Good morning from New Economy Brief.

Last week, reports emerged that the Government was on standby to put Thames Water into special administration. Despite the initial promise of efficiency and investment following privatisation in 1989, critics argue that Thames Water and other privatised water companies have neglected essential infrastructure upgrades, leading to pollution and mounting corporate debt. With debts reaching approximately £14 billion (roughly 80% of the value of the assets of the business), Thames Water faces the risk of collapse, prompting concerns about the continuity of water and sewerage services for its 15 million customers. While the UK government may step in to manage the company temporarily, many see this as a much needed opportunity to renationalise. 

In this week’s newsletter, we explore the lessons from Thames Water, the problems with water privatisation and what can (and can’t) be done about it.


A lost three decades? The potential collapse of Thames Water isn’t the first time that water privatisation has been deemed a failure from across the political spectrum. Amid droughts last summer, former David Cameron advisor Camilla Cavendish wrote that it was “time to admit that water privatisation has been a failure”. One of those who actually worked on the privatisation of water in 1989, Jonathan Portes, has called the policy an “organised rip-off”. 

Investment has declined since privatisation. Privatisation has failed to deliver what it was supposedly introduced to achieve: increased investment, argues Professor David Hall of the University of Greenwich. In fact, companies have invested “no net additional shareholder funds (equity) since privatisation” meaning that “money has been taken out, not put in”. 

  • Debts are climbing. At the beginning of privatisation, all water companies were debt free. Now, however, they are collectively in debt of nearly £52 billion and a large (and increasing) bill for interest. Analysis by Karol Yearwood in 2018 found that any investment that does occur is almost entirely financed through income from customers, “usually with sufficient cash remaining to cover interest payments”. As Professor David Hall argues, companies are essentially getting further and further into debt simply to pay huge shareholder dividends. 

Who are the shareholders? The privatisation of water has been described as “a cash cow for investment firms and private equity companies”. According to Professor David Hall, English water companies paid shareholders a total of £18.9 billion in dividends from 2010 to 2021. Thames Water alone has paid out a total of £7.2 billion in dividends since privatisation. But who are the shareholders receiving these payouts while failings continue? Well, the answer to this question has been described as “as murky as the water in the river”.

  • Overseas investors. Since 2006, Thames Water “has been owned by a consortium of institutional investors, including funds from China and Abu Dhabi”. Infamously, it was managed by the Australian Macquarie Capital Funds, notorious for its “focus on profits”. However, Macquarie sold its shares in 2017, leaving Thames Water “with an extra £2bn debt burden”. Now, the largest share (26%) of Thames Water belongs to Kuwaiti and Canadian investors, represented by the Kemble Water Holdings holding company. This is where it gets murky - there are about seven other intermediary companies between Kemble and Thames Water customers (helpful diagram here). England is unusual in having all of its water companies in private ownership, but most of the beneficiaries of this system are based overseas. Research by the Guardian found that 72% of English water is owned by offshore investors which include “private and state-owned international funds, banks, multinationals and billionaires headquartered outside the UK”. 
  • “An experiment in complex financial engineering”. The huge debts we see at Thames Water and other companies may in fact exist by design, not by accident. England has been “at the forefront” of the ‘financialisation’ of infrastructure in which “diverse physical structures have been transformed into financial assets”. According to Kate Bayliss, this can be traced back to the 2000s when “a new kind of financial investor began to dominate the [water] sector”. By 2021, nine out of 15 English water and sewage companies were owned by “special purpose companies”. These investors, made up of private equity funds, pension funds and sovereign wealth funds, have been able to generate significant shareholder returns by “hiking up debts”, Bayliss argues. Increased debt has been used to refinance water companies “so that investors could repay themselves part of the original cost of buying the water utility”, she explains. However, a “perfect storm” of inflation, high interest rates and pressure to improve performance mean that the high levels of debt we see now, as in the case of Thames Water, are becoming increasingly unsustainable.

