The future for water companies

Water companies have come under huge amounts of scrutiny recently because of the amount of sewage that is being pumped into our rivers and seas. The latest figures suggest 3.6 million hours of sewage discharges last year even though this is only meant to happen in exceptional circumstances.

These issues have triggered a debate about the role of  water companies. These companies are private monopolies and since privatisation over £70 billion has been paid in dividends to shareholders most of whom are foreign private investment companies or foreign pensions funds. Water companies have also racked up huge debts amounting to over £50 billion - about £2000 per household.

The question is what should be done going forward? Here are some of the main options that you see discussed with some pluses and minuses.

Carry on with the current model. This would mean keeping the privatised water industry but with greatly increased charges to customers in order to pay for the required infrastructure upgrades. This is what the industry is currently lobbying for. Opinion polls suggest that most people don’t want to pay higher prices for a monopoly service that hasn't delivered.

Full public ownership by buying out shareholders. The main logic here is that there isn’t any competition anyway and it would be better if all extra profits went into upgrading the infrastructure. This option would probably have a lot of popular support. However, the cost of buying out the shareholders at current market valuation and paying off the water companies’ debts is something most governments wouldn’t want to contemplate given the pressure on public finances.

Force water companies to honour their legal commitments or rue the consequences. The end logic here is that you would in effect prevent the payment of dividends if companies were in breach of their obligations. The problem with this option is that water companies wouldn’t be able to attract any additional financial investment. For example Thames Water has £18m of debt and urgently needs more investment as it can’t even meet its own interest payments. The argument is that if the government allows Thames Water to go bust and default on all its loans it would inevitably dent confidence in investing in UK PLC.

Acquire shares in water companies as part of an agreed process. This option would  require the companies to transfer a significant element of share ownership as part of any deal around investment, pricing and meeting legal commitments. It would combine an element of public ownership with private investment. The reality is that this would be difficult to get agreed.

If this all sounds like we are being held to ransom by the water industry investors this is pretty much the case. Privatising a natural monopoly that sells a product that the customer has to use was a pretty stupid decision and getting out of the mess won’t be easy.