Why addressing sewage spills was not a priority for the water industry or for Ofwat

Many people will wonder what has taken the water industry so long to address the issue of sewage spills in waterways.

One of the main reasons, though, is because Ofwat, the water regulator, has not made it a priority for the industry.

Ofwat’s main focus, for the best part of two decades, has been keeping water bills down.

By the time the current five-year regulatory period ends, in 2025, water bills will have been flat or falling, in real terms, for 15 years.

It is why water bills in England and Wales are so much lower than in countries like France, Germany, Italy and the United States.

Further back, in the immediate aftermath of the industry’s privatisation 34 years ago, the priority was for investment in other areas – chiefly to upgrade crumbling Victorian water mains to reduce leaks and to improve the quality of drinking water in line with EU standards.

Addressing sewage spills was just not a priority for the regulator or the industry – and that was also because they did not happen so much until relatively recently.

More people, more sewage spills

What changed was that the frequency of spills increased.

That was partly because the UK’s population has grown so much.

The population in the region served by Southern Water, for example, has increased by 30% during the last 20 years.

That has put greater pressure on infrastructure that was not matched by commensurate investment. It is also partly because of an increased incidence of extreme weather incidents, such as sudden heavy downpours, as well as droughts that hardened the ground.

The great drought of 1976, when millions of households had their water supplies cut off, is ingrained in the national psyche. But there have been a number of heatwaves since, for example in 1995, 1997, 2003, 2006 and again last year, which have been comparable to that dreadful year.

An additional factor behind increased spills, as Tony Juniper, the chair of Natural England, has pointed out, is that so many Britons have concreted over their gardens. That latter factor, as with droughts, has left more water flowing off hard surfaces and into sewers during times of heavy rain rather than being absorbed into the ground.

And, as all that happened, spills became more of an issue.

As much as could be invested

The cost of addressing this, to meet the government’s spill reduction targets by 2050, has been put by the government at £56bn.

Some may say, then, that the £10bn announced by Water UK today to address the issue does not go far enough. The industry body, though, points out that it is more than three times the £3.1bn that the industry has been permitted by Ofwat to invest during the current five-year regulatory period (2020-2025) tackling spills. It is also new money on top of that existing £3.1bn.

So it is a big and meaningful sum – and, more to the point, probably as much as could be put up by the end of the decade.

Could more be invested between now and then? It’s unlikely.

As Ruth Kelly, the chair of Water UK, told Sky News: “We want to go as fast as we possibly can.

“We think £10bn in a five-year period is the maximum physical capacity of the sector to make these changes – you’re talking about hiring construction experts, scientists, engineers being employed to build huge sewage overflow tanks the size of Olympic swimming pools, thousands of these, underground across the country.

“We don’t think we can do it faster than this.”

Where the money comes from

The big question is where this money will ultimately come from.

According to Ms Kelly, the majority of it will come in the first instance from water industry shareholders, who are being asked to put down “a huge down-payment”.

Inevitably, though, customers will pay for the investment through their bills.

The existing plan to cut sewage spills is likely to add something between £12 and £30 to the existing annual household bill of £448 by 2030.

That is, of itself, not unusual. It is consistent with the way consumers contribute to existing infrastructure built by regulated industries – such as, for example, the construction of the UK’s new nuclear power station at Hinkley Point in Somerset.

But firmer details on how the cost will be split between household customers and the owners of the water companies will probably have to wait until Ofwat has signed off on the investment proposals – the bulk of which will fall into the next five-year regulatory period rather than the current one.

Critics of the industry will argue that it is wrong for customers to be paying anything when the water companies paid more than £1bn in dividends to shareholders last year.

These, though, are privately owned businesses and they need to reward their investors for putting up capital. Were investors not offered a return on their capital, they would take their money and put it to use elsewhere.

Egregious behaviour

It is not to say that there has not been egregious behaviour in the past.

The previous owners of companies like Thames Water and Southern Water loaded those companies with debt and extracted vast dividends in the process.

The current owners of some of these companies – including Southern and Thames – are paying the price for that bad behaviour and have been going without dividends for some time now.

Those owners, in the case of Thames, include tens of thousands of university lecturers whose pension scheme, USS, owns nearly a fifth of the company.

Ah, say critics of the industry, that is why it needs to be renationalised.

The nationalisation question

That, though, is a red herring.

The industry was privatised in the first place because the government of the day, led by Margaret Thatcher, recognised there were vast sums of money which would need to be invested in the sector over coming years that the state would not be able to afford.

That investment duly materialised – some £180bn of it from 1989 to 2020.

Anyone calling for renationalisation now needs to explain where the ongoing investment now required in the industry – that £10bn for starters – would come from when there are so many other demands on the public purse and particularly from the NHS.

They also need to ask themselves whether, without the discipline of the capital markets, every pound invested by a state-owned water industry would be as effectively invested as at present.

That discipline has enabled the water companies in England and Wales to invest more in drinking and waste-water infrastructure, per inhabitant, than any country in the EU.

And they might also ask themselves how the water industry in England and Wales shapes up on the issue of sewage spills compared with other countries in Europe.

That question, by the way, can’t be answered – because most of those countries do not monitor spills as accurately as is the case in England and Wales.