Sewage in the seas and broken contracts: what next for England and Wales’ water companies?

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By Professor Andy Mullineux
Lloyds Banking Group Centre for Responsible Business, Emeritus Professor of Financial Economics

One has to question whether substantial private equity ownership of utilities with such important public service duties is appropriate

In 1989, ten Regional Water Authorities in England and Wales were finally privatised to become water and sewage companies (WSCs) after previous attempts had met with public opposition. Elsewhere in the world, privatised water supplies are rare – perhaps due to their importance for public health and environmental protection. Even now, France and the Czech Republic are the only countries in the EU that have privatised water, and France has been progressively re-municipalising it since 2010.

One of the promises of WSCs was that their private sector management and corporate governance, as well as their access to capital markets, would improve efficiency and financial investment in service provision. But unlike other privatised utilities, such as energy and telecoms, the water industry has no competition among its suppliers and WSCs are effectively regional monopolies based on the geography of river catchment areas.

Hence the water market needs to be regulated with some form of price cap imposed to encourage efficiency and protect consumers. Ofwat is that regulatory body in England and Wales, with the environmental consequences of pollution of rivers, waterways, seas and shorelines and the promotion of biodiversity falling under the purview of the Environment Agency (EA). So how has this industry model delivered over the years?

Well in 2017, Thames Water was fined a record sum of £20m by the EA for dumping untreated sewage in the Thames over the previous decade. There was a public outcry, along with continuing outrage against the failure of WSCs to staunch leaking water pipes. Both issues reflected the underinvestment over many years by the profitable WSCs, which had attracted private equity investors who tended to load the companies with debt.

The response of Ofwat was to promote the development of a ‘public purpose’ agreed with stakeholders in the form of a ‘social contract’ as a means of building trust in the WSCs. Following an initial meeting in 2018, the idea gained traction among WSCs at the industry’s Social Contract Summit in November 2019. No doubt this was aided by Ofwat’s CEO, Rachel Fletcher, delivering a Beesley Lecture shortly before then explaining that, to the extent that WSCs fully engaged with stakeholders to promote the public interest, Ofwat would allow a degree of self-regulation to flourish.

Anglian Water was in the vanguard, incorporating its public interest purpose in its Articles of Association; while Southern Water put the onus on household consumers to deliver its ‘100 Vision’ of restricting individual water use to 100 litres a day. However, much depended on the WSCs maintaining adequate investment to prevent pipe leakage and develop sufficient sewage treatment capacity to avoid dumping of untreated sewage after storms, which were expected to become more frequent as a result of climate change.

Public concern over the state of England and Wales’ rivers and seas was heightened by growing interest in wild swimming and promoting biodiversity, as well as the ever-popular sport of fishing. Meanwhile shareholders (including Australian bank Macquarie, which invested in Thames Water’s infrastructure between 2006 and 2016) and bondholders continued to receive substantial returns. Then, in 2020, four of the SWCs, including Anglian Water, pushed back against the Ofwat’s proposed price caps and investment requirements. They appealed to the Competition and Markets Authority and, as a result, Ofwat was forced to yield concessions.

Then in July this year, Southern Water received a new record fine of £90m from the EA for repeatedly dumping billions of litres of untreated sewage over several years in rivers and the sea, offshore from popular beaches. Thames Water also received a £4m fine after untreated sewage escaped from sewers below London into a park and a river in May. These most recent developments have galvanised a campaign featuring Feargal Sharkey, lead singer of the 70s rock band the Undertones, which is promoting a House of Lords amendment to the Environment Bill that aims to outlaw the discharge of raw sewage by WSCs as soon as possible. The Bill is due to be reconsidered by the House of Commons this month and is now expected to pass following a Government u-turn.

So where does the water industry go from here? Trust in some WSCs has once again been severely damaged. The story seems to be the same one of profitable companies underinvesting in infrastructure while remunerating their share- and bond-holders well. One has to question whether substantial private equity ownership of utilities with such important public service duties is appropriate, especially water supply and sewage treatment that is so important for public health and the environment.

Is a renewed commitment to social contracting (however laudable) bolstered by the proposed new law against dumping untreated sewage going to be enough to restore public trust that companies like Southern Water and Thames Water will behave responsibly in future? Or does the success of Scottish Water, which was never privatised and is thriving while burnishing strong environmental credentials, demonstrate that state oversight is the way forward for the water industry?

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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