We all want to stop private companies dumping sewage in our rivers, beaches and lakes, and clean up our water for good. The Government, however, has repeated a claim from water industry lobbyists that it would cost £99 billion to “nationalise” our water sector. It refuses to stop shareholders and bondholders raising bills and taking the money, rather than investing in clean infrastructure as a public company would. This note explains why the £99 billion figure is nonsense. The true and fair value in law to bring water into public ownership is close to zero.

Privatisation Is the Problem

Bills are soaring, sewage is everywhere, as shareholders and banks take billions.

• Water company bills are being hiked by thirty-six per cent over the next five years, allowed by Ofwat.
• Nearly every river in England is polluted, through illegal dumping of untreated sewage.^[1]
• Our bathing water quality is the firth worst in Europe.^[2]
• Over £85.2 billion in real terms has been taken by shareholders since privatisation in 1989.^[3]
• A similar figure, tens of billions, has been taken by bondholders.^[4]  
• Water companies’ total debt stands well over £65 billion.^[5]  
• Thames Water has £20 billion debt, and Wall Street banks are extracting £800 million for a new loan.^[6]  
• Over one trillion litres of water was leaked by last year, and this is nothing new.^[7]
• No major new reservoir has been built since privatisation, but thirty-five reservoirs have been sold.^[8]

This all adds up to a simple equation that explains our predicament:

Privatisation = £ billions to share/bondholders = starved infrastructure = sewage everywhere

Thus, whether the Cunliffe Report or the Treasury says it, the problem is privatisation. England’s privatised water system is extreme. No country in Europe has privatised its water as we have done; ninety per cent of cities worldwide have water in public hands. Cities like Berlin and Paris that did privatise their water have taken it back into public ownership (in 2013 and 2009 respectively).^[9]

Public Ownership Is an Inexpensive Solution

The cost of public ownership and special administration of the water companies is close to zero.  

The Government has so far refused to engage meaningfully with the policy options to bring water back into public ownership. It says that it would cost £99 billion to “nationalise” water companies,^[10] but this is wrong. The true cost of making water companies public is closer to zero.  

Corporate lobbyist assertions: regulatory capital value

The £99 billion figure is updated from the Social Market Foundation in 2018, a body that was paid by Anglian Water, Severn Trent, South West Water and United Utilities to write a report, entitled “The cost of nationalising the water industry in England”. These industry lobbyists asserted that their “best estimate of the costs of obtaining control of the regulated businesses gives a ‘takeover value’ of £90 billion” and this “would entail a five per cent increase in government debt levels.”^[11]  

This is deliberately false. They arrive at this figure using so-called “regulatory capital value” of companies, which is calculated by Ofwat for the purpose of enabling or restricting dividends. It comes from an assumed market value of water companies at privatisation in 1990, plus Ofwat’s calculation of capital investments that have been made each year, multiplied by the Retail Price Index.^[12] It does not include debt. It is set artificially high (which, additionally, enables Ofwat to allow more dividends to be paid to shareholders).  

It is entirely a construct of the regulator, but it must be stressed that the regulator has at no point endorsed the Social Market Foundation’s assertion. It is not based in law.^[13] It bears no relationship to reality or the true and fair value of the companies.  

Market values compared to regulatory capital value

Even market values of water companies are far lower than their “regulatory capital value”. For instance, United Utilities currently has a market capitalisation of £7.2 billion, whereas its “regulatory capital value” in Spring 2024 was £13.8 billion (nearly double). KKR (a notorious US private equity firm that specialises in asset stripping^[14]) bid £4 billion to take over Thames Water, whereas Thames Water’s ‘regulatory capital value’ was £19.6 billion (nearly quintuple).^[15] So, the idea that if the Government nationalised a water company it should pay “regulatory capital value” is absurd. It is lobbyist nonsense, cynically calculated to scare gullible governments off public ownership.

The following sections consider the cost of public ownership of water.

Appropriate value in law

True and fair value in law — the amount that would need to be paid for public ownership — is different from market values. Market values do not reflect losses from market failures, such as the costs of pollution, or the monopoly profits taken by shareholders and banks. The question in law for a court is whether a “fair balance has been struck” in paying compensation when a government puts a company into public ownership.^[16]  

This concept of a “fair balance” enables the Government to take into account returns already paid to shareholders and bondholders, or the damage caused by pollution, and subtract this from market values.  

Under UK law, the Government may remove a licence from a water company either for poor performance, or if it is insolvent. It does this through “special administration” — a process where the government (not banks) chooses the administrator, and where secured creditors (i.e. banks and bondholders) must be paid “appropriate value” not market value for losing their claims.^[17] The appropriate value’ solely has to be paid to secured creditors, not shareholders.  

