Is South East Water’s £22m fine a step towards total renationalisation?
The total mess that Thames Water and South East Water find themselves in – which touch on issues of environmental neglect, underinvestment in critical infrastructure, the limits of privatisation and the role of shareholders in utility companies that operate an effective monopoly – could be a harbinger of what’s to come, says Brett Israel
Last week was bad for the water industry, even by its own recent standards.
The news of South East Water’s £22m fine by Ofwat, the industry regulator, for “multiple supply disruptions” was announced the day after South West Water admitted supplying water that was not fit for human consumption following a parasitic outbreak in Devon.
Meanwhile, the Thames Water saga is far from over. Crippled by debts of £20bn, the future of the UK’s biggest water company might ultimately lie in a form of public ownership that sees the taxpayer funding a business that has spent recent years lurching from one crisis to the next.
Britain is among the only countries in the world where the water industry is privately owned, but for how much longer? Following years of scandal, the model is increasingly being questioned by all sides of the political divide.
It is a fact that private owners invest to make a financial return. In most companies and industries, the success or failure of this investment is determined by the forces of supply and demand. The water industry is different because it is not fundamentally about making money. It is about service.
The ability of water company owners to deliver that service has been diminished in recent years by a number of factors, including the high cost of servicing debt, paying dividends to shareholders, fines levied for misbehaviour and ancient infrastructure continuing to crumble. These spiralling costs have led to chronic underinvestment in infrastructure and declining customer service.
The real impact of these failures is not on investors but on consumers. According to Ofwat, South East Water customers in Kent and Sussex suffered from “immense stress and anxiety” after being unable to access water during periods of high demand and extreme weather. In Devon, there were four hospitalisations and more than 140 confirmed cases of cryptosporidium, an intestine-dwelling parasite.
Where are the consumers?
Too often, consumers are not heard in the debate. Through my firm, Marriott Harrison, I represented the Liberal Democrat MP Charlie Maynard last year during court proceedings to restructure the debts of Thames Water. We chose to represent Maynard pro bono – in a case involving some of the world’s biggest legal firms – because we agreed with him that the public interest had been left out of the restructuring plan. Staggeringly, a case document of around 2,000 pages had been submitted to the court with virtually no reference to customers or the environment.
This is one of the largest ever restructurings in London and touches on issues such as environmental neglect, underinvestment in critical infrastructure, the limits of privatisation and the role of shareholders in utility companies that operate an effective monopoly yet provide essential replies. By convincing the court to include Maynard as a party alongside the giant global funds that own Thames Water’s debt, we helped to ensure that the public – who have suffered for years as service declined – could not be ignored.
That was a fleeting victory, and the future of Thames Water is still plagued by uncertainty and the fate of its potential restructuring remains unclear. One possible outcome is the application of a special administration regime for water companies that would see experienced insolvency professionals step in and run the business until a new private buyer can be found and more affordable debt arrangements put in place. Yet finding a buyer is far from guaranteed. To some looking at the complex mess of Thames Water’s debts, the only way to put the business on a sustainable footing is through a full nationalisation.
Thames Water is certainly an outlier, and there are smaller companies in the industry that remain profitable and operationally secure. But given the recent fines for South East and South West Water (and Thames Water itself), the profound difficulties afflicting Thames Water could be a harbinger for what is to come.
Brett Israel is a partner at Marriott Harrison