The water industry is in crisis. Can it be fixed?

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Simon Jack asks what reform of the troubled sector could mean for customers and their bills.

Our loos flush and water comes out of our taps. In that sense, the water industry in England and Wales works. In just about every other way, it’s a mess.

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. 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.

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 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.

Regardless, lenders are now demanding higher rates from other water companies, too, as the whole sector appears a riskier bet. The regulator decided, with nudges from government, that cash-strapped customers needed bills to be kept as low as possible. In fact, bills rose less quickly than inflation – so in real terms were getting cheaper.Water industry expert John Earwaker, a director at the consultancy First Economics, has suggested that the rapid fall in financing costs could and should have made room for more investment while still keeping bill rises modest.

In more recent history, population density in cities has gathered pace. In 1990, when water companies were being privatised, 45 million people lived in urban areas. Today that number is 58 million – and increase of nearly 30%. Then, Mr Black told the BBC: “It is clear that companies need to change and that has to start with addressing issues of culture and leadership. Too often we hear that weather, third parties or external factors are blamed for shortcomings.”

 

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