The FT has reported this morning that:
UK regulator Ofwat has warned about the financial health of four water suppliers in England: Thames Water, Southern Water, South East Water and SES Water.
They added:
The regulator said on Thursday that more debt and equity would be needed given lower credit ratings, the potential for fines and the scale of investment required. It also criticised the complexity of water companies' financial structures, and their lack of transparency on reporting.
I would agree with all that, but as usual, a spineless regulator has utterly missed the key issue facing the industry with which it is supposed to be familiar.
The requirement facing the water companies is to deliver us with clean water without simultaneously polluting the rivers and seashores of this country. It's a task that was beginning to happen, just to prove it was possible. And then the Tories relaxed regulation, ignored the needs of a growing population, and turned a blind eye to blatant profiteering. The result was the mess we are now in.
In it I did three things.
First, I noted that the House of Lords, using government-published data and reports, estimated the cost of achieving the goal of clean water without pollution was £260bn of investment.
Second, I assumed we needed that in ten years at most, not the 27 the government is allowing.
And third, I showed as a result that there was no way on earth the water companies could achieve this, for three reasons:
- They could not afford the cost of the investment in terms of interest or returns on capital and keep water prices affordable.
- No one would lend the funds for this investment to them as a result.
- They would be bust long before they could deliver as a consequence.
The decision every business has to make when preparing its accounts is whether or not it is a going concern. To put it another way, it has to decide if it can survive. Unfortunately, accountants have decided, with their usual lack of wisdom, that the test for survival is over a twelve-month horizon. On that basis the water companies and the regulators can pretend that all is well in the water sector when in reality the whole structure of the industry as it now stands is totally bankrupt.
If only we had people who could do three things when undertaking regulation we would be a lot better off. Those three things are to:
- Ask awkward questions.
- Research the issues appropriately.
- Come to difficult conclusions.
But it seems the comfortable life is more important to regulators, and so they live within the land of make-belief that accountants have created for them. And so the disaster in the water industry will continue.
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All regulators “go with the political flow” (pun unintended) – given vile-tory1 & vile-tory2 show no interest in meaningful action regarding water (fresh or sewage) then the regulator sits on its hands (& in any case people within the regulator come from the water companies… conflict of interest anybody?).
When vile-tory2 wins, they will inherit the vile-tory1 mess and will do exactly…………………………..nothing.
Why would they? The name of the game is power & holding it, not clean rivers.
& note the mess that vile-tory2 is making in Wales – the destruction of the Wye is in no small part due to Wales-Vile-Tory2 utterly failing to regulate pollution from chicken farms, because they are nutless, gutless, brainless and corrupt to the very core.
Hi everyone
I wonder if I can ask you to reflect before using phrases like ‘vile-tory’, ‘liebore’ etc to describe the conservative government, labour party, labour opposition etc etc. on this site
The reason I’m asking is that strangers to this site will not comprehend some of the terms (eg tory2 = Labour opposition and policy makers) and the implied insults of these names (which are deserved) make the site look appear many other less worthy sites which also use similar hard to understand phraseology when discussing matters such as flat earths, moon landings and aircraft chem trails (I don’t know either).
Using clearly articulated names for those who are acting selfishly (or worse) rather than using insulting tags is one way we can reflect the intellectual curiosity of Richard’s work and hopefully not put off others from engaging with it.
I do get the passion and the anger, I really do. I despair of where the country is heading. I just think that it should be clear about whom we are talking about, both to those outside as well as we who attend the site. And yes, be angry as before, but articulate too!
Alex
I have somne sympathy with this
I think the time has come to be clear rather than speak in code, which I would not use
Can we raise the game?
I will remind those using code in future to not do so
I really value Mike Parr’s expertise….. but agree that plain speaking would add even more value.
I’d agree with this. As soon as someone starts using playground taunt versions of a political figure’s name, I dismiss their argument, I can’t get past the juvenilia. It’s very common in Australia, where I lived for 13 years and it makes it really difficult to take them remotely seriously. I know I can ask and expect more from a serious commentator like Richard. It’s fun, yes, but it’s not satisfying
You missed a golden opportunity for a “busted flush” pun 😉
Mike could well now use this in reference to Starmer and his refusal to commit to renationalisation! 😉
I did briefly know an Offwat head and arranged a seminar etc . I think he did cap prices in the early days which affected share prices – but not sure where that fits into the whole sorry history.
We are now in a position politically where your entirely plausible report looks unrealistically revolutionary .
But surely govt/offwat has to set a target timetable for clean water and if the companies cant do it they fall back into public hands.
