What Britain can learn from its polluted waterways

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The writer is an FT contributing editor

Anyone casting around for a metaphor for Britain’s fractured political economy need look no further than its waterways and beaches. Blinkered devotion to the market has been the lodestar of the nation’s policymakers. The costs are being counted in the raw sewage dumped daily into its rivers and coastal waters.

The privatisation of the water industry in 1989 was seen as a high point of Margaret Thatcher’s economic revolution. Britain had been labelled the “sick man of Europe”. The prime minister’s cure was to roll back the boundaries of the state. Electricity, gas and telecommunications were shunted from the public to the private sector. So, too, were ports, airports and the national airline. Why not water supply and effluent disposal? Privatisation would generate the energy and capital to renew an industry trapped in its Victorian-era sewers.

That was the plan. Instead, Britain’s rivers, lakes and beaches are awash with untreated effluent. The privatised water utilities, having pocketed large profits, are now looking financially fragile. Amid speculation about the health of Thames Water, talk has turned to renationalisation. The best the government can offer is to require reduced sewage overflows by 2050. Yes, 2050.

The story is not a complicated one. The companies were sold off debt free to maximise the immediate return for the Treasury. The new owners then loaded them up with debt while paying shareholders — many of them overseas wealth funds — hefty dividends. This financial engineering produced payouts to shareholders of more than £74bn. Where they refurbished the industry’s infrastructure, the cost was passed directly to consumers in higher bills.

The Environment Agency says there were an average of 825 sewage spills every day in 2022. These coyly-named “storm overflows” lasted a total of over 1.75mn hours. They are legally permitted during exceptional weather conditions but exceptional has been redefined as everyday. Discharges recorded have more than doubled since 2016. And the financial music has stopped. Higher interest rates have made the industry’s accumulated debts unsustainable. 

The risks were always obvious. Water supply and effluent disposal are not susceptible to competition. The privatised companies would seek to exploit their regional monopolies to maximise profits. For years, Ofwat, the regulator set up to prevent that, had inadequate powers. It has been defined by weak leadership and a reluctance to confront the operators. Regulatory capture, I think this is called.

Polluted rivers and filthy beaches speak to the much bigger problem of political culture. The legacy of the 1980s reaches well beyond the water industry. The market-knows-best solution has become a national reflex. This was visible when the Bank of England’s light-touch regulation of the City of London amplified the 2008 financial crash. The privatised railways have consistently failed to run a half-decent service. Billions have been wasted in an effort to inject “competition” into the NHS. Even now, the Treasury holds it as an article of faith that the state is bad and the market good. Public investment comes first in the list of spending cuts. 

The answer is not to head straight back to the past. The 1970s was not a golden era. Beyond water and rail, the case for renationalising industries is at best contestable. The old, nationalised, BT was scarcely a model for state ownership. The sorry state of the gas industry is as much about bad government policy as ownership.

The state does not have all the answers. And the market has a pivotal place in the efficient allocation of resources. But a fundamental shift of mindset is needed. Everyone agrees that a return to sustained economic growth in Britain requires a step change in productivity. That, in turn, demands a much higher rate of investment in the national infrastructure. The market has a big role but so does the state.

A change in Downing Street is a necessary, but insufficient, condition for the required rebalancing. The next government, whatever its political colour, will have to make the case for sustained public investment — and the tax rises needed to pay for it. The Treasury will have to be deprogrammed of the ideological certainties of the Thatcher era.

Britain has come full circle. It is once again the sick man of Europe; it’s no accident that Europe’s more successful economies have chosen not to privatise their water industries. Blowing up the economic relationship with the EU through Brexit has accelerated our decline. But the ideological lurch to anything-goes capitalism laid the groundwork.