Thames Water scandal – is the party drawing to its close?

As we go to press it has been announced that Sarah Bentley, the CEO of Thames Water, is resigning on the basis that the company is no longer financially viable and The Times is reporting that government ministers are drawing up contingency plans for the company’s collapse. It seems that next year average water bills across the board are likely to be 40% higher in order to raise the funds to clear up the mess that the privatised water utilities have got the system into.

Long-term mismanagement

The only question is: why wasn’t something done sooner?  The mismanagement of the water utilities by privateers even led Jonathan Ford of the Financial Times on 10 September 2017 to write an article entitled: ‘Water privatisation looks little more than an organised rip-off’, because the companies were doing such a bad job of managing the water supply while their top managers and investors were raking in huge profits:

How hard can it be to be the chief executive of a privatised British water company? Your customers are determined by geography, your prices set by a regulator and designed to offer ample scope to fund both capital expenditure and to pay returns to your investors. Pretty much all you have to do is to make sure your sewage plants work and to keep the public waterways clear of human waste…

Yet even this bare minimum seems to have eluded Martin Baggs, the former boss of Thames Water. He… was the man at the corporate stopcock when the utility’s malfunctioning plants spilled so much excrement into the Thames that locals in the Berkshire town of Little Marlow took to referring to the scum-covered surface as ‘crappucino’. The company was this year fined a record £20m for venting 4.2bn litres of raw sewage into the rivers Thames and Thame between 2012 and 2013.

Not that this escapade unduly crimped Mr Baggs’ career prospects. Despite evidence of negligence in its operations that later led a judge to brand the company’s actions ‘borderline deliberate’, he not only prospered after its disclosure, but received a rise of 60 per cent in 2015, taking his pay to a princely £2m. He stood down last year, showered with encomiums for his ‘huge contribution’.

To be fair to Mr Baggs, he is not alone. The boring job of plumbing seems almost an afterthought in determining the rewards of water supremos. Not only is pay uniformly high: Steve Mogford, chief executive of United Utilities, collected £2.8m last year, for instance. But if things go wrong, well, why should a bit of sewage stop those cheques rolling? In 2016, Yorkshire Water was fined £1.7m for polluting a lake near Wakefield and a section of the River Ouse. But that didn’t prevent it handing its boss Richard Flint £1.2m”.

Despite the Financial Times expressing its outrage in no uncertain terms, nothing substantial appears to have been done to remedy the situation. In the case of Thames Water, nearly one litre in every four flowing through Thames Water’s mains pipes is lost and its leakage rate is at a five-year high, which is why we can expect hosepipe bans this summer despite having endured a particularly wet winter.  As regards sewage, the situation throughout the country is still grim.  Figures from the Environment Agency reveal that sewage was pumped into England’s rivers and seas at least 301,091 times last year – an average of 824 a day, rendering our beaches and rivers totally disgusting.

Why were utilities privatised in the first place?

The main cause of privatisation of concerns whose primary purpose is to provide a public service is the general crisis of overproduction that has for decades now left the bourgeoisie of the world with very few avenues for the profitable investment of their massive capital. Compliant governments the world over responded to their needs by opening up for their investment every kind of public service despite the fact that it was pretty obvious that there is nothing altruistic about capital – the aim of its investment is to make maximum profit, which stands in antagonistic contradiction to the public requirement for high quality service. In Britain all the utilities were privatised, as were the railways and the rest of public transport, with serious inroads being made into the state school education service and the NHS (in both cases causing increased taxpayer funding to be channelled into profit rather than improving the service).  Where profits are not high enough, we have seen private rail companies walk away, leaving the state having to take over all services that are essential.

The public were softened up to accept privatisation by various means:

1. When publicly run, successive governments, Labour and Tory, starved public services of essential funds, thereby forcing a reduction of quality on the service which people were deceived into believing would be brought back up to standard by the much more ‘efficient’ private sector.

