Martin Ivens say that the Tories’ reluctance to invest in infrastructure and regulate the industry effectively has led to a dire situation. As water bills are predicted to skyrocket, public frustration grows, and the Tories find themselves facing the consequences of their own neglect.

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Thames Water’s Woes Will Swamp the UK Government: Martin Ivens

By Martin Ivens

Britain’s Conservatives swept back to power in 2010 after convincing voters that Labour had “failed to fix the roof while the sun was shining” — the charge that  Tony Blair and his chancellor and successor Gordon Brown should have paid down the national debt in the good times before the financial crash smashed the economy to smithereens. 

Precisely that charge is now being leveled at the Tories for their failure to fix the nation’s infrastructure during their 13 years in office. Events have reached a critical point. One of England’s largest water companies, Thames Water, which serves 15 million captive customers in London and the southeast, teeters on the brink of bankruptcy.  How could the government allow such a basic but essential business to go belly up? Ministers are nervously monitoring the financial health of another four water companies. 

Thames Water’s record is also an environmental disgrace. The company loses 630 million liters (139 gallons) of water each day in leaks — enough to fill 252 Olympic-sized swimming pools. Its poor performance, however, is not unique. A fifth of the nation’s water seeps out or gushes from leaky pipes. 

The water utilities’ woes feed into a larger narrative of national gloom, along with strikes by doctors and public-sector workers, the cost-of-living crisis and a housing shortage.  The Tories used to accuse Labour of presiding over “broken Britain.” That’s another smart line that has come back to haunt them. 

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Discontent with the privatization of state-owned industry, regarded as one Margaret Thatcher’s crowning achievements and copied all over the world, has mushroomed in the land of its birth. The latest opinion polls reveal that 70% of voters, and even a majority of Tories, would like to take water back into government control. 

At the last general election, voters decisively rejected the far left Labour leader Jeremy Corbyn, but polls show that in theory they approved of his socialist plan to renationalize huge swathes of private industry – water, the energy-supply network, Royal Mail (privatized in 2013 after 500 years of state ownership) and the railways. The ÂŁ250 billion ($318 billion) price tag, however, was a turn-off, and Corbyn’s project seemed to be motivated by ideological zealotry rather than considerations about how best to oversee the nation’s infrastructure providers.

Ironically, since then the Conservatives themselves have been forced to nationalize several bankrupt railway companies and power providers — something Blair and Brown never did. The Tories have even been flirting with 1970s style price controls.

Although a youthful cheerleader for privatisation, I confess my faith has taken a knock too. Not far from my north London home, last summer a huge leak from a Thames Water pipe flooded streets subject to a hosepipe ban — the company’s £250 million desalination plant in the capital was closed for maintenance. As the garden wilted, we escaped to our seaside cottage in Whitstable, Kent. To my disgust, I couldn’t feast on the famous local oysters because another failing company, Southern Water, had pumped raw sewage into the water, infecting dozens of fellow guzzlers with norovirus.

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Providing clean drinking water and sewage treatment in return for a reasonable annuity shouldn’t require business genius.  Many suspect that cute financial engineering to avoid tax lies at the heart of the industry’s troubles. Others blame poor management and the naivety of regulators in the pockets of the companies. 

Thames Water, like its peers, had little or no debt when it was privatized by Thatcher in 1989. In 2000 the German utilities giant RWE AG took the company private and then paid itself ÂŁ5 billion in dividends. RWE sold the company in turn to Macquarie Group Ltd., the Australian financial services conglomerate, in 2006. More debt was accumulated. Sold on to pension and sovereign wealth funds in 2016, Thames Water is today burdened with ÂŁ14 billion of debt at a time of rising interest rates. Its well-paid boss, Sarah Bentley, suddenly resigned last week when she encountered difficulties raising new capital from investors. 

But, as Bloomberg News reported last week, any plan to put the company into administration temporarily to sort out its problems could get complicated. Following Labour’s threat to nationalize the industry, Thames Water inserted a clause covering about £560 million ($709 million) of outstanding debt that forces the company to repay the money, including accrued interest, immediately if it is taken over by the state.

Despite the current mess, I would argue that the UK has largely done well out of privatisation.  Not even the fiercest critics of British Airways, British Telecom or British Gas, perhaps not even Jeremy Corbyn, would suggest that they should go back into state ownership. In the 1980s in central London, it used to take up to a year to get a telephone landline installed by the public utility. State-owned transport companies provided a filthy service; the curling British Rail sandwich was — deservedly — a national joke.

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As a nationalized industry the water companies, like many other utilities, were also starved of money by a cheeseparing Treasury. After privatization, they invested close to £200 billion. But water is a local or national monopoly. Effective regulation is vital. Encouraged by ministers, the regulator was fixed on capping increases in customer charges at a low rate, not the modernization of the service. It’s catchup time.

A new round of investment is called for to ensure the higher water-quality standards demanded in the modern era. Digging reservoirs (often in the teeth of local opposition) and laying new pipes and sewers to serve a growing population won’t come cheap. Households have been warned that water bills could jump by up to 40% by the end of the decade. The government, however, is averse to price rises that make its target of halving inflation even more unlikely.

Professor Dieter Helm of Oxford University, a doyen of energy and utility experts, argues that it’s time for the regulator to adjust its priorities. Maintenance of pipes should be treated as an operating cost, not a capital cost, he says. “There is no case at all for borrowing to cover capital maintenance.” The industry regulator, Helm adds, “should distinguish between the catchup that should be paid for by the companies, and ultimately their shareholders, and the capacity on the balance sheets to borrow for  genuine enhancements”.

Chronic underinvestment over decades urgently needs to be reversed. Prices will have to rise and ill-feeling will abound. This  time, it won’t just be customers who feel the pain. The Tories surely will too.

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To contact the author of this story:
Martin Ivens at [email protected]

© 2023 Bloomberg L.P.

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