In the sixth richest country in the world, we ought to take it for granted that our waterways won’t be flooded by human effluent. Sadly, though, this has become commonplace. In 2022, the environment agency reported just over 300,000 sewage spills and this excludes spills from the 9% of sites that still lack the legally required monitoring devices. And, while reducing sewage spills to nothing is unlikely, due to the risk of severe weather, these numbers are an order of magnitude beyond what we might reasonably expect.
Combating the problem won’t be cheap though. National estimates for the required infrastructure investment are in the billions. David Black, the CEO of Ofwat, stated that the government’s estimate for infrastructure needed to stop storm overflows is £54bn over 25 years. The question we face, then, is how this cost should be spread and who should be responsible for deciding how it’s spent.
Is renationalisation the answer?
A common knee-jerk response to the issue is to argue for renationalisation of the water companies. After all, if the companies have failed so catastrophically in preventing sewage leaks, why should they be the ones making decisions about future investment? And if they have failed to manage the public good entrusted to them, why should shareholders, many of whom are located overseas, continue to profit off that public good?
This is an understandable response, but it is nevertheless reactionary and misguided. For nationalisation to be a good option, it would have to be the case, not only that private companies have poorly managed the UK’s water, but that the government is able to manage it better. History shows us that this is unlikely. Prior to the privatisation of water in 1989, the sector was plagued by underinvestment to an even greater degree than it is today. This should not be surprising as the short-term motives of politicians, often focused no further into the future than the next election, militate against all but the most popular infrastructure investments.
When it works, we ignore it
Water and other utilities, when they are working, are rarely the subject of strong public opinion of any sort, positive or negative, so the government will always be inclined to underinvest in the maintenance of water infrastructure. Private companies, while not perfect, are still much better in this respect. As the utilities have traditionally formed the core of low-risk and dividend portfolios, shareholders tend to be in the water companies for the long-term. This creates an incentive to maintain profits for the long-term, incentivising infrastructure investment and maintenance.
Nevertheless, private companies have underinvested in the infrastructure required to prevent sewage spills, and this is because sewage spills have little effect on a water company’s bottom line. Between 2018 and 2022, Ofwat issued only seven fines for sewage spills, totalling just over £94 million. This means only a minuscule portion of sewage spills were fined and, when compared to the £1.4 billion paid by water companies in dividends in 2022, the fines were a drop in the ocean.
If companies are to be incentivised to invest in infrastructure to prevent sewage spills, they must be made to bear the full cost of these spills through hefty fines. The government seems to be moving in the right direction on this. Environment minister, Thérèse Coffey, expressed a desire to implement unlimited fines for sewage companies.
A more militant OfWat
However, this is not enough alone because a fine is meaningless if it’s never issued. To combat this, Ofwat must become more militant in its approach to sewage spills. This, in turn, necessitates reforms to prevent regulatory capture of Ofwat. If these steps can be implemented, then companies will face the appropriate incentives to invest in and maintain their infrastructure, far more so than the government ever would.
This still leaves the question of how the cost should be spread. If water companies are to be left in charge of infrastructure investment, the result will inevitably be rising water bills to cover the costs. This is, to some extent, a surprisingly effective way to spread the cost. After all, every household pays water bills and larger properties tend to pay larger water bills. This means that, not only is the cost spread effectively across all households, but a greater share of the cost will be borne by those who can most afford to pay.
Easing the burden on the poorest households
Still, the very poorest households may be unable to absorb the additional cost, especially given rising prices throughout the rest of the economy. To deal with this, the government must be willing to step in and subsidise the bills of the poorest households on a temporary basis. If fines for sewage spills are properly implemented, the required revenue will come from the sewage companies themselves in the short-term, and the subsidies should be implemented with an explicit expiry date. This ensures the poor do not pay an unbearable price for infrastructure improvements in the short-term, while preventing a long-term subsidy of the water industry that would benefit water companies against the public interest.
Ultimately, then, neither the public nor private sector can effectively solve the crisis of the water sector alone. Only a private water sector, appropriately regulated and tactically subsidised by the government, can be relied on to invest as necessary and prevent sewage spills into the future.