There can be no greater failure of government than when basic standards of sanitation are routinely breached in the upper Derwent catchment area by discharge of raw sewage. According to government statistics obtained by the Rivers Trust, this happened more than 2,000 times in 2020 for a combined duration of over 12,000 hours. A pattern repeated across Yorkshire and the rest of England.
It should surprise no one that the public does not like the idea of raw sewage flowing openly in our streams and rivers and bobbing about near our beaches; although it did seem to surprise the government. So how have the water companies got away with it for so long?
Who oversees and manages our water supplies?
Up to 1974, the responsibilities for water supply and dealing with waste water rested mainly with local councils, under direct local democratic control. Funding of major new schemes was dependent on central government, so also under democratic control.
In 1974, the Tory government removed all responsibilities from local authorities, transferring them to newly created regional water authorities (RWAs). This severed the relationship with locally elected bodies, and placed democratic responsibility with central government. Successive governments starved the RWAs of funding for improvements.
In 1989, Margaret Thatcher privatised the RWAs and wrote off their debts. Privatisation was presented as the solution to a funding problem that the government had itself created. It is instructive that the Thatcher government was able to push water privatisation through, in the face of considerable public opposition, because it had a stonking majority in parliament and could do whatever it wanted.
Weak regulation was installed through Ofwat and the Environment Agency. Ofwat undertakes detailed monitoring of the water companies’ finances, but the monitoring of service delivery and pollution is superficial (see Ofwat 2020 monitoring report) and regulation is light touch.
Essentially these largely foreign-owned private companies have been self-regulating. According to them, they have been doing a great job. And they have too, if judged solely by their dividends to shareholders, which have averaged £2bn a year since privatisation (see University of Greenwich report). Judged by the pollution of our waterways and cost of our water they are an abject failure. As they are monopolies, we can’t get our water and sewage treatment from any other source.
Sewage scandal and the environment bill
The blame for the current scandal lies in the first place with the government that privatised the service and then failed to regulate it effectively. Successive governments bear the responsibility for what has happened since.
Considerable responsibility also lies with elected representatives on local councils. They have chosen for the last 30 years to carry on giving permission for housing developments with little regard to the implications for sewage treatment, sewerage and surface-water drainage capacities.
When central government denies that the commercial priorities of the water companies are causing industrial scale pollution, and locally elected councillors ignore the pollution that is happening under their noses, the result for local people is truly toxic.
To head off the widespread condemnation of this part of the 2021 environment bill, the government added a requirement in the legislation for water companies to “secure a progressive reduction in the adverse impacts of discharges from storm overflows”. This woolly phrasing allows water companies so much wriggle room that they will be able to carry on getting away with it.
The financial scandal of the water authorities
The pollution scandal became topical because of the environment bill, but running alongside that is an equally shocking financial scandal. When the water authorities were privatised, there was a financial hit to the public. Instead of being paid for the capital value of the infrastructure assets and the value of the monopoly business the water companies acquired, we, or our government acting on our behalf, actually paid them to take the business. We paid £2.3bn net and in addition gave them £12bn capital tax allowance.
That’s history; but the warped approach to the public interest continues to the present. Since privatisation, the water companies have borrowed in the private money markets. By 2019, they had racked up £52bn of debt. But instead of investing this borrowed money as one might expect in improvements to sewage works, sewers and water pipes, they handed it to their shareholders in the form of dividends.
These dividends to date total over £60bn. The annual cost of paying off these loans had reached £1.2bn per annum by 2019. The public pays for this cost in their water bills. Averaged across England, every household pays £62 a year in dividends to shareholders. The average in Yorkshire is £50 a year.
Between 1991 and 2018, water companies invested £123.2bn in infrastructure. Clearly this has been nowhere near enough to prevent routine pollution of rivers or waste from leaking water mains. Surprisingly water companies have no statutory duty to do either of these things.
This investment has been entirely funded by householders through their water bills. There has been no contribution from shareholders or borrowing. Consumers are therefore paying for the work necessary to rectify the under capacity and dilapidation arising from a hundred years of underinvestment on top of the real value of the services they receive.
Fat cat bonuses vs consumer water bills
In 2017, the average remuneration of water company CEOs in salaries, bonuses, shares and pension contributions was £1.25m. The CEO of Yorkshire Water received £1.3m. This is about ten times the public sector equivalent. Most CEOs receive a substantial part of their pay in shares. While there is no information to hand on the value of their current accumulated shareholdings, these are likely in many cases to be substantial. The CEO of Yorkshire Water received £1.7m in shares between 2013 and 2017, for example. It is no surprise that most water companies place a high priority on paying dividends to shareholders.
Another hidden hit that householders take is the ongoing financial cost of privatisation. Public sector bodies can borrow at very low interest rates in comparison to private companies. The effect of this on the cost of water and sewage services is significant. Averaged across England each household pays £93 a year in their bill for this. In Yorkshire the cost is £98 per household.
The cost of water privatisation
Householders are therefore paying for a lot more than the actual cost of getting water to them and taking wastewater away. They are also paying for shareholders dividends, CEOs’ inflated pay, the higher cost of borrowing resulting from privatisation, and for rectifying a hundred years of under investment in infrastructure.
According to Water UK, the average annual household water bill in Yorkshire is currently £397. If Yorkshire Water had not been privatised the average bill would be £249. If they were not charged for rectification of the defects in the legacy infrastructure, the bills would be even lower.
Access to water and sanitation are widely considered to be basic human rights. The United Nations formally defines them as such adding that they must be affordable.
In 2019, Ofwat reported that, “Approximately three million customers in the UK say that they struggle to pay their water bills”. The English water companies then adopted what they called a public interest commitment to “make bills affordable as a minimum for all households with water and sewerage bills more than 5% of their disposable income by 2030 and develop a strategy to end water poverty”. It’s cryptically worded, commits them to little, and once again gives them plenty of wriggle room.
Water poverty
In 2021, Water UK published a report on water poverty. It found that across England 6.3 percent of households were paying more than 5 percent of their annual disposable income to their water company. In Yorkshire, the proportion of households affected was even higher at 7.6 percent (about 146,000 households).
Constituents in Yorkshire are already being shamefully exploited by Yorkshire Water. It can, and probably will, carry on doing this because its monopoly position allows it to. Are our elected representatives happy for this to continue or will they do something to protect consumers? Will they support capping water bills to ensure that households pay no more than they would have done before privatisation? Better still, will they bring these vital services back into public ownership?
