Five charts that explain why water bills are about to go up
This is a crucial week for the water industry.
Regulator Ofwat will on Thursday give its “final determination” on how much bills will rise over the next five years.
Before then, Britain’s largest company Thames Water hopes to win court approval for a £3bn bridging loan to stop it running out of cash in the spring.
Together they amount to the greatest test of the water system, the only fully privatised network in the world.
To understand how we got here, and what might happen next, it pays to go back to the beginning.
In 1989, 10 state-owned regional water and sewage companies in England and Wales were sold off by Margaret Thatcher’s government, raising £7bn for the Treasury. The companies were sold debt-free but never intended to stay that way.
The rationale was that the private sector could raise the billions required to upgrade the Victorian sewage network, and fund it from customer bills, so the state didn’t have to.
So borrowing was always part of the plan and, as of this year, the companies have accrued £70bn of net debt, at a ratio to equity (gearing) of around 85%.
In water the problem with debt is not the total, but whether the companies can afford to service it, and what they did with the money.
The answer to the first question varies by operator, but water companies have poured billions into infrastructure and other investments. Adjusted for inflation, investment has run at between £4bn and a record £9bn last year, a total of £210bn in today’s prices, spending that has reduced leakage and improved water quality on some measures.
But it has not been enough to meet public expectation of basic services, of sewage control, or to the challenges of climate change and a growing population. To pick one example, the UK has not built a new reservoir since 1992.
At the same time, the companies’ shareholders have extracted dividends of £83bn (as calculated from Ofwat figures by the University of Greenwich and adjusted for inflation).
But like debt, dividends are a deliberate feature of the privatised system. Investors in any industry need to make a return.
Water UK, the companies’ trade body, says that since 2020, when the regulator began paying closer attention to payouts, dividends have averaged 2.7%.
The level of dividends and executive bonuses have become harder to defend with the emergence of the water industry’s dirty secret; sewage outflows.
These occur when the pipes shared by sewage and rainwater become inundated and, as a failsafe, are deliberately discharged into waterways through storm overflows to prevent sewage backing up into homes and businesses.
For decades the full extent of their use was unknown, with industry, regulators and the public in the dark because of the absence of monitoring. That has changed in the last decade, with full monitoring of almost 15,000 overflows in England revealing more than 460,000 sewage outflows in 2023.
Sewage releases have caused controversy. File pic: iStock
Public outrage has pushed the issue up the political agenda, increasing the pressure on companies.
The water industry can point to some success in improving water quality since privatisation, with a reduction in levels of phosphorus and ammonia and 85% of bathing water classified as “good” or “excellent” by the Environment Agency.
But none of those are in rivers, where wild swimming, and the public activism that comes with it, is a recent phenomenon. And as public expectations for water quality rise, so do costs.
The challenge for the industry is that the cost of addressing the mess – whether physical, financial or of their own making – has just got more expensive.
Water was once a haven for long-term investors who enjoyed reliable returns from monopoly providers of an essential resource. For many years, water enjoyed a “halo effect” with cheaper borrowing costs than other industries.
This chart shows yields for water industry bonds, effectively the interest rate on their debt, compared to an index of other UK corporate bonds. While borrowing costs for everyone increased following the global inflation spike in early 2022, water remained cheaper.
In July 2023, after the full scale of the crisis at Thames Water emerged, the lines crossed over and water debt became more expensive. Water now has a premium attached, growing to almost a full percentage point by the end of this year.
And it is not just Thames. Ratings agencies have downgraded several water companies, damaging confidence in the entire sector. All companies face higher costs for borrowing, from the publicly listed Severn Trent, to distressed Thames, trying to secure terms on a £3bn bridging loan at an eye-watering 9.75%.
To meet these rising costs of capital water companies are now arguing that Ofwat should not only let them raise customer bills, but that investors need a greater return to commit money to the sector.
Luke Hickmore, investment director at abrdn, part of the Thames Water creditors’ group, said: “Water companies are facing a significantly higher cost of funding at the same time as seeing a growing need for infrastructure investment to maintain water and sewage systems.
“Investors have placed a risk premium on the entire industry because of uncertainty over whether the regulatory framework can support this increased investment need, and this drop in confidence has accelerated since Ofwat’s Draft Determination in July.