• Thames Water shareholders have taken over £10.36 billion in dividends, in real terms, since 1989,^[18] and they should not be paid any more. When a company is insolvent, shareholders normally get nothing. This was the case when Railtrack plc collapsed due to the then government refusing to bail it out and transferring its assets to the public body, Network Rail Ltd. If it were treated like any other company, Thames Water would be insolvent but is artificially supported by a hope that it may exploit its monopoly to perpetually raise bills.^[19]  
• Thames Water bondholders have taken around £13.68 billion in interest and returns in real terms since 1989,^[20] which is grossly excessive compensation for their loans. Therefore, the “appropriate value” for bondholders to receive is nothing.
• Shareholders and bondholders, while extracting money, have left the need for £23 billion in repairs to infrastructure.^[21] The crumbling infrastructure has caused widespread pollution and environmental damage, that is not paid for, and, therefore, the “appropriate value” for their claims is zero.

The “appropriate value” is zero, rather than negative solely because there is not yet a law to make shareholders and bondholders pay for harm they leave (a “bail in” provision). That is, it could be possible — but there is not yet a legal ground — to pass a law to make shareholders and bondholders pay for the damage that they leave if a company is insolvent or has its licence stripped. Currently, the only cost to government is to pay a special administrator, if not the Government Legal Service, to enact the government’s plan.

Figure 1, below, illustrates the differences between what is required to be paid in law and the figures advocated by water industry lobbyists, in Thames Water’s case.

[.fig]Figure 1: Disparity between lobbyists’ assertions for public ownership costs and real costs defined by law[.fig]

[.notes]Sources: Ofwat; Gill Plimmer; Lithgow vs UK (1986); Anna Isaac.[.notes]

A water company’s licence can be stripped for poor performance that is “serious”.^[22] This threshold is met if there are one or more breaches of licences or statutory duties that could result in enforcement action. The most salient example is the breach of duty to ensure that all sewage is treated twice before being released into the environment.^[23] Dumping untreated sewage is illegal if this occurs “regularly” rather than taking place in exceptional circumstances.^[24] Every water company in England fulfils this condition and could have its licence stripped once the Secretary of State or Ofwat takes its job seriously and begins to enforce the existing law.  

To summarise the steps of the process which could be used to make water public at zero cost to taxpayers:

Water company bondholders and shareholders would be likely to argue in court that a special administration plan — where they receive zero compensation — is unfair. However, they would have to show that the Government is acting irrationally, which is a very difficult case to make when they have taken more in interest payments and dividends than they had originally paid for their rights, and when their profits have come from the pollution caused through their breaches of statutory duty.

They would have to argue they should profit from pollution, a violation of the “polluter pays” principle. They would have no ground to say there is an error of law, that their legitimate expectations are defeated, or that their human right to property is violated, because they knew the rules and freely accepted the risks to their money inherent in the law being enforced. The markets have already priced in those risks, for instance, by rating Thames Water as junk.^[25]

The cost of finance is much lower for a public sector body than for privatised companies

There are no costs to public ownership under the standard rules for special administration that the UK already has in place, aside from a small sum to pay an administrator.  

This is important because the benefits of public ownership, compared to private ownership, are:

• Money that goes to shareholder dividends can now be put into infrastructure investment.
• Money that goes to bondholder interest can be greatly reduced. For instance, Thames Water’s latest £3 billion loan carries an interest rate of 9.75 per cent per annum, which will cost billpayers and profit Wall Street banks at least £800 million. Public sector bodies borrow at the cheapest rate available, close to the Bank of England base rate (currently 4.25 per cent per annum).

This means that public ownership is also preferable to the “non-profit” (yet private) model of ownership, found in Wales, because public body borrowing costs are always the lowest.  

The Treasury may worry that if water companies are brought into the public sector, then the cost of this and of the debt of water companies will be factored into government debt. If a fiscal rule is to reduce debt to GDP over the next Parliament, more debt might be thought to undermine this goal. However, this is not a real concern using special administration because the reckless debt that water companies have accumulated would not be taken on by a new public water company. Any new debt that is taken on by water companies would be entirely invested in infrastructure, instead of going to foreign shareholders and banks.

The Case for Democratising Water  

Modern water company governance includes staff and service-users in boardrooms. The new Water (Special Measures) Act 2005 section 1 gives the government a power to make “governance” rules for water companies, whether private or public. Regardless of what the Government does to bring failed companies into public ownership, it should use its power to put worker representatives and bill-payer representatives on the board of directors of all water companies through a democratic election process. There are at least two good reasons for this.

First, worker representation — of at least one third of a board of directors — is the standard in most wealthy democratic countries for all large companies, not just those in the water industry. Staff are the experts who know far better than foreign shareholders and banks how to fix our water.  

Second, bill-payer representation, in place of working competition, is found in most modern publicly owned companies. For instance, in Berliner Wasserbetriebe (Berlin Waterworks) which was brought back into public ownership in 2013, half of the board of directors is elected by workers and unions, and the other half is chosen by the Berlin City Council. Water users see the problems of pollution, and care about the waste of their hard-earned money the most.

The UK has lagged behind other countries in democratic representation in companies, historically preferring top-down Whitehall appointments to publicly owned boards. Now is the time to give change a chance.