Here’s how our water crisis could be fixed – without costly nationalisation

Not being safe to drink or swim in, the state of the nation’s water has been pulled into sharp focus, but as the conversation turns both to utility privatisations or nationalisation, splashing the cash may not be the answer many think it is, writes Chris Blackhurst

Up to his neck in... the water crisis: Ed Davey in Lake Windermere this week (Reuters)

It was always going to happen, of course. Sir Ed Davey, the Liberal Democrat leader, went paddleboarding on Lake Windermere for an election photocall and fell in five times.

He was there to support local candidate and former party leader, Tim Farron. But in making a splash, the serious message was about water quality.

Back in February, Windermere was hit with a large raw sewage spillage. Pollution has become a cause célèbre, with showbusiness stars joining locals to rage against the water company, United Utilities, for making Windermere unfit for swimming and harming the natural habitat.

So, Ed staying afloat was never an option. The giveaway life jacket said he would fall in as many times as it took for the photographers to do their work.

Windermere has joined Brixham, where the water was found to contain a sickness-inducing parasite; the Thames, where competitors in the recent Boat Race were advised not to swallow the water if they fell in because of the presence of e-coli from sewage; the Thames again, as Thames Water is sending samples of water to a laboratory for testing after dozens reported being sick with vomiting and diarrhoea in southeast London; and swathes of the coastline, where swimming and fishing have been impossible due to contamination from sewer overflows. Much of it has been caused by disrepair and lack of investment, in a country that regards itself as highly developed.

The state of the nation’s water has become a major issue, bringing into sharp focus the ideology behind utility privatisations. They always did divide opinion, their backers claiming supply would be better off in private hands and much-needed investment would result. Opponents disagreed, and in the case of water especially, argued it really was a sale too far – that water, an entirely natural product and essential for human life – could not, should not, be a profit-generating commodity.

Since then, we’ve had instances of burst water mains, flooding and shortages. Now, things have come to a head. Repeated heavy rainfall – possibly the result of climate change – and under-investment in sewers and water treatment plants, have propelled the industry to the fore. Sewage spills make it impossible to ignore the issue any longer, and the sector’s companies have become a very public enemy.

So far, the controversy has centred on their owners, mostly drawn from private equity investors, and their demands for ever greater returns. Water is price-capped, so to maximise their returns the companies fall back on the amount they’re spending, which includes making improvements.

Meanwhile, the overall cost of the necessary refurbishments continues to rise – currently an estimated £51bn. It’s a vast sum, symptomatic of decades of neglect and decay, not keeping pace with changing farming practices that have increased pollution risks and a rising population.

One solution would be to renationalise, but that would cost a fortune. This, with an Exchequer that is woefully short of cash. Don’t forget, too, the cost of returning to state control would not include that £51bn.

Other, less radical, methods have been mooted. They tend to revolve around imposing additional taxes or levies on the companies or forcing them to invest more. They’re fraught with legal complications – it’s likely the owners would use the courts to try to block and delay any change. The value of the water companies would also fall. Little would be achieved, not to anything like the level of investment required.

What if there was another way, in which the landscape was altered so it became more attractive for them to spend and repair? Leading competition and regulation lawyer Tim Cowen, from Preiskel & Co in London, surveyed what was being suggested and has come up with a scheme that might finally lead the water companies to water.

Talking to industry experts and analysing the legal aspects, has seen him produce a paper: “Action to Change UK Water Companies: incentives to invest”. Cowen proposes a firmer regulatory regime: Ofwat and the Environment Agency need to get tougher. At present, “management can withhold, manipulate, mislead or misrepresent activity and investment because it controls information. Oversight of investments needs to return to checking physical activity; self-certification should be prohibited.”

But this isn’t anywhere like enough. Currently, water companies are vertically integrated regional monopolies – in essence, they do everything regarding water and they face no competition in their local area.

What Cowen suggests is taking some of those operations from under, so that sewage, wastewater and sludge treatment and disposal are not restricted by the consumer price-capping formula.

The Competition and Markets Authority could be asked to intervene. It has the power to require a company to divest – new, specialist businesses could be established that would then supply these services to the water company and the amount these new players could invest would not be conditioned by the price cap. Or the water company agrees to ring-fence these operations in a separate P&L – similar to the route chosen by BT when it created Openreach (it’s perhaps no coincidence that Cowen was previously general counsel and commercial director at BT Global Services). “Separate activity within separate organisations can help to remedy the information and incentive problem,” he says.

He advocates localising the new water treatment operators so that they deal only with a particular river basin. They could bring in outside directors, experts in the area and its wildlife and fauna.

Staff would be entirely devoted to sewage and water quality, not having to worry about the amount the consumer pays. They would not be hidebound by the price cap and could implement new technology and innovation. “New organisations with different goals may help move from any non-compliant firm culture and deliver at the pace required,” he says. “An election has been called and the Labour Party is attacking the current government’s track record on water quality. It will need a plan to achieve a much better outcome.”

He maintains they should consider ring-fencing, which may be attractive to the water companies themselves if they see the benefits of “outsourcing” the current sewage problem to another entity, even one partially financed or ultimately controlled by them. “New capital attracted under a new regulatory compact may also alleviate their projected investments, improving their returns,” Cowen says.

Something has to give; we cannot go on like this. As Cowen says, the public outcry over the current crisis may enable some much-needed new thinking.