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As of this writing, in summer 2025, parts of the United Kingdom are experiencing drought conditions, which is strange to me because I figured that it is always raining in the British Isles. But here we are. Turns out that droughts do indeed happen in England, and they aren't too uncommon either, which makes a strong water supply system essential. Over 30 years ago, in 1989, England and Wales privatized its water industry, selling them into the public markets. Today, several of those companies, including the largest, teeter from excessive debt and huge infrastructure bills. How did this happen? In today's video, a brief history of the momentous 1989 water privatization and the debt crisis it created. The business of procuring and selling water in what is now the United Kingdom is centuries old. Back in the medieval era, rich people might pay someone to literally carry water to them from far away. But most townspeople relied on their local wells, cisterns, or rivers. Some larger towns might build special fountains fed by water passageways called conduits. These were funded by city councils and local monasteries, augmented with donations from wealthy individuals. An example being London's Great Conduit, built in the 1230s and expanded since then. It brought water from a London brook called the Tyburn to a fountain. At first, the conduit's water was apparently offered to individuals for free. The land had been gifted to the city of London and its construction funded by gifts from the city council, mayor and wealthy citizens. Brewers and other businesses had to pay, mostly because they used so much water. But by the late 1200s, people were assigned to protect the water and take fees, and by the 1400s, everyone had to pay. The late 1500s saw improvements in water engineering that helped create the sophisticated networks of today's water utilities. Technologies like wooden water pipes, water wheels and pumping mechanisms came to London, where they achieved scale. In the 1570s, a Dutch or German immigrant in London named Robert Moritz or or Morris, opened the city's first waterworks company. The royal government was then experimenting with the concept of royal patents, which granted 20 year monopolies on innovations. In 1575, Morris was promised a royal patent for a new pumping technology if he can set it up in three years. Morris soon encountered trouble, so the city helped put up the £4,000 to complete the waterwheel driven system. It pumps up water from the Thames and brings it to London. Houses and conduits, households were charged by usage and got water, albeit intermittently due to the tides. London's situation as one of the largest cities in the world made it a bit of an outlier, A survey of 81 large British towns in 1801 found that joint stock water companies provided water for just five of those towns. But throughout the first half of the 1800s, private water companies started taking over from the public. During these years, England's growing urban population and industrializing economy demanded more water. But local town councils found themselves increasingly unable to meet that demand. So private water companies arose to meet that need, sometimes going to Parliament itself for control. Take, for example, the city of Manchester. Like many towns, its main water source prior to the 1700s was a public fountain maintained by an arm of the local government, supplemented by wells, rivers and rainwater storage. But from 1700 to 1811, Manchester's population surged from just 8,000 to nearly 80,000, thanks to a booming textiles business and and industrialization growing beyond its single fountain. Residents started digging wells. But by the 1770s, those wells drew up dirty, contaminated water. The Manchester city government grew concerned that the problem had grown beyond their grasp. The dirty water issue was not just a public health problem, but a firefighting one, too. By the 1800s, the city lacked the water to fight major fires. A Gloucester firm proposed to take over the water supply and install stone pipes. An opposing venture sought to keep the town council in charge, saying that the town's inhabitants can do a better job than private venture. However, in the end, Parliament authorized the Manchester and Salford Waterworks Company's control of the water supply going over the local authorities heads. Manchester's story was repeated many times over, and by 1846, a survey of 190 local authorities found that just 10 owned their own water. A few reasons have been proposed as to why Parliament did this. One was that members of Parliament were financially invested in the water companies. Another was that privately owned companies were perceived as being better equipped to raise the capital needed and to build waterworks infrastructure. I am more apt to the theory, though, that Parliament at the time genuinely believed that market forces presented a better solution. Over the following years, however, many of these private water companies revealed themselves as quite incompetent. Private water companies like the Manchester and Salford Waterworks Company faced issues like managing reservoirs undermined by pollution, surging population growth and uncontrolled industrialization. But the private water companies disastrously failed to solve or