Households risk water bill shock in row over Britain’s leaky pipes
Oliver Gill
8 min read
water companies
A queue stretched 750 feet out the door of NatWest’s main branch in the City of London in early December 1989 as the public patiently waited to get their hands on water company shares.
''It is a reaffirmation of popular capitalism,'' said Michael Howard, the then environment minister who was responsible for the £7.6bn sell-off of Britain’s 10 water authorities. ''It is obviously a very enthusiastic response.''
Labour’s shadow minister Bryan Gould said the privatisation was a "rip-off" as shares began trading. Water stocks, he said, would be flipped to unaccountable overseas investors "within a matter of weeks".
"Water has been sold at a scandalously low price, and it is the taxpayer and the water consumer who will have to pay," he added.
Nearly three and a half decades later and Gould’s remarks look somewhat prophetic. Britain's water sector has become synonymous with what some argue are the evils of capitalism.
While shareholders have basked in an estimated £66bn in dividends since privatisation – in part by injecting vast sums of debt through complex financial manoeuvrings – the country has been left with a network of leaky pipes and overflowing drains.
Rishi Sunak's government is going to get even tougher. Thérèse Coffey, the environment secretary, will this week rip up a £250,000 cap on civil penalties for the companies that pollute rivers and seas.
However, executives warn that overly punitive measures will scare off investors and risk forcing re-nationalisation by the backdoor.
Former Conservative party leader Michael Howard talks to the media outside the Houses of Parliament in London on April 19, 2017. / AFP PHOTO / Ben STANSALLBEN STANSALL/AFP/Getty Images - BEN STANSALL/AFP
Water companies say that more than £160bn has been invested in the sector since 1989. "What has been achieved so far is quite significant and shouldn't be forgotten," says one chief executive.
However, industry leaders concede privately that questions remain as to how wisely the money has been spent.
The UK has not built a new water supply reservoir since 1991, for instance. During this time the country’s population has swelled by 10 million people.
Feargal Sharkey has established himself as the de facto leader of a movement determined to force change.
Sharkey, who shot to fame in the 1970s and 1980s as lead singer of punk band The Undertones, says: "The water companies have made off with billions of pounds worth of our money and the money's gone."
Public anger is so heightened that comparisons have been drawn to the Great Stink of 1858, when a heatwave intensified the smell of untreated human waste in the River Thames. Then, the smell was so acute it prompted parliament to approve Sir Joseph Bazalgette’s new London sewer system – a system on which the capital relied upon for the following century and a half.
However, analysts from Barclays reckon £100bn in total is needed to bring the sector up to scratch.
Who will pay? Asking consumers will be difficult. Bills would need to rise by an estimated £700 per household – some 60pc up on where they are now.
Campaigners say that, having leeched billions out of the industry since privatisation, it should be the water companies that put their hands in their pockets.
But industry leaders warn of unintended consequences.
"The fundamental debate is: who pays for the investment? And how?" says a source at one of Britain’s biggest water sector investors. "You can either fight the last war, or choose to fight the one we are in now."
The source says Ofwat's approach "has been to try and drive down water bills over the last 10 years", which has left little spare to invest.
Insiders point out that the investors that benefited from the dividends may no longer be on the share register.
If the Government comes down too hard on the industry, it will struggle to attract investors. Raising money will become more expensive and push up costs in the long run regardless.
Mandating that companies inject eye-watering sums without being able to recoup the money through increased bills will also disrupt the careful equilibrium of companies’ highly leveraged finance models.
Investors’ equity could be wiped out. In a doomsday scenario this would leave them with little choice but to hand back the keys to the Government – forcing parts of the industry into nationalisation.
Ofwat has signalled that there will be no let up to the adversarial approach it has recently taken towards bosses and their investors, however.
Announcing “new powers” last month, the regulator said it would block dividends from being paid by water companies that could not afford them – a move designed to prevent investment money being diverted into the pockets of shareholders.
The regulator said: "If the company falls short, Ofwat will be able to step in and take enforcement action."
The crackdown has sparked alarm among investors in the sector, who accuse Ofwat of "moving the goalposts within a regulatory period", according to one an investor in one of the UK’s biggest water companies.
"Introducing something from 2025 realistically means companies have to de-lever now, but Ofwat is not providing any funding for such de-leverage," a source says.
"De-leveraging and increased cost of equity comes at the same time Ofwat, the Environment Agency and Government are trying to drive a step-change in the level of investment, which will require new equity into the sector. This risks making the sector less attractive and more expensive for investors.
"Customer bills are already likely to increase given the above investment and higher interest rates, with Ofwat only exacerbating the situation with additional costs."
The sector crackdown has already had implications for Thames Water, Britain’s biggest supplier. With 15 million customers, the company risks being unable to pay interest on its debts, analysts from Fitch said last week as it downgraded its credit rating.
The downgrade came just weeks after it emerged that Thames Water had hired investment bank Rothschild and legal firm Slaughter & May ahead of crunch talks with lenders over a £14bn debt pile.
FEARGAL SHARKEY AT THE AMWELL MAGNA FISHERY NEAR STANSTEAD ABBOTTS INN HERTFORDSHIRE TODAY. PICTURE JEREMY SELWYN - JEREMY SELWYN
Meanwhile, the sector has other problems to deal with. The impact of soaring inflation and another winter of challenging weather was laid bare by United Utilities, the FTSE 100 owner of North West water, last week. A cold snap in December led to a slew of burst pipes, while soaring prices means the company’s inflation-linked interests will quadruple.
That pain will manifest a further drain on already squeezed household budgets, the chief executive admits. "Yes, inevitability bills will rise over the next 30 years as investment goes up."
Sharkey says: "I'm not blaming the water companies. For me, where the blame lies, it's clearly about the lack of political oversight, and a regulatory system that has failed to properly monitor and intervene.
"What Ofwat needs to do, what the Government needs to do, is to sit down and come up with a genuinely clearly laid out strategy and policy. We know this is going to take 10 or 15 years to fix. We know that we're going to have to share the pain."
Michael Howard remains defiant.
Howard, who is now a member of the House of Lords, says: "Privatisation, certainly in the early years, was a great success.
“It led to a very substantial increase in investment in the water industry and a substantial improvement in standards."
But even he concedes: "The original legislation did provide for the regulatory regime to be reviewed from time to time. And I am not sure whether that was ever done.
"Regulators subsequently slightly took their eye off the ball, allowed the water companies to pile up a lot of debt, and perhaps were not as rigorous as they should have been in maintaining high standards."
A spokesman for Ofwat said: "We are clear that companies need to improve their performance for customers and the environment. Recently, we secured commitments from companies to take urgent action to reduce sewage discharges, brought in new powers on dividends and unearned or risky pay-outs, and have set ambitious target to cut leaks.
"We are pushing the agenda to get companies to step up and where they fall short, we act – over the last five years, we have imposed penalties and payments of over £250m. We currently have our biggest ever investigation underway with live investigations into six companies."
