On 28 June, Sky News revealed that government ministers and Ofwat, the water industry’s government regulator, have started to hold discussions about the possibility of placing Thames Water into a special administration regime that would effectively take the company into temporary public ownership due to its imminent collapse. This news, following years of raw sewage dumping and debt accumulation, reveals the sordid underbelly of looting and plundering across England’s water industry and is the result of over three decades of privatisation cutting corners and rerouting funds to shareholder dividends.
Thames Water – at the brink
Thames Water, Britain’s largest water company that serves 15 million people over 13,000 square kilometres spanning Gloucestershire in the west to Kent and Essex in the east, now faces a £10bn hole in its finances. The company has also hit five-year highs in leakage rates. The scale is so massive that the government has ‘no true grasp on the costs’ involved in preventing a collapse of the company. Estimates of £10bn cover some of the infrastructural upgrades required to bring Thames Water up to regulatory standards but do not touch the interest payments required on its £14bn pile of debt.
Thames Water is currently the most indebted water company in US credit rating agency Standard & Poor’s global portfolio. According to Ofwat’s ‘gearing’ measure which assesses the amount of debt a water company has compared to its size, Thames Water is ranked highest amongst water companies at 77.4%. Ofwat’s recommended ‘gearing’ measure is 60%. More than half the company’s debt is inflation-linked as rapidly rising interest rates push up the cost of borrowing, indicating rising costs into the future as well.
1989 water utility privatisation
The current state of Thames Water can be traced back to then Prime Minister Margaret Thatcher’s Water Act of 1989. Prior to 1989, the water industry was publicly owned and operated by ten regional Water Authorities. The Act wrote off £5bn of debt accumulated by these Water Authorities and turned them into private companies whose shares were then sold off. Despite significant opposition to water privatisation, government campaigns to sell water company shares to individuals were very successful. Over 2.5 million people applied for shares at the time. This comes as no surprise: the average gain to investors on the first day of trading was 40%. The government sold shares well below their value to encourage small shareholder ownership, in accordance with Thatcher’s deceptive vision for a ‘shareholding democracy’. As revealed by former Treasurey official Jonathan Portes, who worked on water privatisation, these small shareholders predictably sold their shares to primarily private equity companies for a quick profit, leading to the current model of ownership.
On paper as part of the Act, Ofwat was set up to regulate water companies by setting standards and price limits. In practice, Ofwat has fulfilled its real purpose: it has allowed water companies to pocket billions of pounds in profits and turned a blind eye as companies spew raw waste into England’s waterways. As entities, Ofwat and Britain’s water companies are one and the same, run by the same people pretending to wear different hats to create the illusion of regulation. Amongst the more brazen of these individuals, current joint chief executive of Thames Water Cathryn Ross has refused to apologise for allowing water companies to increase their debt during her time as chief of Ofwat, openly showcasing the alliance between Ofwat and private industry.
Masters of financial manipulation
Thames Water’s present shareholders include: the Canadian pension fund Ontario Municipal Employees Retirement System; the Universities Superannuation Scheme, which invests retirement savings for UK university lecturers; China Investment Corporation and Abu Dhabi’s Infinity Investments. They have so far coughed up £750m, and promised a further £1bn in funding, but discussions about further funding faltered after the board was warned billions more would be needed.
Much of Thames Water’s current debt was taken on under the Australia-based Macquarie consortium. Between 2006 and 2017 when Macquarie was the majority owner, Thames Water increased its debt from £3.4bn to £10.8bn. Macquarie used ‘securitisation’ models – which allow the owners to unlock more financing – to raise the debt-to-equity ratio to levels unanticipated at privatisation in 1989. Its pattern was to borrow against its assets to increase dividend payments to shareholders. Macquarie’s business and finance practices are notorious for being opaque, purposefully impossible to understand and predict from the outside. During the same time period, Macquarie paid itself and other investors £2.7bn in dividends while saddling Thames Water with an extra £2.2bn in loans.
Ministers and economic experts have wrung their hands at this financial scheming, claiming it was impossible to predict this ‘financial wizardry’ when first developing the 1989 Water Act. This purposefully dismisses capitalism’s underlying drive for profit at any cost. Macquarie has enjoyed near uninterrupted profit growth over more than a decade to become a global heavyweight in infrastructure and funds management, commodities trading and investment banking, with no obvious single competitor. In fact, Macquarie consortium purposefully timed its withdrawal from Thames Water, duping its successors: days after Macquarie’s sale to the current consortium was announced in March 2017, the utility was hit with a then-record fine of £20.3m linked to huge leaks of untreated sewage in 2013 and 2014.
Rot across the industry
Thames Water’s issues are emblematic of England’s water industry at large. Aside from Thames Water, four other English water companies – Yorkshire Water, Portsmouth Water, Southern Water and SES Water – are in precarious financial positions. Since the late 1980s, water companies in England and Wales have accumulated an astounding debt pile of £53bn. In the same time period, these companies have paid out £72bn to shareholders, bolstered by borrowing on an exceptional scale.
In real terms, bills have increased by around 40% since privatisation, yet investment by the companies has gone down by 15%. The material results of such brazen financial manipulation are obvious: up to 2.4bn litres of water a day (equivalent to nearly 1,000 Olympic swimming pools) are leaked by English water companies. Every day, raw sewage is discharged into water bodies more than 1,000 times on average, a total of over nine million hours since 2016. Just 14% of English rivers have adequate ecological status.
The Environment Agency (EA) has also announced it is sending specialist investigators into water companies across England to secure evidence in the biggest criminal investigation into illegal sewage dumping since privatisation. According to water company permit rules, sewage discharges are illegal. A failure to meet permit requirements can lead to prosecution or water companies being stripped of their licences to operate. The criminal inquiry is the largest since investigators spent five years examining illegal sewage dumping by Macquarie-owned Southern Water, an investigation that led to a record £90m fine for the company in 2021. Southern Water continues dumping raw sewage on public beaches to this day, £90m but a drop in the bucket of Macquarie’s £4bn annual profit portfolio.
The EA investigation, launched in November 2021, involves visiting some of the 2,200 sewage treatment plants run by Thames Water and other companies to secure evidence as they prepare their case. The investigation was sparked by research by outsider Professor Peter Hammond, a career academic in data, ecology, and hydrology, that suggested the scale of illegal sewage dumping by water companies was 10 times what the EA had believed.
The combination of environmental destruction, financial trickery and drive for profit in the water industry comes as no surprise to the vast majority of the population who were against privatisation in 1989 and now. The working class can now expect annual bills to increase from an average of £450 to £680 plus inflation by the end of the decade. Nearly 35 years later, Thatcher’s privatisation, now admitted as an ‘organised ripoff’ even by its architects, has left behind a carcass of a utility, gutted and mutilated by shareholders to serve capital. Nationalise water!
Soma Kisan
FIGHT RACISM! FIGHT IMPERIALISM! 295 August/September 2023
