Utility Week

26 | JUNE 2023 | UTILITY WEEK Water Analysis Is renationalising the water industry the fi x we need? With the water sector under more critical scrutiny than ever before, calls for renationalisation are growing. But what would a return to 'the good old days' actually look like in 21st century Britain? F or years, water companies were a quiet, ever-present part of public life. They kept our water owing, sent us our bills and xed the odd burst water main when required. Now, the industry is facing considerable media attention as ooding damages homes and businesses, the public becomes more conscious of climate change and our impact on the environment, and politicians face the uncomfortable optics of water company shareholders receiving con- siderable dividends while public duties to protect the environment and livelihoods are not being•met. However, any temptation to return to the "good old days" of nationalised water infra- structure should be given serious thought regarding practicalities and potential reper- cussions before steps are taken. What are the challenges to the industry? Recent reports from the European Environ- ment Agency have shown that the UK has the lowest quality of water in Europe. This, combined with above in ation dividend pay- outs to shareholders, debts of over £57 bil- lion between 1991 and 2019, and a portfolio of ageing infrastructure being asked to cope with unprecedented environmental chal- lenges, has led campaigners to argue that something has got to give. What does renationalisation mean? Renationalising the water industry would involve the state (or a state-owned company) taking the place of existing shareholders. A government-owned entity would take over ownership of the infrastructure or the corpo- rate entities managing the industry by way of an Act of Parliament. The employees would likely become either partial or wholly pub- lic sector workers, and the funds received from water bills would go to the state (or those state-owned entities) rather than pri- vate companies. Funding needed to improve infrastructure may then come from the Treas- ury or from income collected from the public. There are two main concerns about this – rst, whether shareholders would be com- pensated upon renationalisation, and how that compensation would be calculated; and second, whether the cost and disruption of renationalisation would result in more e" - cient water companies, paying dividends to the exchequer rather than to shareholders. Compensation? What compensation? Campaigners on both sides of the argument have put forward the case for water compa- nies to be valued based on net assets (that is, assets less liabilities) or market value (what the company would sell for to a commercial buyer). These gures di• er hugely and illus- trate the potential for a erce legal contest. Some campaigners are even going so far as to suggest that England's water industry can in fact be renationalised without com- pensating those who have nancial stakes in the businesses. They o˜ en cite examples such as Northern Rock (or more recently, Sili- con Valley Bank UK), where companies have been nationalised and shareholders received minimal (or no) compensation in return for their shares. However, these cases are not comparable. When Northern Rock collapsed in the 2008 global nancial crisis, the com- pany was no longer a viable going concern. Its shares did not hold any value and there- fore the shareholders received what was con- sidered a fair market value for an insolvent business at the time. Introducing a system where the government has the ability to seize functioning private companies without fair compensation is a very di• erent matter. Aside from being a dangerous precedent to set, it may be incompatible with the UK's obligations to other countries under bilateral investment treaties, and to private citizens (under human rights legislation). What needs to change? Ofwat has received new powers under the Environment Act 2021 which has allowed it to amend water companies' licence condi- tions without their consent. These amend- ments are directed at the recent critiques and will require companies to take account of their environmental performance, customer delivery, and credit rating when deciding whether to pay dividends. If implemented and policed su" ciently, these measures could help to focus minds on upgrading ageing infrastructure (much of which dates back to the Victorian era) to minimise ood, drought, and pollution, in order to enable shareholder rewards. Ofwat's new powers do not su" ciently address the problems facing the industry however. The water industry is being asked to do more with less resources, in a new era where cheap money is not available. Exist- ing infrastructure is not able to cope with current demands during extreme weather events (such as oods or drought), and water companies are being criticised for prevent- ing desperately needed new developments where they would add to existing nutrient burdens in the surrounding water environ- ment (sewage and water run-o• would over- load the local sewerage network).

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