Down the drain: how billions of pounds are sucked out of England’s water system

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The untreated sewage that overflowed into England’s rivers and beaches this summer came only a few months after the companies responsible paid £1bn to their shareholders. The payment, for the financial year to March 2022, was less than average. Dividends from England’s big water and sewage companies are usually twice that – £2bn a year.

The amount of sewage leaving the system was unusual, but the amount of money leaving the system is not.

In the 30 years since England’s water was privatised by Margaret Thatcher, water companies have set up a system in which billions of pounds leave the network in an average year.

It’s money that could have gone towards building a more resilient water system, say academics. Among them, Dieter Helm, an Oxford professor of economic policy specialising in utilities, went as far as saying in 2021 that England’s water system was “a scandal of financial engineering”.

So where is the money going?

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The water company debt mountain

England’s nine big water and sewage companies had zero debt in 1989 when they were sold off to the private sector. Now they have £54bn. The number is even higher when you include the six smaller water-only companies.

It’s normal for companies to take out debt to fund things like investment.

But it is actually customers that have been footing the bill for investment, researchers say.

“Investments have been entirely financed from customer payments, almost every year,” argues David Hall, visiting professor at Greenwich University and leading commenter on England’s water industry, in a 2021 analysis.

In Hall’s argument, that means the loans have been used for something else. He claims: “The companies have nevertheless borrowed large amounts of money, building up a large pile of debt and large annual bill for interest. This debt has not been taken on to finance investment, but to finance the payment of dividends.”

Approximately 20% of our water bills each year pay dividends and interest payments, the Competition & Markets authority found.

Water company debt has gone from zero in 1989 to £54bn in 2022

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In the same time frame, £66bn has been paid out in dividends. Again, including dividend payments from England’s smaller water-only companies would result in a higher figure.

Water companies made several statements to the Guardian about their dividend policies and levels of debt.

Several companies say that dividends are important to shareholders and allowed by the regulatory system. Some highlight that less is spent on dividends than investment.

Several emphasise that external shareholders haven’t received dividends this year, though it is evident from financial statements that all the big nine regulated water companies except for Southern paid out dividends in the year ending March 2022, though these may have gone to “internal” shareholders such as parent companies. Once these payments leave the water company under the title of “dividends” it can be hard to track where they go, but we do know the money is no longer on the balance sheet of the water company.

Companies also say that they have spent significant sums of money on investment since privatisation. Using Ofwat figures we can see that the big nine have spent a total of £158bn on capital expenditure (investment) between 1991 and 2022. On debt levels, companies maintain that they have responsibly raised debt and worked to ensure financial stability, with some taking action to reduce inter-company loans and overall debt levels.

Full responses from the water companies can be found here.

Is a public system better? How England compares with Scotland

A look at the Scottish system shows that bills are slightly lower, and investment is slightly higher, for each household in Scotland.

A household in Scotland pays 7% less for its water and sewage services than one in England or Wales. The annual average bill for an English or Welsh household is £419 in the year 2022-23 compared with £391 in Scotland, data from Water UK and Scottish Water shows.

It is hard to make a direct comparison because there are many differences between the two systems, such as the type of the territory – Scotland is more mountainous and has more remote areas – and the length of the mains and the total volume of water produced. Scotland has a population of 5 million to England’s 57 million.

But we can see that the Scottish system has invested more in maintaining and upgrading its water infrastructure in the last decade than companies operating the system in England and Wales.

In the year to March 2021, Scottish capital expenditure was 7% higher, spending £243 per household compared to £228 per household in England and Wales, analysis from Ofwat and Scottish Water data shows. The financial situation of Scottish Water is different to England’s water companies as it is a public body, but it had £3.9bn in debt in March 2022.

Pipes in Scotland leaked 9% more water. On average, 10.5 litres of water per mile of pipe were lost in Scotland every minute during the year to March 2022 compared with 9.7 in English and Welsh pipes per minute.

A Water UK report published this year shows that all companies have reduced leakage from 2004 to 2020, with Scotland registering the biggest reduction.

A Water UK spokesperson said that “leakage is a top priority for the industry” and that leakage has reduced 10% in the last few years.

‘The purpose has been to profit-maximise’

Reflecting on how England’s water system has fared since privatisation, Helm writes:

“The sad reality of 30 years of privatisation has been high gearing [a measure of debt], high profits and dividends, and investment well below what could have been achieved.”

The flaw is in the set-up of the system he argues – because this is what the businesses that own the water companies do.

“The purpose of private water companies has indeed been to profit‑maximise. It would be odd to expect the infrastructure and private equity funds to have decided to forgo an open goal.”

About the data

  • Operating expenditure and capital expenditure from nine English water and sewage companies taken from Ofwat. Average derived from 1991-2022.

  • Dividend expenditure by nine English waters companies taken from Karol Yearwood 2018 (1991-2018), David Hall 2022 (2019-2021) and Guardian research (2022). Average derived from 1991-2022.

  • Interest payments by nine English waters companies taken from Karol Yearwood 2018 paper (1991-2018). Average derived from 1991-2018.

  • Net debt position of companies taken from 2022 company annual reports.

  • Companies included: Anglian Water, Northumbrian Water, Severn Trent Water, South West Water, Southern Water, Thames Water, United Utilities, Wessex Water, Yorkshire Water. NB: Welsh Water is excluded from these calculations – it became a not-for-profit in 2001

  • All historic prices adjusted for inflation to March 2022 values.