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The Guardian - UK
The Guardian - UK
Environment
Editorial

The Guardian view on England’s water companies: a badly broken system

Members of the Environment Agency take a water sample after a ruptured pipe leaked sewage in Saltburn-by-the-Sea in February 2022.
Members of the Environment Agency take a water sample after a ruptured pipe leaked sewage in Saltburn-by-the-Sea in February 2022. Photograph: Getty

The revelation should anger all who care about England’s rivers and beaches. Two decades ago, ministers were warned about private equity firms buying up water companies. In a briefing prepared for Britain’s competition regulator prior to the takeover of Southern Water, researchers raised the alarm that private equity-owned water companies would become “impossible” to regulate. Despite the 20-year transparency rule, the Competition and Markets Authority (CMA) has not released the briefing. Its existence was uncovered by this newspaper. Though its full contents remain secret, its implications are clear: ministers were alerted to the devastating impact that this industry could have on England’s water supply, but they chose not to act.

Since then, a tide of effluent has polluted England’s rivers. Following the privatisation of water companies in 1989, owners have enriched themselves while neglecting infrastructure and dumping vast quantities of untreated sewage. As investors have loaded water companies with debt, they have continued to pay dividends to their shareholders, which totalled £1.4bn last year. The public, meanwhile, have shouldered the costs. Water bills have risen. Last week, the industry apologised for these sewage spills and pledged to invest £10bn in infrastructure – to be paid for by increases in customer bills. Ruth Kelly, the former Labour cabinet minister who is head of the industry’s trade body, Water UK, said more should have been done to address the spillages. She was silent on the subject of dividend payments.

The main line of defence for consumers is supposed to be Ofwat. Yet water companies have run rings around the regulator. Its rules are premised on a version of capitalism that no longer exists. When it was founded in 1989, England’s water suppliers were listed on the stock market, allowing anybody to buy shares in this public resource. Today, most of them have been bought up by investment funds that do not face the same disclosure requirements. Opacity has shielded their finances from scrutiny. Since 2015, water companies have been required to demonstrate their “financial resilience”, and Ofwat will now prevent negligent ones from paying out dividends. But the horse has already bolted, and many of the firms responsible for loading these companies with debt have already moved on.

The regulation of England’s water suppliers is grounded in the illusion that it is possible to promote competition in a marketplace of natural monopolies. A narrow focus on competition and prices has led Ofwat to largely ignore other crucial issues such as the environment and the cost to taxpayers, and to overlook the risks posed by financial engineering. In 2007, for example, it credulously took the view that firms’ capital structures (and by implication their dividend payments) “are essentially a matter for companies and the markets”. Meanwhile, the CMA, which has been urged to do more to prevent private equity buyouts, has no remit to investigate these issues. Neither regulator was designed with this industry in mind, and both now find themselves outmanoeuvred by its tricks.

Solving these problems requires change from the top. There are two main options for improving England’s spectacularly broken system: empower regulators to restrict financial engineering and prevent companies that load firms with debt from entering this market, or nationalise the water supply. The government seems unwilling to do either.

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