Water woes: who’s to blame for the shortages?

For residents of the London borough of Islington whose homes were flooded this week by a burst water main, Thames Water’s decision to announce a hosepipe ban the following day must have come across as a sick joke. Just a few days before the flood, the company sent out an email asking its customers to be a ‘hot spell hero’. ‘Every drop you save really is another drop more in your local river or reservoir.’ But Thames Water seemed unable to follow its own advice: five million litres of water were lost during the leak.

The episode neatly encapsulated much of what is wrong with Britain’s water industry: crude, 1940s-style rationing on the one hand and a failure to prevent much of the product leaking away on the other. Last year, Thames Water lost 600 million litres a day – 250 Olympic pools’ worth of water. Over England as a whole, three billion litres of water are lost a day: a fifth of the total supplied.

It wasn’t supposed to turn out this way when the water industry was privatised by the Thatcher government in 1989. It was promised that privately owned water companies would unleash a wave of investment, and that they would introduce competition, reduce consumer prices and make the industry more responsive to demand.

It is hard to see how any of these objectives have been fulfilled. Nor, indeed, has the water industry become as private as critics feared. Thames Water, which services 15 million people, is still largely owned by public sector entities, just not entirely British ones. Among its largest shareholders are the Ontario Municipal Employees Retirement System, the UK Universities Superannuation Scheme and sovereign wealth funds of China and Abu Dhabi. Almost 10 per cent of Thames Water is owned by the Chinese government.

What happened to the promise of investment? In the 1990s, it seemed to be being fulfilled. Since then, however, investment doesn’t seem to have flowed quite as well as the dividends. Spending on infrastructure has dropped from an average £5.7 billion a year (in today’s money) in the 1990s to £4.8 billion in 2020/21. Bills have increased in real terms by 31 per cent but £72 billion has been paid to shareholders. The industry regulator Ofwat refutes these figures, saying they are affected by a change in accountancy practice, yet its own figures show investment pretty flat for the past 20 years.

Clearly the promise of a great wellspring of extra money has not been delivered. There has been a lot of spending on improving the quality of water discharged from sewage works into watercourses and on some distribution projects such as the Thames Ring Main, which pumps drinking water into London. But no substantial reservoir has been constructed in England since the Kielder Water dam was completed in 1981. Part of the reason we have pictures of empty reservoirs is not that we are in a worse drought than 1976 (the Environment Agency has yet to declare a drought, though may do so later this month if it doesn’t rain), but that while demand for water has increased as the population has grown, capacity to store it has not.

Thames Water did propose a reservoir at Abingdon, Oxfordshire, in 2006, plans for which were opposed by the Environment Agency on the grounds that it was not needed. It has remained on hold ever since. Proposals for a national water grid have similarly come to nothing. In 2006, the Environment Agency scotched the idea, saying it would cost £15 billion to build a pipeline capable of bringing 1,100 megalitres a day from the North Pennines to London, and that building reservoirs would be more cost-effective.

All ambition has drained away from an industry which, between Victorian times and the 1970s, built a system of remarkable dams and pipework to transport water long distances. Somehow, a far-poorer country than modern Britain managed to build the Elan Reservoirs in the 1890s to transform sanitation in fast-growing Birmingham.

The result of the failure to build reservoirs is that we are pumping ever more water from groundwater. The Environment Agency now reckons we are extracting 700 million litres a day. Over time, this will cause the water table to fall. Even if water companies succeed in tackling leaks, we are always going to struggle if we can’t store enough water.

Inevitably, current water shortages have been blamed on climate change – the standard get-out clause for any government or public authority failing in the provision of public services. Yet Britain is getting wetter. The Royal Meteorological Society’s recent State of the Climate Report revealed that summer rainfall 2012-21 was up 15 per cent on the period 1961-90 and winter rainfall up 26 per cent. There is plenty of water to capture if we had the means to do so.

There are also alternatives to storing water. In 2010 Thames Water opened a desalination plant in Beckton capable of producing 100 million litres of water a day. It was designed to cater exactly for times like these, yet it has mysteriously been closed for maintenance, leading to doubts about whether it will ever be fully used. Thames Water has suggested that it is too expensive to run.

But in a genuinely privatised water market, consumers would be able to choose whether they wanted to pay more to keep up their consumption in times of drought, and we would have surge pricing to determine whether or not to turn on desalination plants. Yet three decades after privatisation water companies operate as localised monopolies.

Moreover, half of homes still have no water meter. For these households, the marginal cost of consuming water is zero. It’s not hard to see why the water industry isn’t very interested in fixing this situation. If we all had water meters, it would be far easier to introduce competition. The local monopolies would be destroyed.

Water policy in Britain works on the assumption that consumption of water is a bad thing. The Environment Agency’s National Framework for Water Resources imagines that average daily consumption per person will fall from 143 litres now to 110 litres by 2050. Ofwat sets targets for water companies to reduce their customers’ consumption, which they try to achieve through giving us idiots’ advice such as ‘Refill your paddling pool or hot tub less often’ or ‘Don’t wash your hair every day’. It is not going well. Last year, not one company hit its target.

If a company can’t encourage customers to use more of its product, or persuade them to switch from other providers, the only way it can grow its profits is to charge more for the same thing – difficult when prices are regulated – or to slash costs. No wonder, then, the reluctance to invest in new infrastructure other than that required to meet regulator demands. And even then, this is at times ignored. Southern Water, a significant stake of which is owned by the Chinese tycoon Li Ka-shing, was fined £90 million in July last year for negligently dumping sewage on nearly 7,000 occasions.

Water companies are seen by some as an example of the evils of capitalism. But this isn’t real capitalism. It involves the greed element, but without the competition to ensure corporate power is balanced with consumer power. Britain’s water companies combine some of the worst elements of both the public and private sectors. We have highly paid executives, such as Thames Water’s chief executive Sarah Bentley, who receives a basic salary of £750,000 as well as an annual bonus of up to 120 per cent of her salary. Yet these executives are employed to do little more than perform the role of civil servant.

It’s a cosy business but it isn’t helping to keep the water flowing. Meanwhile, consumers must endure infantile messaging, rationing and the pernicious suggestion that we should grass on our neighbours. We are little further forward than the patronising advice from Labour’s minister of drought in 1976, who told us he was saving water by sharing a bath with his wife Brenda.