even ameliorate those problems. Companies delivered water to customers from contaminated water sources. The companies tried to save money by underinvesting in water pipes to households. All in all, they just made it worse. The most significant impact of the water company's failure to perform, however, was that they were literally killing people in the mid-1830s, the famous epidemiologist, Dr. William Farr was commissioned to collect the first scientifically rigorous statistics on death rates and causes of death in Great Britain. The statistics told a shocking tale. In 1840, Great Britain's general mortality rate was a staggering 2.2% as compared to today's 0.9% for those under five years old. Over 6% mortality rates were much higher in the towns than in the countryside. The public health movement that followed in the 1840s identified the town's water as a common factor. They did not know what in the water was causing the deaths, but knew there was something. An influential 1842 report examining the country's high death rates in the towns cited the private water companies as contributing to the problem. Aware of Parliament's favour of market solutions, reformers argue that the companies abused the market by failing to fulfill the services of their contract. In the town of Bristol, for example, less than 5% of the town's 5,000 people had access to piped water. Between 1831 and 1844, the the death rate nearly doubled to the third highest rate in the country after Liverpool and Manchester. The public health reformers arguments hit home. Parliament decided his laissez faire attitude to private water ownership was not working. In 1847 they set rules requiring companies to provide the public with good quality water constantly. And a year later they passed the 1848 Public Health act, granting town councils the ability, if needed, to address water and sewage concerns as needed for towns with particularly high death rates like Bristol. New powers for more centralized control. In the case of Manchester, the town took over the waterworks from the utterly incompetent Manchester and Salford Water Company in 1851. The Manchester Corporation then built a waterworks that brought water from a valley in the Pennines with immediate impact. Under the municipal council's purview, the public water supply per head in Manchester soared from 4.8 gallons per day in 1841 to 32.7 in 1878. The proportion of households with piped water to their homes rose from 23.4% in 1846 to 79.4% in 1878. Moreover, the water was higher quality, softer, which benefited the area's textiles industry and provided at higher pressure which helped fight fires more effectively. The proportion of property lost in a fire incident fell from 21% in 1846-1850 to 4.3% in 1876. 1880. By the 1860s onwards, the number of municipal owned water corporations rapidly grew. In 1875 parliament authorized authorities to ensure satisfactory water services, a policy that accelerated the shift. By World War I, 80% of the British water industry had resettled into public hands. Since no coordinated policy had been behind this municipal shift, it created a weird mishmash of overlapping governmental bodies. In 1945, river supply and quality was handled by 198 water undertakings, including 30 private water companies, 64 local authorities, and 101 joint water boards staffed by multiple local authorities. A vastly overlapping situation resulting in wasteful duplication, fragmentation and poor rural service. It took a major drought spanning 1933 and 1934 to make the UK government realize that it had a problem. So in 1963 the country passed a new Water act to begin the process of consolidating these overlapping agencies. But the 1963 reform did not go far enough. Namely, there were still nearly 1,400 sewage authorities handling the treatment and disposal of sewage. Since sewage is dumped into the river, this separation made no sense. So Parliament passed the water act of 1973, creating 10 multipurpose agencies called Regional Water Authorities, or RWAs. Each RWA oversees a river basin and is vertically integrated, responsible for supply, sewage, pollution, fisheries, the works. By the way, I should note that this reform took different directions in the United Kingdom's other two countries. In Scotland, regional water councils were created to handle the water supply and sewage. And in Northern Ireland, water and sewage responsibilities were transferred to the central government. The RWA reorganization or regionalization can be seen as bold and science minded. Having the water organization's jurisdictions based on their basin's physical borders rather than the historically drawn lines of local governments made a lot of sense. No more passing off pollution to a neighboring district. The reorganization also vastly reduced the size of the water bureaucracy. Between 1974 and 1989, the workforce fell from 80,000 to 50,000. Soon after the reorganization, Great Britain was hit by a drought in 1975. 