Nearly Right

When water companies drown in their own debt

Why the government's £100bn nationalisation claim doesn't hold water

Environment Secretary Steve Reed's parliamentary performance last Monday was designed to kill debate with a single devastating number. Nationalising England's water companies would cost £100 billion, he declared—roughly the entire education budget. "Those are not figures from the water companies," Reed assured Labour's Clive Lewis, "they are provided by officials in my Department."

The arithmetic was politically perfect and economically absurd. Even as Reed spoke, Thames Water—valued at £21 billion under his calculations—was burning through £100 million monthly to avoid collapse. Private equity firm KKR had just abandoned a £4 billion rescue bid that valued the failing utility at less than a fifth of government estimates.

Reed's figure represents more than miscalculation. It exposes systematic deception about what nationalising bankrupt companies actually costs when shareholders have extracted far more than they invested and assets are worth far less than regulators pretend.

The regulatory mirage

Reed's £100 billion derives from Ofwat's Regulatory Capital Value calculations, which treat water companies as worth £106 billion. Yet RCV exists solely for price-setting, not compensation law. Professor Ewan McGaughey of King's College London calls using it for nationalisation costs "absurd"—like valuing a bankrupt company based on what its advertising claimed.

Market reality tells a different story. United Utilities trades at £7.2 billion despite its £13.8 billion RCV. Thames Water's failed £4 billion private equity bid contrasts with its £19.6 billion regulatory fiction. These aren't rounding errors but systematic fantasy that inflates public costs to protect private wealth.

UK compensation law focuses on genuine asset values, not regulatory arithmetic. When companies face insolvency, as Thames Water demonstrably does, the law protects essential services whilst imposing losses on investors who extracted profits during mismanagement. The £100 billion estimate ignores this legal framework entirely.

The democratic experiment that worked

Scotland proves water privatisation was always politically toxic when subjected to genuine democratic scrutiny. When Westminster proposed Scottish water privatisation in 1994, Strathclyde Regional Authority organised a referendum. The result: 97.2% rejection on a 71.5% turnout. The opposition was so overwhelming that the Conservative government abandoned the policy entirely.

Three decades later, this democratic revolt appears prophetic. Scottish Water invested 35% more per household than English companies between 2002–2018. Result: 87% of Scottish water bodies achieve good ecological status compared to just 14% in England. Executive pay tells the same story—Scottish Water's chief executive earns £265,000 whilst English counterparts average £1.7 million for presiding over systematic failure.

The contrast extends to public trust. Scottish Water enjoys broad public confidence whilst English companies face unprecedented anger over daily sewage discharges exceeding 1,000 incidents. Scottish bills remain lower and rise more slowly. English consumers face proposed increases exceeding 50% to fund infrastructure that private companies should have maintained.

When cities fought back and won

International remunicipalisation tells the same story: public ownership works better and costs less. Paris terminated contracts with Suez and Veolia in 2010 after audits revealed systematic overcharging of 25-30%. The new public entity Eau de Paris immediately cut tariffs by 8% whilst expanding solidarity programmes for 44,000 poor households.

Buenos Aires follows an identical pattern. After Suez imposed 88% bill increases whilst failing investment targets, the city terminated the concession in 2006. The replacement public company AySA expanded service to 700,000 additional users whilst improving quality. Private operators had prioritised shareholder extraction over infrastructure - precisely the dynamic destroying English water companies.

These cases demolish claims that private management improves efficiency. Remunicipalisation consistently delivers lower costs, better service, and increased investment. Compensation negotiations typically result in significant investor write-downs, particularly when contracts end due to performance failures rather than political whim.

The great extraction machine

English water privatisation created a wealth extraction mechanism disguised as efficiency improvement. The numbers expose the deception: £85 billion paid to shareholders since 1989, financed by £60 billion in additional debt. Meanwhile, infrastructure investment declined 15% as executives awarded themselves ever-larger compensation packages for delivering environmental catastrophe.

Thames Water exemplifies this model perfectly. Shareholders extracted £10.36 billion whilst bondholders received £13.68 billion. The combined total equals the £23 billion now required for essential repairs and environmental cleanup. The arithmetic is damning: investors have already received full value whilst leaving taxpayers to fund the actual infrastructure.

This was always unsustainable. Companies borrowed against guaranteed consumer payments to maximise immediate shareholder returns, deferring essential investment indefinitely. The current crisis represents this strategy reaching its logical conclusion as environmental regulation and infrastructure decay force recognition of accumulated costs.

The politics of impossible numbers

The £100 billion estimate serves clear political purposes beyond simple miscalculation. It protects institutional investors holding water company debt in pension funds. It shields officials who championed privatisation from admitting systematic failure. Most crucially, it maintains the illusion that privatisation succeeded by making reversal appear financially impossible.

The numbers' provenance confirms this political dimension. The Social Market Foundation's 2018 research producing nearly identical figures was commissioned by Anglian Water, Severn Trent, South West Water and United Utilities. Industry-funded research inevitably inflates costs by assuming continued profitability for failing business models.

Tax expert Richard Murphy calculates the real arithmetic. Even generous £60 billion compensation would cost £2.4 billion annually in debt service, compared to £3.4 billion currently extracted through dividends and interest. The financial logic favours public ownership even under compensation assumptions that ignore companies' distressed circumstances.

The inevitable reckoning

The government already possesses extensive powers for managing failing water companies without paying inflated compensation. Special Administration Regime legislation enables ministers to control insolvent utilities whilst protecting services and imposing losses on shareholders who profited from mismanagement. Parliament designed this framework precisely because it anticipated water company failures.

Historical precedent supports realistic compensation. British Railways was nationalised in 1948 without cash payments - shareholders received government bonds in exchange for equity. The transaction protected public services whilst fairly compensating investors without inflating public costs through fantasy valuations.

Thames Water's trajectory suggests this framework will soon face testing. The company burns £100 million monthly whilst shareholders refuse fresh equity and creditors demand increasingly punitive terms. When collapse arrives - likely during parliamentary recess to minimise democratic scrutiny - the precedent will trigger systematic revaluation across the sector.

Clive Lewis plans to challenge Reed's figures when Parliament returns in September. His intervention represents more than technical correction - it exposes systematic dishonesty designed to prevent democratic choice about essential infrastructure. The £100 billion estimate represents privatisation's final deception: claiming vast public cost for reversing a policy that imposed vast public costs whilst delivering private benefits.

Scotland's example demonstrates that water privatisation was never economically necessary, whilst international precedents show public ownership delivers superior performance at lower cost. When the accounting clears, nationalisation will prove far cheaper than continuing a failed experiment that socialised risk whilst privatising reward. The only question is how long political mythology will defer inevitable economic reality.

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