2. When utilities were privatised, the public were encouraged to buy shares in the newly-formed private companies, with widespread publicity campaigns waged under such slogans as ‘Tell Sid’ (for the gas privatisation) and “You could be an H2Owner” in the case of the water utilities.  This was a wheeze of Margaret Thatcher’s who claimed to be turning Britain into a “shareholding democracy”, just as the sale of council housing to tenants was supposed to be creating a “property owning democracy”.  That of course was just propaganda to disguise the fact that assets owned by the state for the public benefit were being handed over in the ultimate analysis to capitalist vultures so that they could be milked for profit.

The Guardian sighs: “The problem was that few small shareholders could resist the temptation to cash out their large profits.

So, as they sold their shares, the companies were bought up, mostly by private equity, institutional investors and large infrastructure firms from abroad” (Jonathan Portes, ‘I worked on the privatisation of England’s water in 1989. It was an organised rip-off’, The Guardian, 16 August 2022).

Clearly Jonathan Portes swallowed the Thatcherite propaganda and is still condemning the ‘greed’ of those workers who invested relatively tiny amounts in order to make a windfall profit averaging some 40% by reselling their shares almost immediately. Of course, this was Thatcher’s intention and expectation.

And subsequently “These [corporate] investors spotted the combination of large investment programmes, effectively guaranteed returns, and a supine and underpowered regulator that lacked access to high-powered economic consultants and lawyers. The result is that companies have been loaded with debt that has permitted huge returns for shareholders” (ibid.).

It is probably true to say, however, that even Thatcher did not foresee the full extent to which the privateers would sabotage public services for the sake of their profits.  Bourgeois politicians tend to believe their own propaganda to the effect that private capitalists are capable of running businesses more ‘efficiently’ than the state.  However, the word ‘efficient’ has different meanings, and in capitalist circles its primary meaning is ‘most profitable’ and not ‘most effective in meeting the needs of the public’!

The numbers

This is how capitalist ‘efficiency works:

Over the past decade, the nine main English water companies have made £18.8bn of post-tax profits in aggregate…. Of this, £18.1bn has been paid out as dividends. Consequently, almost all capital expenditure has been financed by adding to the companies’ debt piles. Collectively these now [in 2017] stand at a towering £42bn.

“… annual interest bills might be £500m lower if the companies were still in state ownership… Customers also would not have to finance the … dividends. Bundle it all together and that could knock £100 off a £400 annual water bill” (Jonathan Ford, op.cit.).

In fact, in any normal business, the cost of renewing and maintaining its infrastructure is taken from income before calculating what profit there has been.  The cost of new infrastructure, e.g., building a new reservoir, might be financed by borrowing, but both capital and interest repayments should be deducted from income before calculating profit. This would not appear to have been happening in the case of most water companies, and certainly not at Thames Water.

Had the utilities remained in public hands, a study published in 2018 argued that the cash flow from customers could have funded all the investment that has been undertaken by the water companies, without any need for borrowing.  The only reason for borrowing was to have cash to pay hefty management salaries and bonuses and pay an above-average return to privileged sections of shareholders.  Of course a public utility might need to borrow were it to engage in major infrastructure works, but even in such an event, it would be able to borrow at far lower rates of interest than a commercial corporation. Moreover, had the utilities been in public hands, there would be no question of their managements being able to determine their own salaries at stratospheric levels.

Scottish Water was never privatised and it is instructive to see the difference that this has made to customers: “between 2002-18, Scottish water, which stayed in public hands, have kept real prices stable, whilst prices in England rose 15%. And during the same period, Scottish Water invested 35% more per household than English water companies” (Tejvan Pettinger, ‘Water Privatisation – Pros and Cons’, Economics Help, 13 December 2022).

By way of contrast, “The Competition and Markets Authority has found about 20 per cent of customer bills are put towards debt servicing and payments to shareholders” (Martin Wolf, ‘How to fix Britain’s water industry, Financial Times, 14 May 2023) – and that was before skyrocketing interest rates!

