The Conservative Party has rejected the idea of an “early” general election and Labour’s victory in the Rutherglen and Hamilton West by-election might make this seem sensible, but there are downsides to running down the clock. Next December, for example, whoever is in power will have to deal with the public reaction to Ofwat’s 2024 price review, which will be deeply unpopular.
The price review sets the bills that can be charged by water companies over five-year periods. To make their case for charging higher bills, each water company prepares a plan for the next asset management period (AMP) that says how much money they plan to raise, and what they plan to do with it. AMP8, the period from 2025-30, will involve huge investment in infrastructure: £96bn, at latest estimate, across the industry. This is about double the investment of the previous period and will be paid for by some gruesome increases in bills.
Yesterday afternoon the UK’s largest water company, Thames Water – which reportedly came close to nationalisation in July, although the company described this as “speculation” – was the last to publish its full AMP8 plan. Buried in the appendices is a graph showing how much Thames plans to charge – more than £735 a year by 2030 once current inflation projections are taken in, a 61 per cent increase on current bills.
There is some light relief within the business plan itself. At 154 pages in, Thames declares humbly: “we understand the root causes of our shortcomings”: apparently Thames’ dismal performance in cost and pollution control has been because the company lacked “mature processes” and “tools to drive insight” and “well embedded corporate values”.
I’ve re-read this section a couple of times, and nowhere does it say: “we’re up the proverbial creek, which by the way derives its name from all the shit we’ve poured into it, because we’ve spent three decades taking on billions in debt while paying out billions in dividends.”
Thames Water’s interim CEO, Cathryn Ross, also frames the company’s previous low level of investment as being a function of the amount Ofwat “allowed” it to spend, which is true (the price review sets out investment levels) but also almost literally priceless, because Cathryn Ross is the former head of Ofwat.
The most egregious part of the Thames plan, however, is its declaration that if Thames is not allowed to make larger profits, and in a less regulated way, it won’t have the money to build new infrastructure.
The company opposes the unlimited pollution fines imposed by the government in July, and rather than returning money to customers through financial penalties as it is currently required to do (a £100m penalty was levied last week), it would prefer to create a “customer satisfaction fund” (cheques to be addressed to a Mr T. Water), to be spent on the upgrades that Thames Water should have done to avoid being fined in the first place.
[See also: The Tories are driving themselves to distraction]
Most significantly, Thames also cites a “material change in market conditions” for its investors, who must be offered a higher “allowed rate of return” if they are to be persuaded to chip in the more than £2.5bn it needs for the plan.
This is a reasonable argument in that, as the company points out, government bonds currently offer a high (and rising) rate of return and are almost risk-free, so investors need to be offered more for financing a water company. Without the extra incentive, they’ll just buy gilts or investment-grade bonds. It also tells us something about where public finances are headed.
We are moving back into the old world of expensive debt, which markets now see as being the new (old) normal. Long-term public borrowing costs hit a 25-year high on Wednesday, and this will change the conversation about what the country can afford, whether it’s tax cuts or new spending.
It may also change how parties think about private capital and infrastructure: the underlying issue, as Thames Water’s report makes clear, is that even when the yields on government debt rise significantly, governments can still borrow a lot more cheaply than anyone else. In the more expensive future, the added cost of private profit will make even less sense than it does now.