1976, one of the worst in recent memory. It lasted 16 months and was called the standpipe drought because how it forced water rationing. People had to gather at standpipes in the street for water, river navigation was curtailed, algae blooms killed loads of fish and agriculture yields suffered, and the heat wave that accompanied the drought caused a surge in excess deaths. In response, the RWA started building a rash of new reservoirs, integrating them in such a way to provide additional resilience. Their efforts were successful when a second, albeit briefer, drought hit in 1984. The reservoir is held and no emergencies were announced. In 1979, Margaret Thatcher's conservative government took power and kicked off a broad privatization program. The general idea behind it being to shrink the public sector release government imposed constraints on British industry and prevent a fiscal crisis claimed to be straining the tax base. Early on, it was not clear that the RWAS would be privatized. They the Thatcher government's initial steps were to just make the RWAS invest and work more like private companies. Thresholds for investment were imposed for new capital investments. Several national level quasi autonomous bodies were replaced by a general trade association. And in 1983 RWA's board meetings were closed off from the press and public. After the UK government's successful 1984 IPO of British Telecom, the Conservative Party turned its focus to other industries with a perceived national monopoly like the gas and water utilities. And the water companies themselves lobbied for less public involvement. They pointed out that the industry might need to invest as much as £100 million due to impending water quality standards mandated by the European Union and said that only the private markets can provide such a thing. So in February 1986, the Conservative government finally announced that the government would sell shares in the RWAS in Wales and England to the public market. To make the RWAS more attractive to the financial markets, the UK government threw in a number of perks. They wrote off all the company's prior debts. A gift of about £5 billion. They transferred about £1.5 billion as a sort of green dowry. Moreover, the RWAS were instructed to raise sewage and water prices by 35 to 40%, increasing profitability. And finally the stocks were ipoed at a 22% discount to their cited market value. The largest of the 10 companies was Thames Water, which had 1989 revenues of 558 million pounds and employed nearly 9,000 people. The smallest was Southwest, with turnover of just 100 million and a workforce of 1,800. Note that it was only the water companies in England and Wales that were privatized. Water undertakings in Scotland and Northern Ireland remained publicly owned for what are essentially political reasons. The Conservative Party had limited representation in Scotland, so those undertakings remained government owned and were eventually consolidated into what is now Scottish water. And the political situation in Northern Ireland remained tumultuous with the Troubles. And all that country's water comes from a single government owned entity called Northern Ireland Water. So what has been some of the consequences of privatization? First, the water companies and the government received some pretty severe criticism. One of the original intentions of privatizing the water industry was to reduce government influence. But just because the water Companies are now privately owned and publicly regulated. Does not mean the public won't still blame their government when water bills surge or rationing has to be implemented during droughts. After the Conservative Party first took power in 1979, they mandated that the RWAS can only implement capital investments to judged to return a certain amount over the benchmark. So the RWAS stopped investing, falling to levels not seen since the mid-1960s. But then, during the lead up to privatization, annual capital expenditure grew at 8% per year to over 2.2 billion pounds. And after 1989, capital expenditures surged to address prior underinvestment and also meet European water quality standards. Unfortunately, the customer must bear those increased costs. In the first nine years after privatization, average water bills rose 102% nominally and 46% when adjusted for inflation. The public never likes this, despite it being true that other countries, like France, saw similar price increases for the same reasons. In 1995, the UK was hit by one of its worst droughts yet. 40% of the population had their water usage restricted. And in Yorkshire and northern England, up to 600 tanker trucks were employed to bring water into the shrinking reservoirs. So obviously they called it the tanker drought. Bad news about Yorkshire's water company, Yorkshire Water started to come out that they maintained leaky pipes that lost nearly 30% of its water, translating to a loss of 100 million gallons of water a day. Despite all that, Yorkshire Water turned record profits. In 1995. Public anger towards the company and its executives got to such a level that the company advised its employees against wearing anything that would identify them as an employee. Another company issue has been balancing the needs of infrastructure and shareholders. It is bad optics for the companies to raise water bills and lag on capital investment, but then also pay dividends. From 1989 to 2023, the water companies have paid shareholders between 75 to 85 billion pounds in total dividends. On one hand, dividends are a widely accepted part of capitalism. If someone invests in a company in a low growth area like water, it makes sense that they are compensated for that. Lower growth dividends