So, what now? It is possible that the shareholders of Thames Water could bail out the company. But failing that, the government will have to step in in some way. One option is that Thames Water will be put into special administration, a power outlined in the Water Industry Act 1991 which can be used when a private company is on the brink of collapse. This would enable the company to carry out its functions and provide a public service until either being transferred to another private company (in the case of Bulb in 2022) or into public ownership

  • Renationalisation? Many view the current situation with Thames Water and the apparent failure of privatisation more generally as an obvious case for renationalisation. Of course, public ownership would eliminate profit motives and dividend obligations. However, this isn’t necessarily so straightforward. Opponents of renationalisation argue that taking Thames Water into public ownership would require transferring corporate debt onto the government's balance sheet, which some would argue is unfair for taxpayers to foot the bill and pay the debts incurred under poor management. Additionally, the administration process typically involves asset sales to repay debts, but in the case of a water company, the integrated and complex infrastructure makes breaking up assets impractical. Buying the assets from the shareholders would entail an enormous cost, necessitating adequate compensation for existing shareholders, including pension funds.
  • Reducing the costs to the Treasury. Think tank Common Wealth argues that the answer to this problem lies in the 1991 Water Industry Act. Under the act, they argue that the government could trigger special administration proceedings and use these to facilitate the transfer to public ownership: “the special administration procedure enables secured debts to creditors to be reduced, subordinated, or removed, where they would not be “consistent with the purposes of the special administration order”. Such an order’s purposes include ensuring a water company’s “functions... may be properly carried out” such as stopping leaks or pollution. This will reduce or eliminate the cost of transfer to public ownership.”
  • Regional ownership. Nationalisation does not have to mean direct ownership by central government. All three failing water companies (Southern Water, South East Water and Thames Water) could be taken into special administration but then, instead of being renationalised, could be “transferred into public ownership under the councils in the region as the first regional publicly owned water company”. 
  • Enforcement. The Water Industry Act 1991 also enables ministers and regulators to issue enforcement orders to control the company’s behaviour. They could order the company to pay down debts, restructure, reduce payouts or keep bills down. Critics of this approach argue that this is essentially renationalisation but without the same level of accountability. 
  • Let it go bust. Some have suggested that the government could let Thames Water go bust and take it back into public ownership then. However, this would have profound implications for customers and as the Guardian’s Environment Correspondent Sandra Laville explains, is “simply… not allowed”. 
  • The Welsh model. Academics Robert Branston and Phil Tomlinson propose that Thames Water follows the “unusual” example set in Wales. “Welsh Water has a unique corporate structure, with no shareholders and is run solely for the benefit of its customers. It is commercially run, with professional managers held to account by 62 independent trustees. While not perfect, its performance in recent years compares favourably with that of the other privatised water companies”, Branston and Tomlinson argue. They admit that creating such an organisation “would not be easy” but does have a precedent in the case of Network Rail “which was created when its commercial predecessor Railtrack went bust”. Railtrack’s debts were subsumed into Network Rail and underwritten by the government. Branston and Tomlinson explain that “while it is true that these public-interest companies are funded by debt, a government debt guarantee helps keep the costs of servicing this debt down (while costing the government very little)”.
  • Regulation and social purpose. Purposeful Company co-chair Will Hutton argues that through good regulation, water companies like Thames Water can deliver social purpose while remaining in the private sector. “The sunshine of accountability” could ensure that Thames Water gets serious about its environmental responsibilities, invests properly and banishes “opaque ownership structures”, says Hutton.

Lessons from Thames Water. You’d be hard pressed to find anyone who could enthusiastically defend the record of water privatisation over the last 34 years. As the climate crisis worsens and debt becomes more expensive, reforming the water sector so that investment is put before shareholders has never been more urgent. The legacy of years of privatisation can be difficult to unravel, with high debts and the need to make up for historic deficits in infrastructure investment both providing significant barriers to action.

  • Funding the future. Ultimately the question of how necessary future infrastructure upgrades will be financed is the long term challenge facing the sector. Common Wealth argues that if the industry remains in private hands, even with additional stakeholder responsibilities, bills will rise significantly. This is because such capital demands a return, and this return can only be extracted from consumers. In contrast they argue that the public sector can borrow for upgrades at lower rates, making public ownership “a cheaper and more strategic mechanism to fund the water industry’s future”.
  • Voice and value. But who gets a say in the industry's future is also a vital question. For example newly renationalised water companies could be structured so that consumers, workers and other stakeholders are represented on the board as with the newly remunicipalised Eau de Paris in France (where bills fell by 8%). This would end the domination of shareholder interests, which has arguably led to the current mess in the industry.
Weekly Updates

Public services

NHS workforce plan. The Government released its NHS workforce plan last weekend. Chris Thomas from the Institute of Public Policy Research explains why the plans fall short of solving issues with staff retention and ignores the problems in the social care sector. (We explored the issues of funding pressures and staff shortages in the NHS earlier this year.)

