Is renationalising England’s water industry the fix we need?

With the state of the UK’s water industry gaining more media and political attention than ever before, Isaac Murdy and Helen Rowland of law firm Shakespeare Martineau explore the case for renationalising the industry. The pair look at what renationalisation means and explore the potential pitfalls of a return to the “good old days”.

For years, water companies were a quiet, ever-present part of public life. They kept our water flowing, sent us our bills and fixed the odd burst water main when required. Now, the industry is facing considerable media attention as flooding damages homes and businesses, the public becomes more conscious of climate change and our impact on the environment, and politicians face the uncomfortable optics of water company shareholders receiving considerable dividends while public duties to protect the environment and livelihoods are not being met. However, any temptation to return to the “good old days” of nationalised water infrastructure should be given serious thought regarding practicalities and potential repercussions before steps are taken.

What are the challenges to the industry?

Recent reports from the European Environment Agency have shown that the UK has the lowest quality of water in Europe. This, combined with above inflation dividend pay-outs to shareholders, debts of over £57 billion between 1991 and 2019, and a portfolio of ageing infrastructure being asked to cope with unprecedented environmental challenges, has led campaigners to argue that something has got to give.

What does renationalisation mean?

Renationalising the water industry would involve the state (or a state owned company) taking the place of existing shareholders. A government owned entity would take over ownership of the infrastructure and/or the corporate entities managing the industry by way of an Act of Parliament. The employees would likely become either partial or wholly public sector workers, and the funds received from water bills would go to the state (or those state owned entities) rather than the current private companies. Funding needed to improve infrastructure may then come from the Treasury or from income collected from the public.

There are two main concerns about this – firstly, whether shareholders would be compensated upon renationalisation, and how that compensation would be calculated; and secondly, whether the cost and disruption of renationalisation would result in more efficient water companies, paying dividends to the exchequer rather than to shareholders.

Compensation? What compensation?

Campaigners on both sides of the argument have put forward the case for water companies to be valued based on net assets (i.e. assets less liabilities) or Market Value (i.e. what the company would sell for to a commercial buyer). These figures differ hugely and illustrate the potential for a fierce legal contest.

Some campaigners are even going so far as to suggest that England’s water industry can in fact be renationalised without compensating those who have financial stakes in the businesses. They often cite examples such as Northern Rock (or more recently, Silicon Valley Bank UK), where companies have been nationalised and shareholders received minimal (or no) compensation in return for their shares. However, these cases are not comparable. When Northern Rock collapsed in the 2008 global financial crisis, the company was no longer a viable going concern. Its shares did not hold any value and therefore the shareholders received what was considered a fair market value for an insolvent business at the time. Introducing a system where the government has the ability to seize functioning private companies without fair compensation is a very different matter. Aside from being a very dangerous precedent to set, it may be incompatible with the UK’s obligations to other countries under bilateral investment treaties, and to private citizens (under human rights legislation).

What needs to change?

Ofwat has received new powers under the Environment Act 2021 which has allowed it to amend water companies’ licence conditions without their consent. These amendments are directed at the recent critiques and will require companies to take account of their environmental performance, customer delivery, and credit rating when deciding whether to pay dividends. If implemented and policed sufficiently, these measures could help to focus minds on upgrading aging infrastructure (much of which dates back to the Victorian era) to minimise flood, drought, and pollution, in order to enable shareholder rewards.

Ofwat’s new powers do not sufficiently address the problems facing the industry however. The water industry is being asked to do more with fewer resources, in a new era where cheap money is not available. Existing infrastructure is not able to cope with current demands during extreme weather events (such as floods or drought), and water companies are being criticised for preventing desperately needed new developments where they would add to existing nutrient burdens in the surrounding water environment (i.e. sewage and water runoff would overload the local sewerage network).

It is clear that the British water infrastructure is in need of a significant upgrade to ensure that it can effectively serve its purpose and the needs of a growing population. Although additional investment will lead to fewer overflows and fewer issues of contamination, these improvements will not be achieved overnight, regardless of whether solutions are instigated by the state or by private companies

Innovation

Private companies, however, have far more freedom to experiment with out of the box solutions. For example, to reduce the number of trees that grow on land needed for run-off, one water company has introduced a grazing herd of sheep and a shepherdess to stabilise plant growth.

Some would argue that the money which would be spent on renationalisation could be put to better use. For example, if the government is minded to raise funds (for instance, by selling low interest green bonds), that investment could be made available for a small mark-up to water companies undertaking the large infrastructure projects needed to cope with a rising population and climate change. This has the advantage of leveraging the government’s ability to borrow at low interest rates, against the water companies need to fund their investments. This is a conceptual inversion of the Public Private Partnerships, and could place the government as a preferred creditor, ahead of shareholders.

It would be important for this funding to be ringfenced and only available to improve, repair or build new infrastructure. It would also be necessary to balance these funds against the subsidy control provisions in the upcoming UK Procurement Bill, but this could be seen as a potential example of the elusive Brexit dividend. Adding in incentives such as providing access to lower interest rate loans could help break the damaging cycle of under investment that the industry is experiencing.

Ultimately, the issues facing the water industry have not been caused by a single problem, and so there is no single, simple solution. However it is resolved, the situation will take time, and will certainly require considerable investment before significant results are seen. While some may see renationalisation as a panacea, improvements to the current system may be more effective than implementing a whole system change, only to discover that the grass is not always greener on the other side.