The water industry is in crisis. Can it be fixed?UK loos flush and water comes out of taps. In that sense, the water industry in England and Wal...

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The water industry is in crisis. Can it be fixed?UK loos flush and water comes out of taps. In that sense, the water industry in England and Wal...
The water industry is in crisis. Can it be fixed?

UK loos flush and water comes out of taps. In that sense, the water industry in England and Wales works. In just about every other way, it’s a mess.
The most visible sign of that mess comes after those loos have flushed. Last year England’s privatised water firms released raw sewage for a total of 3.6m hours, more than double the amount recorded the year before.
Millions of customers, surfers and bathers have joined a chorus that former pop star Feargal Sharkey has been singing for years - that the sector is a “chaotic shambles”.
It’s not just our rivers, lakes and coastlines. Some communities have been told to boil tap water to make it safe, others have seen their water supplies cut off for days or even weeks.
Environment Secretary Steve Reed told the BBC some parts of the country could face a drinking water shortage by the 2030s and plans to build new homes have been jeopardised by water supply problems.
Faith in these companies has never been lower and it’s not hard to see why.
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The independent commission will be led by former Bank of England Deputy Governor Sir Jon Cunliffe and will report back with recommendations next June. Options on the table include the reform or abolition of the main regulator Ofwat.
To critics like Sharkey, the former lead singer of the Undertones who nowadays is vocal about the state of UK's rivers, it’s an admission that the privatisation of essential monopolies has been a failure. Recently, he described this as "possibly the greatest organised ripoff perpetrated on the British people".
So how did we get here, how might it be fixed and what will that mean for customers and their bills?
Drowning in debt
Reflecting on water privatisation in her memoirs, Margaret Thatcher wrote that "the rain may come from the Almighty but he did not send the pipes, plumbing and engineering to go with it".
When her government privatised the water companies in the late 1980s, they were debt free. Today they have a combined £60bn in debt.
There is nothing intrinsically wrong with debt. It can be a cost-efficient way to finance investment in an industry that lenders have been very happy to lend to.
And it's easy to see why they've been so happy to lend to it. Water companies have guaranteed and rising income from customers, who can’t go anywhere else for something they will always need. Regional monopolies of an essential service that provides a guaranteed income have always been considered a safe bet.
The other attraction for shareholders in water companies, like others, is that the cost of the loan repayments can be deducted from earnings to reduce reported profit and therefore their tax bill.
Some shareholders, not all, have pushed this too far and loaded an excessive amount of debt on water companies. That can backfire when the cost of that debt begins to rise – as we have seen over the last two years as interest rates rose to tackle the surge in inflation since 2022.
For example, during the 10 years that Australian investment firm Macquarie was Thames Water’s biggest shareholder from 2007 to 2017, debt rose from £2bn to £11bn, during which time Macquarie and the other investors did not inject any new cash or equity of their own.
Graph showing Thames Water's cumulative debt by year, 2006-23. It rises from approximately £2bn in 2006 to almost £15bn by 2023. Macquarie was the primary shareholder from 2007-17.
In five years out of the 10 that Macquarie was a major shareholder in Thames Water, investors took out more money in dividends than the company made in profit and made up the shortfall by borrowing heavily while letting debt levels soar.
Thames Water's dividend often exceeded profit. For five of the 10 years Macquarie was a major shareholder, from 2007-17, the graphic shows dividends were greater than the profit made.
Thames Water stood on the brink of bankruptcy following fears it would run out of funding by Christmas until it secured a £3bn emergency cash lifeline that will tide it over until October next year.
Macquarie sold its share of the company in 2017. Newer shareholders, including large domestic and foreign pension funds, recently cancelled an injection of £500m. They did so after they learned that Ofwat would not allow bill rises that the newer shareholders insisted were necessary if their investment was to earn a return for their own pensioners and shareholders.
In a statement, a spokesperson for Macquarie said: “We supported Thames Water as it delivered record levels of investment, which enabled the company to reduce leakage and pollution incidents while improving drinking water quality and security of supply. Much more needed to be done to upgrade its legacy infrastructure, but when we sold our final stake in 2017 the company was meeting all conditions set by the regulator and had an investment grade credit rating.”
Thames Water’s debt today stands at over £16bn and the cost of that debt is rising for the UK’s biggest water company, which one in four people in the UK rely on for their supply.
It is the most extreme example but other companies including Southern Water are in a similar debt-laden boat. Since 2021, Southern’s largest shareholder has happened to be Macquarie.
Greedy shareholders and bosses?
As a result of all this, there is a widespread belief among the public that investors and executives have sucked out money in dividends and pay that should have been invested in improving water firms’ infrastructure. The Liberal Democrats capitalised on this perception during this year's general election, gaining dozens of seats after making the state of the reform of the industry one of their key campaign pledges.
According to Ofwat, water companies have paid out £52bn in dividends (£78bn in today’s money) since 1990. Many feel that was money that could have been spent helping to prevent sewage spills rather than ending up in investors pockets.
But over the same time frame water companies have invested £236bn, according to Water UK, which represents the sector.
Last year, it adds, the England and Wales water sector invested £9.2bn, which it says is the highest capital investment ever in a single year.
And it’s important to note that not all water companies are the same.

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