Your conclusion matches mine
Clean water in a decade at fair prices…. or hand over the keys of your business to the government.
Asking “what can companies do and still keep shareholders happy is the wrong way round.
Agreed
If we were to set the ten year target then the companies would cease to be a going concern and hence worthless, at which point Government has to step in and take them over for nothing…………
10 years is a long time.
Weownit has the idea of taking shares into public ownership rather than fining companies. Fines just get passed on.
https://weownit.org.uk/act-now/take-shares-not-fines
Is that possible?
It is possible…
The law would need changing but it is possible
10 years is a long time…. but the regulators have the power to determine price AND service quality. If they do this now it might become apparent that they cannot meet the requirements quite soon and we might end up as owners very quickly before fines mount up.
The point is to get renationalisation without compensation, compulsion or major law change.
Agreed
https://weownit.org.uk/act-now/take-shares-not-fines
Weownit had the idea of taking shares, not fining companies. Would it work?
Yes, if the law was changed
You are missing the point of privatised water companies, their job is not to provide a decent, environmentally sound water and sewerage service to it’s customers, but to provide a revenue stream to the City institutions, banks accountants lawyers and others. Water bills are a tax on all, especially the poor to reward the rich and privileged in the city.
When it all eventually falls apart, the water industry will have to nationalised, put back into a sound state then sold off again to repeat the process, possibly under a Kier Starmer Government, the banks big 4 etc again taking huge fees in the process.
Agreed
YOU are missing the point that water is a natural monopoly that should never have been privatised in the first place.
Doesn’t mean that because it has been privatised it can’t be renationalised again, does it? Do you have shares in it, Martin Bray?
Anyway, you are wrong. Their job is to provide clean potable water and to have a decent sewage system. It says so in their terms and conditions.
If only…..
Their objective is to trouser as much cash as possible within the letter of the (feeble)regulations.
There in lies the problem with all privatisations – particularly of natural monopolies.
https://www.nwl.co.uk/services/water/water-quality/
Their mission is clean clear water that tastes good.
https://www.nwl.co.uk/globalassets/customer-pdfs/gss/nps0104-our-promise-codes-of-practice-amends-nw—lg—v1.pdf
Code of practice from Northumbria Water. They appear to be breaking every code particularly to do with sewage.
For OFWAT to say that is an admission of failure. We are not going to get such honesty as there maybe a revolving door for OFWAT’s seniors into the water ‘providers’ looking to make money by becoming poachers.
I think the question is along the lines of ‘Is the Pope a Catholic?’ because no-one I know would disagree with that verdict. It is obvious they have failed. It is also obvious – looking at the amount of bog roll and prophylactics stuck in the bushes along side the River Derwent where I am – what is happening too.
What is shocking is that there seems no political will to solve this problem and let the water companies charge us for the diversion of their profits into executive pay, investor returns etc.
Nationalisation solves many problems, if it is done right.
☑️ It doesn’t bail out the water companies, only for them to be given a chance to re-acquire the companies on the cheap, later.
☑️ Nationalised water is not underfunded, the usual trick designed to make public companies “fail”.
☑️ Company officials get fairer salaries.
☑️ Customers come before shareholders.
Ed Conway, Sky News has an interesting piece on the history of the water system; based on Halliday’s excellent book ‘The Stink’ (1999). It focuses on the 1856 debate between Bazelgette and Chadwick on the form of a new system, given the lack of clean water in British cities, the stench from the Thames and the dangerous outbreaks of cholera in the early-mid 19th century. The problem centred on the choice between rainwater being evacuated through the sewage system (Bazelgette’s preference), or separately. Bazelgette won; and we are now paying for the legacy he left.
The real problem is that we are still dependent on an 1856 engineering solution, and the Victorian network. Think of it this way. We have a National Debt of £2.5Trn, and over £1.5Trn was raised since the Conservatives came to power in 2010. Thirteen years; $1.5Trn blown like confetti, and nothing to show for it but a wrecked, over-priced Victorian water/sewage system on its last legs, an antiquated Victorian railway system not fit for purpose, and the oldest, clapped-out, energy gorging housing stock in Europe. Just what did the Conservatives blow £1.5Trn on? Cui bono?
The question is not what they blew it on.
It’s why they didn’t spend enough to create an economy big enough to pay the right amount of tax to avoid the deficits they deliberately engineered to justify their inaction via austerity.