help with that, but as a form of payout to shareholders and a reduction in shareholders. Equity dividends also raise companies debt to equity ratios. Thanks to their dowries. The water companies began life with 5.7 billion pounds in retained earnings and no debt. Thirty years later, thanks to dividends and a lot of loans, the companies are quite indebted. Now they have some four times more debt than equity. Financial academics find that debt is a more efficient way to finance Infrastructure investments. But higher debt ratios also reduce financial flexibility and raise the risk of insolvency. To me, the most serious contradiction remains the role of government oversight. Regulations implicitly still control the industry to this day. The Office of Water Services sets a price cap for each company based on a general cost index plus a K factor unique to them. These metrics are reviewed as part of a five year cycle called price reviews. During price reviews, ofwat locks in company commitments, sets their expected revenues and levies penalties, if any. This gives the government a very strong say in how the whole industry works, with certain consequences. After the global financial crisis in 2009, the UK government and OFAWAT began emphasizing rising water bills in their five year price reviews. So the water industry reduced their capital expenditures to only the most essential things. People's water bills declined 10% in real terms between 2010 and 2024. But it also created chronic underinvestment and longer term problems. By 2024, 60% of the country's water mains were over 40 years old. 13% were over 100 years old, which deserves a letter from the king. The UK hasn't built a new reservoir since 1992. None of this is good considering the UK's drought record. The National Infrastructure Commission estimated in 2024 that that if a severe drought were to happen then there is a 25% chance that UK citizens will again get water rationed. And in 2024 the Environmental Agency reported the number of serious pollution incidents up 60% from prior years. So there is a lot of work still to do. What you see here is a sort of boom and bust cycle of investment. A situation where investment is spent reactively in response to 5 year price reviews and drought crises. This is nowhere near ideal. So we had the bust. Now the boom is back. In 2024, infrastructure spend will grow four times over from an average of £5 billion between 2004 and 2019 to almost £24 billion. This means about 60% higher prices for customers in the future. Very welcome at a time of economic difficulty. Even with these price increases, the water companies are more indebted than ever before. The UK government uses a metric called gearing ratio. It's like debt to equity ratio in that it just measures the indebtedness of the company. Four suppliers are under watch by OFWAT for having gearing ratios of over 60%, which is very high. Two are on the brink of that. The most concerning situation by far, however, is the largest water company of all, Thames water. Thames has 16 million customers and £20 billion of debt. Their gearing ratio is a staggering 88%, way higher than 60%. Its parent company, Kemble Water Finance, which also owns Waste Management Services, already defaulted on a 400 million pounds bond in April 2024. They need shareholders to inject more money, but OFWA refuses to allow a rate of return for projects high enough for investors to do that. OFWAT can try to pressure pension funds, private equity or sovereign wealth funds, but investing in leaky English water pipes doesn't sound all that great in a world where AI exists. There's also the consideration that creditors are writing down several Thames Water debts by several billion and that the PE firm KKR passed on a deal when they realized there was little upside in it. Quite a mess. And ah yes, as I mentioned at the start of this video, there's a massive heat wave and drought conditions in several areas. Six areas are experiencing rainfalls as low as they've seen since 1976. Looking back at it, there are probably other ways that the UK government could have privatized its water industry. Scotland and Northern Ireland's water companies are government owned. Germany and France practice a mixed ownership model, with government owning the assets, but companies getting paid to run them. There's an interesting report out there that argues that the value of these water companies are inflated and that it would not cost much for the UK government to take them back into public ownership. Looking at the history of the UK's water industries, it wouldn't be unprecedented. And the company's rampant borrowing have weakened them though you have to wonder what they're going to do about all that debt. But to me, the key issue isn't necessarily the ownership model, it's the regulator. The regulator controls the price, it approves the levels of debts, it reviews the quality of the water, what is actually being left in the market. People are trying to have it both ways and the result is a complex and fragmented regulatory framework that does not build ahead on a 15 or even 10 year cycle leading to bad consequences. Considering that there are worse droughts yet to come, this must be fixed. Alright everyone, that's it for tonight. Thanks for watching. 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