  • The crisis in care. OpenDemocracy have launched their series on the crisis in care in partnership with War on Want, Autonomy and others. They will be releasing articles from authors such as Dalia Gabrial on gig-economy care work, Asad Rehman on an expansive vision for a care-based economy, Sarah Jaffe on unpaid care work, Nadia Whittome on the need for a National Care Service and more. Check out their video explaining these issues in the UK’s care system and their parliamentary event on how to fix the crisis of care on 11th July.

Tax and fiscal policy

How to match higher taxes with better taxes. The Resolution Foundation’s Economy 2030 Inquiry has released a new report calling for a tax strategy to boost economic growth. Their recommendations include “a revenue-neutral package worth around 1 per cent of GDP comprising reforms to business, environmental, income and wealth taxes.” 

The macroeconomic case for £30bn additional public investment. The Institute for Public Policy Research’s Carsten Jung has modelled the economic implications of a £30bn public investment in the UK economy and made two interesting conclusions: the multiplier effect on growth means that a £30bn investment is compatible with a falling debt to GDP ratio over a 5 year period and that the impact on inflation will be limited

Fiscal rules and electoral success. David Klemperer has written an article for the New Statesman explaining why Keir Starmer should learn lessons from the failures of the left-wing former French president François Hollande, including not to let adherence to fiscal rules derail the rest of the electoral agenda.

Inflation and monetary policy

Is it time to get rid of the 2% inflation target? Writing for the Financial Times, economist Adam Tooze explains how getting inflation back down to a 2% target is a “profoundly conservative political argument dressed in the garb of economic necessity” that will necessitate renewed fiscal austerity. He questions whether subordinating all other macroeconomic goals to reducing inflation to 2% is “fit for purpose in an age of polycrisis”.

Tackling inflation beyond monetary tightening. A new peer-reviewed paper looks at the role of fiscal and monetary policies in tackling inflation, using Denmark as a case study. The authors conclude: “a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.”

Fiscal price caps help reduce inflation. Pierre-Olivier Gourinchas, the IMF’s Chief Economist, has explained how “unconventional fiscal policies” to tackle inflation in the Eurozone worked by reducing inflation-expectations. IPPR’s Carsten Jung explained how fiscal price caps could achieve the same result in the UK

Corporate profit margins are propping up inflation. The Observer’s Phillip Inman documents the sectors in the UK economy accused of profiteering from the cost of living crisis. He comments on a report from Capital Economics’ Simon Macadam which found that UK corporations have used their market power to maintain profit margins in the face of surging costs, which is unusual amongst other advanced economies: “In the second half of 2022, UK inflation was about four percentage points higher than it would have been had profits absorbed rising costs as they did before the pandemic.”

Monetary tightening is benefiting savers. Bloomberg analysis has calculated that UK households on aggregate are actually about £10 billion ($12.7 billion) a year better off as a result of a jump in interest rates, as savers are benefiting from higher rates but the increase in costs of borrowing are yet to fully pass on to mortgage holders. The fact that so many people are on fixed rate mortgages mean that the Bank of England’s blunt tool for slowing inflation is acting slower and less effectively than it has in the past. (Read our previous New Economy Brief on the ‘mortgage timebomb’ for more.)


Sharing the benefits of growth. A new report from the Resolution Foundation argues that “to make sure economic growth raises living standards without raising inequality, we need predistribution and redistribution: higher employment, pay, and reform of the benefits system.” The authors suggest that social security benefits should be uprated in line with wages rather than prices, and LHA rates should keep up with growth in housing costs, following recent social security reforms in New Zealand, Germany, Belgium and the Netherlands.

Local economies

‘Levelling up’ buses. IPPR have published a report explaining how the rest of England’s metropolitan areas can achieve the same level per head of public transport provision as London to help decarbonise the transport system.

Community Wealth Building and Bidenomics. The Biden Administration has released a new fact sheet explaining their plans to embed a community wealth building approach into their federal agencies. Their policy memorandum outlines actions federal agencies can take to advance equitable development in American cities and urban communities.