Free from fear or favour
No tracking. No cookies

The Water Industry is Environmentally Insolvent: So Where is Future Investment Going to Come From?

Polluting privatised water companies have been hollowed out by dividend stripping and reckless borrowing. But there is a way out

Protest sign reading from the River Wey, Guildford. Photo: Sam Oaksey/ Alamy

Newsletter offer

Subscribe to our newsletter for exclusive editorial emails from the Byline Times Team.

According to the Rhyme of the Ancient Mariner, there was “Water, water, everywhere, Nor any drop to drink.” And so it now feels in England. English water companies are seemingly incapable of controlling the vast amounts of sewage they pump into rivers and onto beaches each month. They also look to be financially inept.

I have been reviewing the accounts of these companies for the last twenty years. A number of very clear messages fall out from the data.

First of all, supplying water is a potentially very profitable activity. On average 38p in every pound paid to them is operating profit, i.e., money made before finance costs. That is a very high margin.

However, their financial costs are considerable. On average they have been 20 per cent of their income in interest per annum. That is 20p in every pound we have paid them.

Tax makes up about 3p in the pound of sales income. And the rest – or 15p in every pound of sales – has been profitable for the owners.

That’s a handsome rate of return. Many companies might envy it. It could have been used to refinance the industry and make it viable for the long term. That, though, has not happened. Instead, every single penny of profit earned by these companies over the last twenty years has been stripped out of the industry, in aggregate. The shareholders have provided no funds for reinvestment out of profit as a result.

The Sewage Scandal: ‘The Worst We Have Seen in Years’ – Why British Bathing Water is the Dirtiest in Europe

With its budget halved, the Environment Agency has seen a dramatic drop in enforcement actions against utility companies that continue to pollute our waterways

Instead, the industry has relied on borrowed funds to finance its net investment in new equipment. It now has debts of around £54 billion in all, which is a sum vastly bigger than the £13.4 billion the shareholders now have invested in these companies.

What is more, the type of debt that these companies have mainly used to finance their operations has been index-linked bonds. These provide incredibly cheap finance when inflation is low, as it was for a long time. But when both inflation and interest rates rise – as both now have – index-linked bonds become a toxic form of finance. Their costs skyrocket in line with inflation.

The industry made a loss of £1.3 billion before tax in 2022, compared to average profits of £1.5 billion over twenty years. It is almost bound to do so again in 2023. Some companies in the sector look very vulnerable as a result. Thames Water is high on this list, but it is not alone.

Put simply, without any other factors being taken into account, the model of water industry privatisation now looks to be hollowed out by dividend stripping and reckless borrowing. Some companies in it look likely to fail soon.

Environmentally Insolvent

All that being said, then the other factor of significance must be taken into account. That is the fact that this industry is what I call environmentally insolvent. What this means is that the industry’s already dodgy financial situation is wholly dependent for its success on the willingness of the public to accept the massive pollution problem it creates without the industry paying compensation.

We now know that the public is no longer willing to accept that. The industry has offered to spend £10 billion over ten years to put this right. The government has demanded it spend £56 billion over 27 years. But neither plan is remotely adequate. The government-approved plan will only reduce pollution in rivers by two-thirds over a generation.

The House of Lords, using government data, has suggested the true cost of getting rid of pollution, so guaranteeing us a drop of clean water to drink, would be £260 billion.

Put simply, given their current financial positions and cost structures the water industry has no way it can finance this expenditure in the required short time scale. That is why they are hopelessly environmentally insolvent.

Government and Capitalism: A New Economic Narrative for the Left

In the first of a series exploring the post-2008 economic realities, Richard Murphy analyses the failure of the financial system to invest in productive and sustainable development, and what incentives could transform it

That means it is time for a reckoning. The model of privatisation was never suited to an industry that was always a monopoly that required long-term investment when the markets just wanted (and got) a cash cow. So, privatisation has to end. Nationalisation has to follow. And the idea of compensation for shareholders and maybe many of the lenders has to be forgotten about. If they chose to invest in a bankrupt business model that was also environmentally insolvent, then they must bear the cost.

So, nationalisation should cost nothing. But who then provides the money for investment? The Government clearly could. We know such things are possible. QE proved that. But I suggest another option.

There is more than £8 trillion of financial wealth in the UK most utterly unrelated to meeting human needs sustainably. If the Government launched savings funds with the benefits of ISAs and a guaranteed market rate of return and sold them on the basis that saving in this way was the best way to guarantee the investment required to deliver safe water for the young people of this country in the future then I think the money would flood in. Inter-generational solidarity would be built into savings and the interest cost would be much cheaper than the industry pays now.

We all need water. What we also need now is imagination on how to fund it collectively and not for ill-gotten profit.

Written by

This article was filed under

Subscribe to Byline Times

This website is free. We don’t have a paywall, there are no ads, we don’t profile you with intrusive analytics or track you with cookies. Unlike most UK papers, Byline Times is subscriber-funded. Our team is small, we keep overheads low, we pay journalists fairly… and we pay our taxes in the UK.

An easy way to support us is to receive our newsletter emails (and install our app, for iOS or Android); we gain insight into our readership, and you make sure you don’t miss vital news.

Subscribing to our print newspaper (from £3.75/month) is the best possible support for our journalism. We also sell gift vouchers and books.