“Weaker companies with higher debt have suffered more, right at the time when many of them are looking for additional capital to meet the needs of customers and environment for the next five years and beyond.
“This financial strain and deteriorating investor support means higher cost of borrowing, which eventually feeds through to customer bills.”
All of which means your water bill is about to go up, though how much depends on where you live, and unlike other privatised utilities you can’t switch.
In July, Ofwat said bills could rise by an average of 21% to fund £88bn of spending, but the water companies are now asking for 40% to cover an investment of £107bn.
Wherever Ofwat draws its line this will be the most significant bill hike since privatisation. For decades the regulator and politicians were focused on affordability, leaving bills lower in real terms today than they were a decade ago.
But it is clearer than a chalk stream that this approach stored up trouble, and whether you blame poor management, corporate greed, slack regulation, political indifference, or the principle of privatisation itself, the industry faces a critical moment.
Sir Keir Starmer has defended a decision not to compensate women affected by changes to their retirement age – saying doing so would “burden” the taxpayer.
The prime minister said he understood the concerns of the Women Against State Pension Inequality – often known as Waspi women – but their demands were not affordable.
He was speaking after Work and Pensions Secretary Liz Kendall issued an apology for a 28-month delay in sending out letters to those born in the 1950s impacted by state pension changes.
However, she said she doesn’t accept that compensation should be paid.
Follow politics latest: Reaction to Waspi decision
Ms Kendall said the “great majority of women knew the state pension age was increasing” and that a state-funded pay-out wouldn’t be “fair or value for taxpayers’ money'”.
The announcement was branded a “day of shame” by the Liberal Democrats, who accused the Labour government of “turning its back on millions of pension-age women who were wronged”.
In the mid-1990s, the government passed a law to raise the retirement age for women over a 10-year period to make it equal with men.
The coalition government then sped up the timetable as part of its cost-cutting measures.
The Waspi group say millions suffered financially as they were not given sufficient warning to prepare for the later retirement age.
Earlier this year, an investigation by the Parliamentary and Health Service Ombudsman (PHSO) found that thousands of women may have been adversely impacted by failures to adequately inform people of the change.
The watchdog suggested that women should receive compensation of between £1,000 and £2,950 – but the findings were not legally binding.
Read More:
What is a Waspi woman and what happened to them?
Ms Kendall said paying that would have cost up to £10.5 billion, which is not “fair or proportionate”.
She also said she did not agree that sending letters earlier would have made a difference, saying research given to the Ombudsman showed “only around a quarter of people who are sent unsolicited letters actually remember receiving them or reading them“.
However she did accept there was maladministration in communicating the changes and vowed to “learn all the lessons” so it did not happen again.
Speaking later to journalists, Ms Kendall said “real and concrete actions” were coming out of the report, including a “detailed action plan to make sure those sorts of delays never happen again”.
Speaking to reporters after the announcement, Sir Keir said: “I do understand, of course, the concern of the Waspi women. But also I have to take into account whether it’s right at the moment to impose a further burden on the taxpayer, which is what it would be.”
The Waspi campaign group hit out at the decision on X, reminding Ms Kendall that she had previously called for a “fair solution for all affected”.
Women protest against changes in the state pension
Angela Madden, chairwoman of Waspi, said refusing to compensate them was a “bizarre and totally unjustified move”.
She added: “An overwhelming majority of MPs back Waspi’s calls for fair compensation and all options remain on the table. Parliament must now seek an alternative mechanism to force this issue on to the order paper so justice can be done.”
This may be as big a political blunder as chancellor’s winter fuel cut
When Liz Kendall declared in the Commons there’ll be no compensation for the so-called WASPI women, there were shouts of “shame!” from MPs.
And no wonder. Could this be as big a political blunder as Rachel Reeves axing winter fuel payments for pensioners? Potentially, yes, given the furious backlash already.
Yes, compensation was promised by former Labour leader Jeremy Corbyn and his shadow chancellor John McDonnell in the run-up to the December 2019 general election.
Mr McDonnell promised a £58 billion compensation scheme designed to end a “historic injustice” and said a “debt of honour” was owed to women born in the 1950s.
And yes, Sir Keir Starmer fought this year’s election as a changed Labour Party. And no, there was no repeat of the Corbyn-McDonnell pledge in this year’s election manifesto.