As it is, Thames Water’s debts amount to 80% of the value of its assets, so that the interest rate rises that are the result of the government’s attempts to reduce inflation by increasing interest rates are close to bankrupting it:

The company has to renegotiate about £1.4 billion (of its £14 billion debt) which matures at the end of 2024. Furthermore “Thames Water now needs to refinance £2.1 billion worth of debt by spring 2027. Executives are under pressure to establish how the company will refinance £909 million in debt due to mature by the end of next year. The company needs to reach a resolution before a bond worth £84.7 million matures in October this year” (Helen Cahill, ‘The £14bn debt that could sink Thames Water’, The Times, 29 June 2023).

Most of the damage to the company’s finances, though by no means all, took place between 2006 and 2017 when Thames Water was under the control of the Australian investment bank, Macquarie Capital Funds, known in Australia as the “vampire kangaroo” as a result of its asset stripping and tax evading reputation.

Macquarie’s stooge managers included Martin Baggs, the chief executive from 2009 to September 2016 whose annual pay rose from £1.29m in 2014 to over £2m in 2015 and Stuart Siddall, the chief financial officer whose pay almost doubled, from £785,000 to £1.4m in the same period.

The pension fund was also brutally raided: during the period of Macquarie control, Thames Water’s pensions liabilities went from a £26.1m surplus in 2008 to a £65m deficit in 2009 and £260m in 2016!

There was a reminder of this … when it emerged that Thames Water (or rather its customers) had obligingly paid off £2bn of the £2.8bn of debt that the Australian investment bank Macquarie took on when it acquired the company in 2006 [that is twice what an investor might expect from a private utility] despite conditions set by the regulator that the utility’s finances would be ringfenced from the acquirer. The financing cost of this corporate transaction — from which water users derived no conceivable benefit — was simply lobbed on to their bills” (Jonathan Ford, op.cit.).

Moreover, for 10 years the company paid no corporation tax.

The situation in 2017 was:

£1.16bn Dividends paid by the utility from 2006 to 2015

0 Corporation tax paid by Thames Water from 2011 to 2015

£10.2bn borrowings by March 2016. In 2007 they had been £3.6bn

£260m Pensions deficit by March 2016

Sarah Bentley, who became CEO 3 years ago, with a golden hello of £3.1m, and was given the task of ‘turning around’ Thames Water’s dire situation – a feat which was surely impossible considering the damage that had already been done – has had no choice but to admit defeat, given escalating interest rates, and so has just resigned, with a mere £1.5 m payoff – having nobly foregone her bonus that was expected to be in the region of half a million pounds.


Thames Water is not an outlier in the industry on how it has managed its balance sheet. Companies across the sector became heavily leveraged after they were privatised by Margaret Thatcher’s government in 1989” (Helen Cahill, op.cit.).

In other words, with rising interest rates it is not just Thames Water that is in trouble:

Any financial collapse could have a ‘domino effect’ and lead other water companies to topple, one chief executive of another water company warned. In December, Ofwat said it was concerned over the financial resilience of Thames Water, Yorkshire Water, SES Water and Portsmouth Water” (Leke Oso Alabi, Gill Plimmer and Maxine Kelly, ‘Thames Water chief in sudden departure amid struggle with £14bn debt pile’, Financial Times, 28 June 2023).

It is estimated that the increase in interest rates will burden water companies with another $1.3 billion of debt.

Alarmingly, one company, Southern Water, which was about to collapse into insolvency in 2021, was then ‘rescued’ by … Macquarie in what the Financial Times (ibid.) terms “a secretive deal”!  No doubt that has gone well!

Financial shenanigans

Investigators have had considerable difficulty in ascertaining what actually happens to the money generated from millions of customers and from the massive borrowings of the water companies.

It is hard to trace exactly where the cash from water bills is going, says Sir Dieter Helm, professor of economic policy at Oxford university” (Gill Plimmer, ‘UK water company dividends jump to £1.4bn despite criticism over sewage outflows’, Financial Times, 8 May 2023).

