“Sweet Thames, run softly till I end my song,  Sweet Thames, run softly, for I speak not loud or long.  But at my back in a cold blast, I hear the rattle of the bones.”

—T.S.Eliot, “The Fire Sermon,” Part III of The Waste Land

After a flurry of catastrophic publicity around England’s privatised water companies and centring on Thames Water, the largest, things have gone eerily quiet. But this huge rock in the UK government’s financial waters has not gone away; it has simply submerged below the sight of our ever-faddish media. As a supplier of water and sewage to a quarter of England, it is like the banks 15 years ago—too big to fail, especially as it supplies the imperial capital.

Yet the stench of failure is in the air. As with the banks, its troubles could have been foreseen. Instead of junk mortgages being packaged as sanitised investments and sold to the gullible Goodwins of the world, Thames had gambled that interest rates would continue at insanely low levels indefinitely. The past year’s 15 rate hikes has proved them horribly wrong.

Thames Water waded in well out of its fiscal depth before that. Having been privatised in the fire sale of public assets that characterised the latter days of Thatcher, it proved to be a bargain. Investors love utilities because they hold their market captive, providing consistently fat dividends. There was no shortage of buyers when it went private in 1989.

Things stayed quiet for the first couple of decades. But when Australia’s Macquarrie bank became the dominant investor 2006-2017, the temptation to milk this cash cow became irresistible. By leveraging miniscule interest rates to borrow cheap to fund minimal infrastructure investment, it became possible to pay lavish dividends, while keeping Ofwat quiet as the regulator. The result was Macquarie left Thames with an extra £2.2bn in loans, while £2.7bn was taken out in dividends. Meanwhile, debt rose sharply from £3.4bn to £10.8bn under its ownership.

It was another of those wizard wheezes offered by privatisation. Like the rail Roscos, PFI, power generation, Covid PPE, etc, etc, those in the know could tap the public’s munificence. All they had to do was clear the shelves of their offshore vault for the imminent cascade of cash. Even when Macquarrie bowed out in some disgrace for this behaviour, ownership remained largely foreign. 

The largest onshore shareholder is Universities Superannuation Scheme, holding 19.7%. But that’s it for Britain. Ontario’s Municipal Employees Retirement System owns 32.8%; Abu Dhabi’s Infinity Investments SA owns 9.9%; both British Columbia Investment Management Corporation, China’s Investment Partnership and Europe’s Hermes GPE each own 8.7%. Three other small investors sharing 12.5% are all foreign. But, even if they were not, the idea that any pressure on Thames from investors to please residents of Reading, as opposed to pensioners in Ontario, seems naive.

The cash cow culture was taken so far that infrastructure investment to the tune of £52bn was funded by customer charges and borrowing. Meantime, dividends totalling £57bn were paid out to shareholders. The below-the-radar time span over which such cognitive dissonance can be maintained is limited and McQuarrie was forced out. In 2020, Sarah Bentley was appointed as Chief Executive with a promise to forge an 8-year plan to rectify matters. She had been lured from Severn Water by a lucrative sign-on package.

Just a year ago, she was handed a total of £727,000 in two one-off payments, part of a £3.1million ‘golden hello’ for signing on—and this within days of being blasted by the Environment Agency for the firm’s pollution record. This is in addition to her eye-watering annual pay and bonuses the year before.

Given the growing outrage at Thames performance in both mains and sewer leakages, in May of this year, Ms Bentley announced that she and Alastair Cochran, Chief Financial Officer would forgo any performance bonus this year. It seems the scepticism that this was a “PR stunt” was justified, as Ms Bentley’s actual compensation rose to £1.6m—larger than her £1.5m last year.

“In 2022, untreated sewage discharges in England equated to a rate of more than 825 a day”

 —The Environment Agency

Despite such largesse last month, Ms Bentley resigned from Thames Water, giving no explanation. Give the lady her due—if she was bright enough to negotiate such a lucrative pat deal, she would be bright enough to anticipate the crushing debt juggernaut rolling down on Thames ever since interest rates soared.

The ticking time bomb is £10bn in debt that Thames needs to refinance at rates more like 5% than the 1% at which they originally borrowed. That translates into interest payments of £400 million that must be found each year. And any company with finances as shaky as Thames will not find lenders queuing up; rates charged vary according to to risk.

Was there another way? Consider the case of Scottish Water.

