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The writer is an FT contributing editor
Seeking a metaphor for Britain’s fractured political economy? Look no further than its polluted waterways and beaches. The nation’s policymakers have been blindly devoted to the market, resulting in raw sewage being dumped into rivers and coastal waters.
The privatisation of the water industry in 1989 was considered a significant moment in Margaret Thatcher’s economic revolution. Great Britain, known as the “sick man of Europe,” underwent a transformation as Thatcher rolled back the boundaries of the state. Electricity, gas, telecommunications, ports, airports, and even the national airline were all transferred from public to private ownership. The water supply and effluent disposal industries were no exception. Privatisation was expected to breathe new life into an industry struggling with its outdated infrastructure.
However, instead of renewal, what followed was an abundance of untreated effluent in Britain’s rivers, lakes, and beaches. The privatised water utilities, having reaped substantial profits, now face financial instability. With concerns about Thames Water’s health, talk of renationalisation has begun. The government’s proposed solution? Reduced sewage overflows by 2050 – 2050 being the proposed deadline.
The story is straightforward. The companies were sold off without any debt to maximize returns for the Treasury. The new owners then burdened them with debt while generously rewarding shareholders, many of whom are foreign wealth funds. This financial engineering resulted in dividends exceeding £74bn. Industry infrastructural improvements were passed down to consumers through higher bills.
The Environment Agency reported an average of 825 sewage spills per day in 2022, lasting over 1.75 million hours. These spills, euphemistically referred to as “storm overflows,” are legally permitted during exceptional weather conditions, but these conditions have become the norm. Since 2016, recorded discharges have more than doubled. However, with higher interest rates, the industry’s mounting debts have become unsustainable.
The inherent risks were never a secret. Water supply and effluent disposal are not industries conducive to competition. The privatised companies sought to exploit their regional monopolies for profit maximization. Ofwat, the regulatory body established to prevent this, lacked sufficient authority. Weak leadership and a reluctance to confront the operators resulted in what is commonly known as regulatory capture.
Polluted rivers and filthy beaches reflect a broader issue within the political culture of the country. The influence of the 1980s extends well beyond the water industry. The belief that the market always knows best has become ingrained in the nation. This was evident when the Bank of England’s lightly regulated oversight of the City of London amplified the 2008 financial crash. Privatised railways have consistently failed to provide satisfactory service. Billions have been wasted in attempts to introduce “competition” to the NHS. Even today, the Treasury upholds the notion that the state is bad and the market is good, leading to reductions in public investment.
The solution is not a return to the past. The 1970s were not a golden age. Renationalisation of industries, apart from water and rail, is a subject open to debate at best. The nationalised BT, for example, was hardly a model for state ownership. The poor state of the gas industry can be attributed to both bad government policy and ownership.
The state does not possess all the answers, and the market plays a crucial role in resource allocation efficiency. However, a fundamental shift in mindset is necessary. It is widely agreed that sustained economic growth in Britain requires a significant increase in productivity, which in turn demands substantial investment in national infrastructure. Both the market and the state have essential roles to play.
A change in leadership at Downing Street is necessary but insufficient. Regardless of political affiliation, the next government will need to advocate for sustained public investment and the necessary tax increases to finance it. The Treasury must rid itself of the ideological certainties inherited from the Thatcher era.
Britain has returned to its former state as the “sick man of Europe.” It is no coincidence that Europe’s more successful economies have chosen not to privatise their water industries. Accelerated by Brexit, which severed economic ties with the EU, this decline can also be attributed to the ideological shift towards unchecked capitalism.
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