Why isn't the business of providing water straightforward

The Thames Water van

Given that everyone must purchase it in order to survive, water should be a straightforward business.

For instance, a quarter of the population receives their water from Thames Water exclusively. Actually, it would be impossible for another water provider to compete. It appears to be a permit to print money, a cash machine, and the simplest way to get rich quick.

It is known as a natural monopoly in economic lingo. In contrast to other privatized utilities like energy or rail, there was never any chance of using the power of competition to raise standards. No other water source is vying for a household's patronage. And debt-free, the privatized businesses were transferred to the private sector.

Numerous other industrialized nations decided against privatizing their water systems. Ireland, one of our nearby neighbors, only started charging households for water in the last ten years.

So something has drastically gone wrong. There are financial and debt floods and leaks, in addition to water and sewage. The water companies appear to have focused more of their time and resources on financial engineering than on developing our waste water systems.

As a result, there is a growing public backlash against the privatized water system's standards as swimmers revolt against abhorrent beach and water quality. It was intended to be the Affluent Society, not the Effluent Society, according to economist John Kenneth Galbraith.

The high level of debt at 80 percent of its value, which is close to regulatory limits and significantly higher than that of other water companies, makes Thames Water stand out. For leaks, sewage pollution, and water treatment, it ranks last in the standards league tables.

We do know that most of the debt is tied to the Retail Prices Index, which is currently rising by over 11%, despite the debt's complicated structure. Although Thames has made a great show of not paying its shareholders any dividends, there are other ways for them to make money.

The company's previous owners, Australian financiers Macquarie, left it £10 billion in debt (up £9 billion), having reaped sizable dividends. All of this was perfectly acceptable within the system, but it was also a result of the extremely low interest rates at the time.

The regulator now has to work harder to hold businesses to high standards because there is no longer any competition. According to evidence from all of the privatized utilities, regulators believed that their main responsibility was to keep costs as low as possible. The financial engineering going on behind the scenes at headquarters attracted less attention and knowledge.

In fact, water companies excelled at circumventing the laws that were in place to maximize their short-term profits. A report was also ordered by the coalition government in 2010 in response to complaints from water companies about how burdensome Ofwat's regulations were.

It was successful in the immediate. The cost of the bills was kept down. Thanks to affordable refinancing at extremely low interest rates, shareholders made huge profits.

Governments offloaded the responsibility to the private sector in order to clear their books of debt. There was significant investment. In hindsight, it wasn't enough.

Before Brexit, the threat of repeated fines from the EU was what finally pushed through the biggest single investment—the Thames super sewer—rather than British politicians, regulators, or industry initiative.

However, even though the water industry enjoys a natural monopoly, it does not control nature or the environment. The public's memory is now permanently scarred by vivid pictures of sewage pollution on beaches and in waterways. Among the areas up for election in the next year, this is particularly politically important. A contentious political issue was never necessary. The moment has arrived.

A "how long is a piece of string?" question applies to the potential costs associated with updating the sewage and water systems. It is unquestionably in the billions, possibly in the tens or even hundreds of billions.

The public, politicians, and regulators all have high expectations today. They may be higher than the shareholders in these companies had anticipated when they first set out to invest. However, current ultra-low interest rates are no longer available.

The temptation for the government to deal with shareholders aggressively could exist. The most recent Environment Act included some tightening of dividend regulations with a connection to environmental performance.

However, this government—or even a potential Labour administration—is depending on international sovereign wealth funds and pension funds to help pay for housing, energy, and net zero infrastructure as well.

The exact same investors, three prime ministers, and four chancellors in a year are responsible for the raised eyebrows following the mini-budget. Some of the tiptoeing may now make sense. The leadership of the Labour Party is also defying union pressure to nationalize the water industry.

The alternative is public ownership, which would force Defra to pay off all debts and result in the Environment Agency fining the company for unacceptably high sewage outflows. One idea is to extend some mercy to the water companies regarding fines, which might not be well received by the general public.

For the time being, we are awaiting the shareholders' decision on whether to commit additional funds. However, a business that ought to be straightforward and spotless requires special cleaning.

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