SerpApi.Org
There is a great deal of public anger at the state of our water industry, and much of it is well founded. For years, companies over-leveraged, racked up debts and paid out handsomely to their owners, while our rivers filled with sewage. But it is wrong to suggest the failure was theirs alone.
Ofwat, the body charged with regulating them, saw the warning signs for years and failed to act on them. So I understand the impulse behind Andy Burnham’s promise, as he prepares to enter Downing Street, to give the public greater control over what he calls “the essentials of life”. The difficulty, as he will shortly discover, lies in the delivery.
Begin with what greater “public control” would actually mean in practice. Mr Burnham has said it could involve “tougher regulation” – but water is already among the most heavily regulated sectors in the country. The Government has now committed to replacing Ofwat with a single body drawing together functions previously scattered across four organisations, with extensive powers over pricing, investment, financial resilience and environmental performance.
So what does the incoming Prime Minister intend to add? And how does he propose to go further without frightening off investors?
The water industry needs tens of billions of pounds of capital over the coming years to fix leaking pipes and clean up our waterways. Every signal that returns will be arbitrarily squeezed, or that assets may simply be taken into public hands, raises the cost of that capital and makes the eventual bill for customers and taxpayers larger. A government serious about growth cannot wish this trade-off away.
On Thames Water, Mr Burnham has gone further. He has said that public ownership is not merely an option but, in his view, what ought to happen. Here we move from the difficult to the fraught, and, having spent my career in and around the law, I would counsel some caution.
Thames Water carries close to £20bn of debt, and more than a hundred financial institutions hold the senior portion of it. These are pension funds, insurers and asset managers, and much of their lending is secured against the company’s assets. They are not passive spectators. On the Government’s own methodology, taking Thames into public ownership could cost upwards of £30bn by the end of the decade – partly to reimburse creditors.
It has been suggested that Thames Water could be seized without any compensation paid to lenders. This proposal is better suited to a South American kleptocracy than an advanced economy where we respect property rights and the rule of law.
The precedent is clear. When governments previously have taken over companies, shareholders bore losses but debts were paid. When ministers took Railtrack into administration, Network Rail assumed its £7.5bn debts in full. When Metronet collapsed, London Underground took on almost all of its borrowing rather than leave the lenders short.
The same pattern held through the bank rescues of 2008. Thames Water’s shareholders are, in effect, already wiped out. Its secured creditors are another matter, and any attempt to impose deep losses on them is where the legal exposure begins in earnest.
That exposure is Article 1 of the First Protocol to the European Convention on Human Rights, which protects the peaceful enjoyment of possessions. A bondholder’s debt is a possession in law, every bit as much as a house or a parcel of shares. The state may interfere with it, but only where doing so is proportionate, and the courts require a reasonable relationship between the value taken and the compensation paid.
Although ministers enjoy a wide margin of judgment here, it is not a blank cheque. A deliberate decision to pay secured creditors less than their due, is precisely the kind of measure that invites legal challenge, starting in our own courts. The Government’s own officials have all but conceded the point. Defra’s analysis of the cost of nationalising water warned that creditors “could demand compensation immediately, diverting critical funds from our essential public services”.
That is not a fight an incoming government should welcome. It would be long, costly and very public. It would signal to every international investor that Britain is willing to override the property rights of those who lend to its infrastructure, at the very moment we are asking those same investors to fund our railways, our grid and our future energy needs.
Billions in UK pension money have already been lost on Thames Water. The likeliest outcome is that the taxpayer ends up paying the creditors much of what they are owed in any event, only after an expensive detour through the courts.
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The better course is the one the Starmer administration has, to its credit, already begun. Fix the regulation. Give the new regulator a clear mandate to secure investment as well as to protect customers. Press for a private capital solution that puts Thames on a sustainable footing and protects taxpayers. That may not meet an ideological desire for ownership, but it is deliverable and it does not end in a courtroom.
Mr Burnham will serve the country better by being clear about what “public control” can and cannot achieve. On water, as on so much else, the gap between the promise and the delivery is where governments are made and unmade. This is one promise that will prove a good deal easier said than done.
Sir Robert Buckland KC is a former Lord Chancellor and Justice Secretary