Since regulation was first introduced in Scotland in 1999, the industry has gone from being a very poor performer to being amongst the (if not the) best in the United Kingdom. It has invested over £15 billion in water quality, environmental performance. This proves that public ownership is no barrier to meeting, and even exceeding, the standards set by privatised companies in England. 

Average Scottish household bills for 2022-23 are currently £375. In contrast, Thames average charge jumped from $417 to £456‚and they are not the most expensive (Southwest at £526). In other words, Thames customers are paying a 24% premium for a much inferior service.

“At an average household charge that is £54 lower than in England and Wales, Scottish Water is providing one of the best values for money water and sewerage services.”

—First Minister Nicola Sturgeon

SW are projected to invests a further £0.6billion in improving water quality, environmental performance and addressing climate change. Total investment over this forthcoming twenty-year period will be around a further £20billion. SW receive no Government subsidies – customers cover the full cost of providing water services, borrowing only when prudent. 

While providing better value for the Scottish consumer than the private English model, does Scottish Water offer the optimal solution? Irish Water, which is Ireland’s national water utility, has considered various business models and supply frameworks to demonstrate value for money. They commissioned a Price Waterhouse Cooper study to compare practices with Scottish Water’s. It reported unambiguously that SW’s practice clearly delivered that end.

Scottish Water wholesales to licenced providers that retail their services to the non-domestic market. The usage of competition ensures a fair and equitable service that provides value for money to end users, with quality being directly assured to the customers.

“Drinking water in Scotland has reached a new high, with 99.91 per cent of all samples in 2013 meeting strict quality standards.”

— Scottish Water Annual Report 2013-14.

Starting out as a hodge-podge of regional water departments, Scottish Water was originally organised in 1996 as three companies: North, West and East. Ten years later, these were merged to form Scottish Water under CEO John Hargreaves. A combination of his guidance and Scottish government support for maintaining public ownership meant that SW was never under profit pressure as illustrated so blatantly by the case of Thames Water, detailed above.

Leakage across Scottish Water’s network has been reduced to 492 Mil L/day over its 77,900 square km (30,000 square miles. It has achieved its calculated economic level of leakage. In contrast, Thames Water leaks 639 million litres a day over its 13,000 square km (5,000 square miles). In other words, SW’s leakage is less than 13% Thames Water’s rate.

This is due to SW’s consistent investment of around £0.5bn each year in its infrastructure. To put that in perspective, the entire English water industry has averaged only £1.5bn per year in its aging, largely Victorian infrastructure. Of Britain’s 350,000km of water mains, SW controls 47,000km. Which means English pipes have had less than £5,000 per km spent on them, which Scottish ones received over £10,000 in annual infrastructure investment. And providing water to hilly, spread-out Scotland is a lot harder than to the Thames Valley.

However, the bottom line is that, by borrowing steadily at around £100m each year, SW carries no crippling obligation. In contrast, A report by Prof. Richard Murphy of the Corporate Accountability Network and Sheffield University looks at the accounts of nine major water companies, including Thames, and concludes that their estimate that they need £10bn over seven years to end sewage discharges is inadequate. It also says the environment department’s tally of £56bn over 27 years is an underestimate. Instead, it finds a House of Lords assessment that the problem requires £260bn of investment more accurate.

“Rising costs of production and the need for capital investment in the public water supply network in Ireland, has placed a strong emphasis on the need for water conservation and tackling the current high levels of leakage”

—Irish Department of the Interior

How the water liquidity crisis at Thames will be solved is anyone’s guess. But it is the latest example how this shibboleth of Tory governments—privatisation—winds up being more costly for the taxpayer and seldom for the Sarah Bentleys and Fred Goodwins of the world. Their track record is shabby. The government has had to intervene in several high-profile corporate failures, including RailTrack; GNER; ScotRail; RBS, British Steeland, most recently, the collapsed energy supplier Bulb.

The “greed is good” mantra of Gordon Gecko is over three decades old and it spawned the post-“Big Bang” snazzy braces sported around Canary Wharf, who deeded us the 2008 crash and a decade of austerity.  Perhaps it’s time to return to the sleepy model of staid but reliable institutions that banks and utilities once were before all our savings get siphoned off to Beijing or the Cayman Islands.

“Private sewage and water companies paid out £1.4bn in dividends last year, up sharply from £540mn in 2021.”

—Financial Times, 19^th May 2023

#1075—1,678 word