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The author is a professor of economic policy at the University of Oxford
The privatization wave that swept through the UK in the 1980s and 1990s aimed to create private sector balance sheets that could be leveraged for investment. However, a flaw emerged: a belief in minimally regulated oversight. Regulators consequently entrusted companies with managing their own balance sheets, and, even worse, encouraged borrowing by allowing them to mortgage their assets and distribute the proceeds to investors. Over time, the combination of negative real interest rates, quantitative easing, and financial engineering turned into the primary focus.
Regulators not only disregarded the companies’ increased debt and additional dividends but also failed to ensure the proper maintenance of assets. In the utilities sector, there is a widespread perception that things are not functioning as they should, with visible signs such as sewage contamination in rivers.
This state of affairs resulted from significant regulatory failure, although it wasn’t an inevitable outcome. In theory, regulators could rectify the situation by mandating debt only for new investments not funded by current customers, demanding the return of the remaining equity, compelling investors to repair infrastructure such as pipes and sewers, and ensuring the resilience of electricity networks against storms. However, the likelihood of this happening approaches zero, considering companies have already prioritized dividend payments at the expense of such measures.
The consequences of this mismanagement were evident last week with the challenges faced by Thames Water. Unfortunately, this comes at an inconvenient time when substantial investment is required to modernize all utilities. For example, the water industry necessitates significant funding to address sewage treatment, pipe networks, and supply shortages. Likewise, the electricity sector requires a massive investment program to achieve net zero emissions by 2035 (or 2030 according to Labour plans) and ensure a secure power supply.
Most of the necessary funds will likely need to come from outside the UK. Although utilizing pension funds may provide some assistance, the fundamental reality is that the UK has a substantial external current account deficit. Therefore, we rely on foreign entities to lend us the money required to sustain a higher standard of living, support the fiscal deficit, and finance crucial infrastructure projects such as achieving net zero emissions, improving sewers, constructing HS2 rail links, expanding airports, and completing fiber and mobile networks.
While foreign investors, primarily those from overseas, have taken advantage of the situation in the past, they are unlikely to feel remorse for their exorbitant dividends or willingly invest additional equity to address shortfalls or renew infrastructure. If the nation is unwilling to save, we must actively seek assistance—yet beggars can’t be choosers.
Mere adjustments will not resolve these challenges. A complete overhaul is necessary, alongside the required investment. We must be prepared to bear the costs ourselves or face higher taxes. Naturally, this would significantly impact living standards, particularly during a period of elevated living expenses. However, investment in achieving net zero emissions and cleaner rivers comes at a price.
Moreover, substantial regulatory reform is imperative. We need an integrated, systems-based regulatory regime that allows for reasonable profits and ensures costs are borne by consumers and taxpayers. Currently, regulation operates in silos, lacking synchronized planning for electricity generation, networks, and river catchments. The even basic task of installing smart meters is significantly delayed.
Fixing these issues is not impossible, but the notion of renationalization is a diversion. Neither Conservative nor Labour ministers have fully grasped the reality that no one else will foot the bill for these endeavors. Both parties set ambitious targets, promise affordable and sustainable low-carbon energy, and cleaner rivers. However, they are unwilling to openly discuss the associated costs. Until they confront these uncomfortable truths, expect more temporary solutions, further casualties resembling Thames Water, postponed net zero targets, and an ever-widening gap between the problem and its solution.
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