Yes, that is absolutely the right perspective; but it is breathtaking just how disastrous the financial management of Britain has been and the scandalous profligacy of the Conservatives. I just wanted to underscore that, because the Conservative claim that has quite absurdly kept them in power so often over the last forty years is that they are the Party of ‘financial competence’; quite preposterously absurd, but it has won most elections.
I feel I am entitled to point it out!
There is nothing to argue with in your assertions.
We were told that there would be ‘more investment’ – I remember the adverts, the share issue – all of it. And what have we got?
Basically worse than what we had in many cases. Our rivers and coast line are now just an open sewer.
And this is a richer society than that which conceived the system in the first place. It signals a lot of bad things.
This issue is nothing but one of failure brought about by mismanagement as a result of short term greed. The only thing it is a fine example of why modern capitalism does not work. All the key factors are there that say so.
The politicians who enabled this need to be made accountable.
David Byrne states:
Lack of timely and radical action against the water companies will result in the UK becoming ‘the sick man of Europe’.
Do we wait until the country is disease-ridden with hospital beds full and people dying on their feet?
Does the government (and the unequal 1%) care? The answer is a resounding no.
Taking action now is imperative because failure to act will be catastrophic for the economy and the nation’s health.
And this action must be nationalisation without compensation.
I can live with compensation.
But with proper accounting, these companies are worthless.
How do you “renationalise” OFWAT and other regulatory bodies that have failed miserably and deliberately to do their job that is the question! Replacing FPTP may appear to be an answer but is only part solution. Surely the central issue is a moral one of how does a society deal with greed. If human beings are indelibly prone to greed then there is a constant need to exercise “reverse dominance” to contain this greed. I would argue that we should be looking at structures or mechanisms that contain greed both in free market enterprises and governing systems that does this is and it is now a high priority particularly in the UK. It is no good tinkering round the edges. Notably none of the UK’s political parties are talking about this there is simply the widespread assumption tinkering will be alright on the day if they gain office!
Clearly for starters a “reverse dominance” governing system is MMT because it argues for maximising the use of human resources for the well-being of all. This comes over in one of Bill Mitchell’s pieces, verbose though it might be. The graph relating the rise and fall of the government budget to the unemployment rate is particular telling. As we know the willingness to tax the rich and minimise their government subsidies is the other vital “reverse dominance” component because it acts both to make resources available to government, enables the reduction of taxes on those who can least afford them, and helps contain inflation.
https://billmitchell.org/blog/?p=2326
Why renationalise the regulatory bodies? They should work in the nation’s favour, surely, although I know they don’t.
Change those at the top to people who will do the job in our favour rather than shareholder’s favours.
Or, as weownit says, penalise the water companies by taking back shares instead of fining them. Fines get passed onto the customers. Taking back shares can’t, can it?
My father worked for the nationalised electricity industry and was contemptuous of those he saw working for privatisation because of their greed. He quit rather than work for the privatised industry.
“But it seems the comfortable life is more important”
This seems to summarise most people’s attitude to difficult political questions such as climate change and British water companies.
Same old same from English so-called regulators all I bet Tory supporters
And collecting big share benefits
So have no interest in improving system that WILL AFFECT THEIR SHARE BONUS
SCANDALS ARE RIFE IN ENGLAND
I’ve worked in the sector for 35 years and it’s very hard to simplify the issue. This is a sector with complicated history and a natural monopoly which makes regulation complicated. Please can I suggest my article might be helpful – it discusses possible future models and the current challenges.
https://www.themintmagazine.com/which-way-will-water-flow/
Well, I’ve read it, but it doesn’t say anything in there that we don’t already know, unlike Richard’s work on the economics of water companies.
Can you explain what the point of the article is?
Thanks for the snarky comment! I have read Richard’s very interesting report but I’m not sure that the report notes the natural monopoly economics of the sector as well as the way the sector will change with innovation – some of it disruptive – as well as different ways of working such as nature based solutions that are less capital intensive. Also input is needed from sector funding and project management people who could explain what finance is needed to address all the key issues to a specific degree rather than just saying 100% solution. I work in this sector across the different discplines so I don’t have the space here to go over the nuances of the sector and where it’s going.
Wasn’t meant to be snarky at all.
Can you explain whether you think water and sewage should be nationalised, as water is a natural monopoly?
We don’t have a choice of where we get our water from; it depends on where we live.
Can you explain why shareholders have received £2 billion a year since you have been working for the water companies, and have also managed to build up a debt of over £60 billion which the public have to pay for?
Can you explain why Northumbria Water should be owned by a Hong Kong businessman, and not the British people?
Lots more questions where they came from.