The reason for this difficulty is that where a utility is purchased by a corporation it invariably becomes a member of a group of related companies, who cheerfully pass money and other assets from one to another, usually via a group company registered in the Cayman Islands or some other tax haven, after which it disappears from view, ceasing to be available for inspection even though somewhere it still exists.

These complex financial structures are not transparent or clear” (ibid.). This is obviously useful for tax minimisation purposes: “The FT reports that in a ten year review of water company accounts, that on profits of £20.7 bn they only paid an average tax rate of 8% or £1.7bn” (Tejvan Pettinger, op.cit.).  But it is not only for tax purposes that these structures are used.

The Financial Times tells us that much resort is being had to “internal dividends” – i.e., dividends allocated to another company in the group, which can be made even when the company’s shareholders (often pension funds labouring under the illusion that utility companies were a safe investment!) receive no dividend at all because no “external dividend” is declared (see Gill Plimmer, op.cit.).  The beneficiaries of the ‘internal dividends’ must be the management and shareholders of some other company in the group that doesn’t even have the flaccid supervision of Ofwat over its activities. 


With regard to Ofwat, “Water companies have been running rings around Ofwat for years” (ibid.). It has been quite unable to stop the rot of excessive dividends, excessive executive pay and excessive borrowing. Moreover:

In 2016, the House of Commons Public Accounts Committee found OFWAT were too generous and as a result, water companies made windfall gains of at least £1.2 billion between 2010 and 2015 from bills being higher than necessary” (Tejvan Pettinger, op.cit.).

All along “Ofwat’s powers were inadequate: it could not impose changes on licences, block dividends or control salaries in any way. Now at least it can” (Martin Wolf, op.cit.).  Without these essential powers one can only conclude that Ofwat was nothing more than wallpaper to disguise the cracks.  “Ofwat, the supposed regulator of the water industry … has become a taxpayer-funded apologist for … greed and incompetence.” (‘The Times view on water crisis: Drowning in Debt’, 28 June 2023). It is only now that the water companies have been driven into insolvency by unscrupulous operators, while rivers and beaches are polluted and water shortages are worsening that finally our compliant bourgeois government, after years of warning from the financial press, is actually being moved to grant Ofwat a modicum of power.

The Times tells us: “The body responsible for the economic regulation of the privatised water and sewerage industry first mooted in March the idea of ensuring leaders of poorly performing companies are only paid bonuses by eating into water sector profits and dividends [i.e. not from bills]”. Quite honestly this is nothing but high-sounding nonsense: because of course all profits come from bills! However, “in future executive directors’ bonuses would be reviewed and, where expectations were not met, the new powers would be used to protect customers. Remuneration committees that award bonuses to water bosses will now have to take full account of performance for customers and the environment” (Adam Vaughan, ‘Ofwat bars failing water firms from paying bonuses out of bills’, The Times, 30 June 2023). Sanctions, however, are not spelt out – we can only live in hope!

Who will lose out when Thames Water goes under?

(1) Shareholders will lose out.  The second biggest investor in Thames Water is the Universities Superannuation Scheme, providing pensions to 400,000 active and retired academics. Thames Water shares, handsomely paid for from deductions from teachers’ salaries, would become worthless.

(2) Customers will lose out. Water bills are expected to rise by 40% in an attempt to raise enough money to get the companies out of trouble.

(3) The taxpayer will lose out. When a company is taken back into public ownership, its debts pass on to the government which recovers the money from taxes. Either taxes increase or spending is moved away from something else in order to pay these debts.


It is clear that under capitalism it is well-nigh impossible to reconcile the maintenance of a high quality of service to the public with the need of the owners of capital to maximise its returns. If the service is publicly owned, cash-strapped governments anxious to keep taxes low in order to attract billionaires to invest (and to get themselves elected again by ordinary taxpayers) invariably keep their service providers underfunded.  If it is privately owned, the vultures descend and matters are even worse. It’s time to face it, capitalism must go!

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