I posted this thread on Twitter this morning. The report the thread refers to is here.
There has been a lot of discussion about the possible failure of Thames Water in the last day or so. I have been looking at the accounts of the water companies in England for the last twenty years. My conclusion is that they are all environmentally insolvent. So a thread…
[Please note this is a long thread. If it appears to stop midway just hit ‘See more replies’ and the rest should appear.]
There are nine companies in England that take away the sewage. There is more than just supplying water. But the crisis facing English water companies is largely related to waste water, so my work has focused on those who take away our waste.
Thames Water is one such sewer company. The others are Anglian Water, Northumbrian Water, Severn Trent, South West Water, Southern Water, United Utilities, Wessex Water and Yorkshire Water.
It’s important to say that while I used the accounts from each of these companies in my work, the results I’m talking about here or for the industry as a whole. To get a proper picture of the water and sewer industry, I combined their accounts into one set.
Doing so produced some pretty amazing data. Here’s what the combined UK water and sewerage companies’ profit and loss accounts look like for 2022 in isolation, for 2003 to 2022 in total, and on average over that period:
There is a lot of data there. However, there are some simple facts to focus on.
First of all, the operating profit margin in this industry is 35%. That’s staggeringly high, rising to 38% when other income is taken into account. 38 pence for every pound you pay for water is an operating profit, ie a profit before the cost of the loan.
Second, consider the cost of borrowing. I have generously matched the interest received with the interest paid. That still leaves interest costs that represent an average of 20% of income. 20 pence of every pound paid to these companies, on average, goes towards interest.
However, that still leaves them profitable. And they do pay taxes. The average tax rate is 19%, but it is well below the expected tax rate for this period, when the tax rate reached 30% for a part. And much of that tax has not been paid: more than £8 billion has been deferred.
Finally, of the almost £25bn they have made in profits over the years, they have paid every penny, and more, in dividends. In other words, shareholders have taken 15 pence for every pound of water paid for. There was nothing left to reinvest, at all.
No wonder the water industry is in trouble. The income statement shows that the public is being ripped off by these companies who are simply treating the fact that the English consumer has had no choice about who to buy water from as a means of profiting from them.
Things are worse if I look at the balance sheets. Now I know that this scares most people, so I’ll talk in detail. This is a very summarized balance for the industry in 2022:
The industry has £77 billion invested in equipment. The rest of his assets are some financial investments, some cash, and amounts owed to him by clients. So far, so good.
What is scary is what the industry owes. The £77bn worth of equipment is financed, for the most part, by loans of nearly £55bn or more. It is also funded by over £8.5bn of tax not yet due, which significantly reduces the industry’s cash-paid tax rate.
Even the pension funds of those who work for the industry are contributing to the financing, and there are further loans of various kinds in the other sums owed totaling more than £10.7bn.
What this means is that of the total of around £91bn invested in the sector, more than £78bn is financed by loans or borrowings of some kind and only slightly more than £13bn. Sterling are funded by shareholders.
What that also means is that shareholders provide less than 15% of the total funding for this industry. So much for the idea that private capital would finance water after privatization. The reality is that debt is doing it.
When I started looking at the data more deeply, things only started to get worse. What really interested me was how much the water companies had invested in equipment during the twenty years reviewed.
The answer was, to my best estimate, that the sum was £89.8 billion. Of course, some of that has now worn off and is long gone from the accounts. Assets like vans and computers don’t last as long in use.
Then I found out how that investment was financed. There were only two ways. One was out of operating income. For technicians this is possible using what is called the depreciation charge in the accounts. This sum came to £38.9 billion. Customers provide this money.
The rest of the financing came from the increase in indebtedness during the period. That came to £40.5 billion. Other long-term liabilities, which are again mainly loans or pension fund liabilities, increased over the same period by £10.4bn.
The net result is that of the £89.8bn invested, £89.8bn of funding was provided by customers or loans of various kinds, meaning that shareholders did not invest in the assets of these businesses at all.
This is important for a very good reason. As we all know, these companies now routinely pollute England’s rivers and beaches with sewage. That sewage comes from what’s called storm overflows, though that’s a misnomer now, as many release sewage even after moderate rainfall.
That contamination cannot persist. Unless it is stopped, we will end up without reliable clean water in England. However, the estimated costs of ending this pollution vary considerably.
The industry has offered to invest £10bn over seven years, or £1.4bn a year. The government has decided that £56bn is required over 27 years, or just over £2bn a year. The problem is that no amount will come close to disposing of the rubbish in England’s water.
The House of Lords looked at this problem based on independent analysis and concluded that the most likely estimate of the cost of removing all pollution from our water was £260 billion. And that must be done as soon as possible. I suggest ten years.
If that £260 billion investment were made, we could have clean water in ten years.
What the industry offers is something very different. Even if they meet the government’s demand, at best, I estimate that, based on officially released data, they could reduce the amount of water by two-thirds, at best, by 2050.
So why has the government set such a low investment target that it still leaves us with polluted water? The only possible answer is that they wanted to make sure that private water companies did not go bankrupt because they had to spend too much.
Let me put it another way. The government thinks that it is more important to save the private water companies than to contaminate our waters, rivers and beaches with all the costs that this will generate.
The government has made the wrong decision. But if the required £260bn were spent (and more would be needed to meet net zero), the water companies would go bankrupt. What that means is that they are environmentally insolvent.
The concept of environmental insolvency applies to any company that cannot adapt to make its business environmentally friendly, as climate change and an end to pollution require, and still turn a profit. What it means is that your business model is bankrupt.
That is where the English water industry is now. Thames Water may be facing environmental bankruptcy, but this industry as a whole is, in my opinion, unable to finance the investment required to deliver clean water and be profitable.
The government might be making noise about turning Thames Water into temporary public property, but that doesn’t make sense when Thames Water can never be profitable and deliver clean water. Now there is only one answer for this industry, and that is nationalization.
I would suggest that this nationalization should be without any compensation to shareholders. That’s because their businesses are environmentally insolvent. Loan providers could also be in for a hit: they made a bad decision lending to these companies.
The government will then have to support the industry using borrowed funds. I suggest that you should issue water bonds through ISA to the public to do this. Wouldn’t you like to save in a way that ensures we all get clean water in the future? I would like to.
And the way water is charged might have to change. The idea that we all pay the same unit price regardless of how much water is used now seems absurd and may need reconsideration.
But my essential point is that the water industry must now be nationalized because it’s not only failing us, but under current plans it probably will forever, and that’s not only not good enough, it’s downright dangerous. for our well-being.
Our politicians have to say now that it’s time to cut the shit out of our water and take control of this industry to make sure we have clean water. After all, if they can’t guarantee clean water, absolutely essential for life, what good are they?
Finally, some technical notes. Firstly, this analysis is based on the activities of companies that currently provide water and sewerage services in England. It is not based on the groups of which they are members.
Second, the conclusions are based on aggregate data. They cannot be applied to any company.
Third, the data used is pulled from databases, but is correct to the best of my knowledge based on that limitation.
And, if you want to see the report this thread is based on, it’s here.