The privatisation of England's water industry in 1989 was justified on grounds that are now difficult to defend. Private capital, the argument ran, would invest in infrastructure that public finances could not support. Competition and regulation would keep prices down and quality up.
Thirty-five years later, the sewage discharge scandal, the accumulation of debt, the dividend extraction, and the infrastructure deficits make it harder than ever to sustain that argument.
The Financial Engineering
Water companies are natural monopolies. Their customers cannot switch provider. Their revenues are guaranteed. This makes them, in theory, reliable income streams for investors.
In practice, several companies have been used as vehicles for financial engineering — borrowed against to fund acquisitions and pay dividends, leaving the operating business with debt levels that Ofwat acknowledged were unsustainable.
The Environmental Failure
The scale of sewage discharges into England's rivers and coastal waters is not primarily a consequence of extreme weather, as the industry has tried to argue. It reflects decades of underinvestment in combined sewer capacity.
The Environment Agency's enforcement record — hundreds of confirmed violations resulting in a small number of prosecutions — has provided inadequate deterrence.
The Reform Question
Renationalisation, in its simplest form, would require public borrowing to buy assets that have been deliberately leveraged to make them expensive. A more surgical intervention — enhanced regulation, mandatory debt reduction, and criminal liability for executives — may be more effective.
