There is something poignant about Andy Burnham’s campaign for water nationalisation. In a previous life, the ‘King of the North’ was Health Secretary in the twilight days of Gordon Brown’s government.
From his throne on Victoria Street, he saw the NHS groan under chronic underfunding and managerial sprawl. Now, with his eyes set on Downing Street, he is promising that placing sewage pipes under government control will somehow produce a different result to what he saw when running the health service.
Instead of knee-jerk nationalisation, politicians should be encouraging more of the nation’s water companies to return to the public markets
This is as though the lesson of the public sector’s relationship with capital-intensive infrastructure is that we simply have not tried hard enough. The argument has a certain populist elegance: the private sector is ‘bad’, therefore the wise and moral state (or “the people”) should run things instead, and we can forget about why we needed to privatise the whole thing in the first place. Which is roughly the logic of a man who, finding his newly refurbished but bumpy car has a puncture, concludes that cars are inherently unfit for purpose and resolves to walk.
While walking is basically free, nationalising and running some of the most complex and expensive infrastructure in the country is not. The government’s own estimate in 2024, based on Ofwat’s Regulatory Capital Value, said that compensating shareholders and debt-holders would cost over £99 billion, while DEFRA now projects it would reach £106.7 billion (which is over 180 per cent of the defence budget).
WeOwnIt, a vocal but amnesiatic lobby group, has said that this bill can simply be discounted by toughening environmental regulation until company valuations fall. This is the political economy of a banana republic. Every major UK nationalisation in the last seventy years has involved market-rate compensation because the alternative destroys the UK’s reputation as a stable destination for long-term investment capital, which in the current fiscal environment would be a ruinous own goal. Luckily, the current inhabitants of No. 10 and No. 11 know this, and have pulled away from slamming the big, red ‘nationalise’ button.
Advocates of nationalisation inevitably gesture towards Labour’s rail programme. Rail operators held time-limited franchise contracts, and when those franchises were not renewed, there was no compulsory purchase and no international legal exposure, because the state was declining to renew its previous arrangements. Water is different in every legal respect: under the Water Industry Act 1991, companies hold indefinite statutory appointments embedded in corporate structures whose shares are held internationally. There is no franchise cliff-edge to wait for, and nationalisation therefore requires compulsory acquisition, which at below-market rates means international arbitration.
More than 70 per cent of England’s water industry is in foreign hands: Thames Water’s shareholders include entities connected to the governments of Kuwait, Abu Dhabi and China; Northumbrian Water is 75 per cent owned by CK Hutchison of Hong Kong, the remainder by KKR of New York; Anglian Water is owned by Canadian, Australian and Abu Dhabi investors alongside UK pension funds.
In the first instance, this should be celebrated, as British water infrastructure desperately needs the investment that global capital can provide and the government shirks from. As part of these agreements, capital providers require security that their investments will literally pay off. The UK’s bilateral investment treaties contain Investor-State Dispute Settlement clauses allowing investors from signatory countries to challenge governments at private international tribunals when treaty protections, including fair and equitable treatment and compensation for expropriation, are breached. A government that legislated below-market compensation for water assets held by investors from Canada, Australia, Kuwait and Hong Kong would face ISDS claims at ICSID and UNCITRAL stretching into the 2030s, entirely outside the jurisdiction of British courts. Parliament is sovereign over domestic law; it has no sovereignty over the international obligations it has already entered into.
The current gilt market bonfire compounds the problem that nationalisers wish to frog-march us towards. Foreign buyers account for nearly 40 per cent of UK government debt as the Debt Management Office has highlighted, which is unparalleled among G7 nations, and the ‘mini-budget’ crisis demonstrated with brutal clarity how quickly the market demands a higher risk premium when confidence in British fiscal discipline falters.
The government does not repeat ad nauseum its commitment to the ‘iron-clad fiscal rules’ for the fun of it. The pension funds of Abu Dhabi, Canada, and Hong Kong that own water company equity are the same class of institutional investor that buys gilts and funds British infrastructure. Treating one category of their British investments as politically available for below-market acquisition is unlikely to leave them sanguine about the rest, and adding £99 billion in new liabilities to a balance sheet on which public sector net debt is already at around 95.5 per cent of GDP would test market patience that is already considerably strained.
Before privatisation, capital expenditure fell from nearly £4 billion per year in 1974-75 to £2.3 billion in 1984-85 as the Treasury starved the Regional Water Authorities of investment, and bills rose by thirty per cent above inflation in the fifteen years before privatisation. Since 1989, by contrast, companies have invested more than £236 billion in the network, which is nearly £10,000 per household, at annual levels more than double those pre-privatisation. For the current five-year regulatory period alone, water companies in England and Wales need to invest more than £105 billion, the majority of which will come from international capital markets.
The sewage crisis is partly the consequence of that earlier neglect finally coming due as Victorian infrastructure reaches the end of its working life. Scotland, meanwhile, is routinely offered as proof that public ownership delivers cleaner rivers – yet Scottish officials themselves described their own company as “way behind” England on sewage spills, Scotland monitors only around ten per cent of overflows against England’s eighty per cent, and the Office for Statistics Regulation concluded that there was no suitable evidence for a meaningful comparison between the two nations on pollution incidents.
The country needs stronger infrastructure to deliver growth, and for the water sector this means urgent investment and serious reform: tougher regulation with real enforcement teeth, which is precisely what the Cunliffe review recommended in proposing the abolition of Ofwat.
The government’s own assessment acknowledges that privatisation would take years to undo, during which the sector’s problems would only worsen. Instead of knee-jerk nationalisation, politicians should be encouraging more of the nation’s water companies to return to the public markets and list on the London Stock Exchange to support a real growth agenda.
Andy Burnham deserves credit for saying plainly what he believes; he might also reflect that promising nationalisation is considerably easier than achieving the result. The pipes need fixing. There is a compelling blueprint put forward by Sir Jon Cunliffe. Now we need to see the government follow through on this plan.
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