There is nothing leftwing about nationalising Thames Water
Dan Mead, Economic Advisor at Labour Together
Those of us on the left should ignore the tempting siren calls from Zack Polanski to nationalise Thames Water. If we actually care about fixing our rivers and keeping bills low, it’s much more progressive to make privatisation work.
If you were to start from scratch you would not set up a privatised system. Water is a natural monopoly and the UK is extremely unusual in privatising it (90% of countries have state run water companies)¹. And nationalising Thames Water now could help the government peek behind the curtain of how a water company actually runs and the information and experience gained from running it could be used to improve regulation of other companies.
But we are where we are and if the government wants to follow the example of European cities like Berlin and re-nationalise water it would need to pay the price of the assets. In 2012, Berlin paid €1.2bn to buy the private companies out of their water company.² Similarly the assets of Thames are not completely worthless; it has over 140,000 km of water pipes and sewers in its network. It will take some money to bring them up to current environmental standards but an independent valuer suggests it would be worth £15-£19bn³ if Thames went into special administration.⁴
But if the independent valuation is correct, then there are better things the government can spend £15bn on. Giving this money to Thames Water’s creditors means bailing out private failure. £15bn on Thames Water does not instantly get you cleaner water or lower bills, you’d only realise the benefits outlined above gradually over time. Instead we could use £15bn to improve lives across the country that have suffered from years of Tory underinvestment. The impact on ordinary people’s wages of spending it on infrastructure projects will get more people out of poverty; this money could fund five trams in cities like Leeds.
That is the sensible version of nationalisation. On the other hand you have Zack Polanski, who is suggesting the UK should act like a South American country and nationalise Thames Water for zero cost. His argument is that we should change the rules of the game for investors and devalue Thames Water. ⁵
Consider Argentina’s renationalisation of its water industry in the early 2000s. This saga started off with Argentina facing a currency crisis, devaluing the peso and causing a surge of inflation. As an emergency measure the Argentinian government froze water bills despite water companies’ costs going up with inflation. This left the investors in the privatised Buenos Aires water company unable to fund infrastructure upgrades. In response the Argentinian government claimed the water company wasn’t meeting its performance targets and nationalised it in 2006 for zero cost. The investors sued under the investor treaties Argentina had with Spain, France and the UK⁶ and after a 12 year arbitration proceeding, the investors won and received full compensation for their debt and equity.⁷
The UK has also signed up to international investment treaties. These both protect British investments abroad and attract foreign companies to come here and provide good jobs. The treaties guarantee that investors receive fair compensation and “fair and equitable treatment” if a government decides to nationalise an asset.⁸ As in Argentina’s case, Thames’ investors would likely have a good case that us pulling the rug from under them at the last moment is not “fair” and could sue. This would result in large costs for the government, and cause long dragged out legal fights that distracts Thames from actually making progress on fixing the sewers.
Expropriation would also harm wider investor sentiment. Other investors will worry that the government in turn will take assets off of them. This means they need higher rates of return to account for the greater risk they are taking on, directly increasing the cost of their investment. We want other water companies to invest to reduce pollution, so why put up the cost to consumers of doing so?
The only other option aside from continued privatisation is turning Thames into a non-profit. But that also won’t achieve our goal of reducing pollution at the least cost to the bill payer. A not-for-profit could bid for Thames in the same way as Glas Cymru purchased Welsh Water back in 2001. However, it's unlikely that it would be the best bid. Thames Water would be the second largest not for profit in the UK (after the Wellcome trust), and no other non-profit is currently this leveraged; the Wellcome trust relies on an endowment that it has grown over time.⁹ Therefore given its unprecedented size and that those running the company have no skin in the game, the cost of capital for this approach would be prohibitively high.¹⁰
Furthermore, a not-for-profit is no silver bullet to actually improving performance. Welsh Water faces many of the same problems as English water companies. Sewage pollution incidents are at a ten year high and it holds a 2 star (the second lowest) environmental rating from the environment agency.¹¹
Therefore we are left with continuing with a privatised water system. But to make that work properly, capitalism needs consequences. As I argued back in February in Let Thames Water Fail, if the creditors of Thames Water fail to come up with a deal that ensures progress on pollution targets, then it should be allowed to go into special administration. That’s how we keep private companies on their toes. But the latest reporting from the FT suggests that the creditors’ latest offer means that performance standards “will either be suspended or ‘significantly modified’”.¹² Also, the current offer could leave Thames Water with more debt than it has now, meaning a large part of customers' bills would still be going towards repaying that debt.
To avoid the worst of all worlds where we do not make sufficient progress on pollution, bills remain high, and the siren song of nationalisation gets louder, the government should reject the current deal and allow Thames to go into special administration.
² Water remunicipalisation in Paris, France and Berlin, Germany
³ There are several reasons why the price of Berlin water was much lower than the price would be for Thames: 1) Berlin water serves a much smaller population than Thames Water (3.8m at the time vs 16m for Thames). 2) the Berlin government still held half of the shares and so the 1.2bn only represents half of the value of the company, and 3) the privatised water was structured as a time limited licence for 30 years rather than the indefinite licences here.
⁴ Teneo court submission | 2024
⁷ Aguas Argentinas case study | Freshfields
⁹ Richest 10 charities see assets rise to £67.7bn but trail inflation
¹⁰ This also means that if we were to attempt to restrict bidders to not-for-profits this runs the same risks as nationalisation since it would result in a lower than “fair” price for investors
¹¹ BBC | 2025
Image Attribution: HalloweenHJB (photo)Carl Nyströmer (1856–1913) and Olaf Boye (1864–1933) (building), CC BY-SA 3.0, via Wikimedia Commons
