A bit of history to start: England and Wales’s water companies were privatised in 1989. Scottish and Northern Ireland water remained in public ownership. Welsh Water followed a convoluted path and is now a not-for-profit company. Proceeds from privatisation were £7.6bn, but the Treasury wrote off £5bn of debt and provided £1.5bn as a ‘green dowry’ – so only £1.1bn was raised.
It’s interesting to follow the flow of money through a business like Thames Water (Oct 22 numbers):
Money in = bill income £2.1bn + additional borrowing £0.3bn = £2.4bn.
Money out = investment £1.3bn + operations £0.9bn + interest & dividends £0.2bn = £2.4bn
Thames has borrowings of £14.7bn, which means that its financing costs are around 1%.
Rising interest rates could explain why it is struggling to repay £190m that is due in April next year. An estimate of the value of all of Thames Water’s assets was £16.6bn in Oct 22 (Regulatory Capital Value RCV).
To prevent sewer discharge into rivers and leakage, a huge amount of investment is needed. Londoners are already paying for some of this through a £18 surcharge on their bills for the Thames Tideway Project. It might be necessary to double investment, if you plug this into the above numbers then it’s either increasing bills from about £400 to £650 per house, or more debt, which would still need to be paid for by us.
What cost for renationalisation?
The government could be liable for a sum close to the RCV value – roughly £80bn for the whole industry – just less than half of what the NHS costs to run each year – not top of the list for a new government to spend money on. It could be less, but the shareholders and owners are a long list of people that we would prefer saw the UK as good for investment.
The second scenario is that the business collapses and the government steps in like it did with the banks in 2008 or Bulb in 2021. This may explain why Thames has been successful in getting additional funding from its investors – ‘give us £500m or lose £15bn’.
It’s easy to blame privatisation, but underinvestment and poor standards were given as reasons for the move to the private sector, they were issues in the 1970s.
This will take a decade and we will all pay for this regardless of the route chosen.