But as recently as 2022 the prime minister told a caller in a radio phone-in: “This is a real injustice. We need to something about it.”
In 2019, when she was in Mr Corbyn’s shadow cabinet, Angela Rayner said the Tory government “stole this money” from women born in the 1950s and Labour would “right that injustice”.
But not only that, Liz Kendall herself attended a WASPI campaign event in 2019 and said: “This injustice can’t go on. I have been a longstanding supporter of the WASPI campaign…”
No surprise then, that many of Labour’s newly-elected MPs now feel betrayed. “It feels a bit like we assembled this enormous coalition at the election and now we’re just intent to taking an axe to it piece by piece,” one new Labour MP told Sky News.
If it was an injustice in 2019 and in 2022, surely it’s still an injustice? Should other groups battling against injustice – like sub-postmasters and infected blood victims – be worried now?
Labour MPs were among those who criticised the decision in the House of Commons.
Gareth Snell, for Stoke-on-Trent Central, said today was a “sad moment” and asked the government to re-think its position if the economy improves.
Brian Leishman, for Alloa and Grangemouth, said he was “appalled” at the refusal to compensate the women, calling it “an incredible let down”.
Business
Victims of Post Office Capture accounting software scandal ‘to be offered compensation’ – minister
The government will offer compensation to Post Office Capture victims – while refusing to rule out blanket exoneration for those convicted.
In an exclusive interview with Sky News, Post Office minister Gareth Thomas said his department is “working at pace” and is committed to providing redress as quickly as possible.
Capture accounting software, which predates the scandal-hit Horizon IT system, was used by sub-postmasters in their branches between 1992 and 1999.
Under Horizon, hundreds of sub-postmasters were wrongly prosecuted between 1999 and 2015.
Earlier this year the government-commissioned Kroll report found there was a “reasonable likelihood” that Capture caused accounting losses and errors, although the report did not make any conclusions about the safety of criminal convictions.
A number of sub-postmasters were convicted of theft and false accounting while using the Capture IT system in the 1990s.
Gareth Thomas said ministers are going to offer redress to victims
“This is the first time the government has confirmed it is going to offer redress,” Gareth Thomas told Sky News.
“We recognise that there were significant problems for some sub-postmasters, at least some of whom used the Capture software, and had real difficulties in their branches.
“We’re now going to work at pace across government, and with the Post Office and sub-postmasters directly, to try to understand how many people were affected and how we can offer redress most effectively going forward.”
He insisted that once as much information as possible had been received from the Post Office the government would “be able to work through on a [redress] scheme”.
When asked repeatedly, however, if “blanket exoneration” was off the table, Mr Thomas refused to directly answer.
He said instead that the “first stage” was to “work with the Criminal Cases Review Commission (CCRC)”.
Protesters outside the Post Office Horizon IT inquiry. Pic: PA
Mr Thomas added: “It’s the reason why we’ve asked the Post Office to go through all its records just to try and help us understand firstly how many people were affected in total by using Capture software, how many people saw problems in their branch, and also to try to understand how many people were then convicted.”
“That’s got to be the first stage,” he continued. “We’re working at pace and expect the Post Office to be working at a pace to make those judgements.
“And we will get that information to CCRC as soon as we can – and we’ll make a judgement from that.”
Hundreds of sub-postmasters who were wrongly convicted of stealing because of faults in the Horizon system, introduced after Capture, were exonerated through legislation earlier this year.
Sky News has previously revealed that the CCRC is looking into a number of Capture cases but said that the older the case, the more difficult it could be to determine.
Mr Thomas admitted he was also “worried about the level of information” available “given the length of time since Capture was used”.
He emphasised the Post Office had been instructed “as a matter of urgency” to look into its records and pass on as much information as possible.
The minister also insisted that the government has “a responsibility to work as fast as we can… and we are determined to do that”.
On potential redress schemes, the minister also said the government has learned from past mistakes on compensation.
Read more:
Inquiry hears key final witness statements
Post Office’s ‘malignant culture’
Royal Mail takeover by Czech billionaire approved
File pic: Reuters
Mr Thomas said some Horizon sub-postmasters had not been involved “early enough” in the process previously.
“That’s certainly something we don’t want to happen this time round,” he said.
“I’m now actively talking to sub-postmasters and legal representatives so that we can get redress offered ultimately as quickly as is feasible.”
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