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As you may have seen on the news recently (May 2024), the Oxford rowing crew blamed their recent loss in the boat race against Cambridge on an e-coli outbreak they suffered practising in the River Thames. Most would find this greatly surprising; the modern era of sewage systems and disposal mechanisms supposedly enabled progress past the barbaric Victorian practice of dumping human waste and industrial effluent into the Thames unfettered. This begs the question: who should be responsible for this, if nobody has yet to be? And if there is a body responsible, why have they failed?
Check out Thames Water's area of operation below:
Who is responsible?
The notorious Thames Water is a British private utility company responsible for the water supply and waste water treatment in most of Greater London and other parts of London surrounding it; like other water companies, it has a natural monopoly in the regions it serves.
This is a key fact to notice and the source of the issue. Thames water came under private ownership after Margaret Thatcher’s Water Act of 1989, enacted for a multitude of reasons; this includes a) increased competition in the water market, driving innovation forwards regarding better quality, more efficient sewage systems, also driving costs to the consumer downwards; b) a profit motive, which incentivises investment in the water industry and motivating shareholders to invest, as well as workers to be more productive with potential reward in dividends and bonuses respectively; c) preventing government failure and complacency, who are typically less likely to be incentivised to be efficient with their money when they can continue to run at a loss with cushy salaries at the expense of the taxpayer.
For more on the benefits of privatisation vs nationalisation, check out this video below:
However, in reality, water companies create natural monopolies when left to free market powers. For the non-economists, this is a firm that experiences extremely high fixed costs and barriers to entry (building a network of pipes in a region underground isn’t cheap it appears) but relatively low variable costs: maintaining a water treatment system once in place is comparatively much cheaper. This means that these firms have virtually infinite economies of scale (wherein average costs start to lower as a result of the firm’s growth - examples include purchasing or financial economies), and their average costs are at a minimum as their output increases. However, uncompetitive markets with natural monopolies are characterised by non-contestability: there can only be one firm in a naturally monopolistic market. And therefore all of Thatcher’s hopes for privatising water were all for nought, and doomed to fail - and such a prophecy has fulfilled itself today.
For a one minute explainer on economies of scale, check this out ⬇️
So, why is Thames Water in hot water?
Thames Water’s biggest investors involve Canadian pension fund, OMERS, the Universities Superannuation Scheme (USS), the Chinese Investment Corporation, and Abu Dhabi’s Infinity investments. Analysis of their accounts between 1990 and 2022 reveals that privatisation turned Thames Water into a cash cow for these firms, none more so than Australian infrastructure asset management firm Macquarie which, with its co-investors, bought Thames Water in 2006 for £4.8Bn.
Thames Water net debt (top) and dividends (bottom) are shown below:
Macquarie and its co-investors made their position clear, hiking dividends to £656m in 2007 when dividends were a fraction of the year prior.
Ofwat, the water industry regulating body recommends that companies maintain a ratio of debt to capital value of 60%, but Thames Water has exceeded this ratio by 20%. All of this in tandem suggests that Thames Water has gathered all of this debt to grant dividends rather than invest in the quality of sewage disposal and running water: despite their claims of having invested billions into the service they provide, this still continues to lack, considering the e-coli outbreak in the Thames that rampaged the Oxford Rowing team. And now that Thames Water’s liabilities have wracked up to this extent, investors are not keen to pay a £500M bailout, unconfident in their fees being returned.
What next?
Time has revealed that perhaps privatisation was not the best policy decision. There is still debate over what the government will do next to rectify the situation. The imposition of Ofwat’s fines have only further reduced dynamic efficiency (meaning they have even less profit to reinvest) which doesn’t help matters. When Thames Water runs out of money, it may have to be nationalised and put in government control, potentially adding the bulk of its £15.6Bn debt a taxpayer responsibility. In my opinion, this is the best course of action to ensure that consumers are treated fairly, considering Scottish water, which is nationalised, still has better quality water than most English water companies and at a better price with much less debt. Any policy that simply breaks up water companies will be ineffective with the risk of natural monopolies looming.
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