The water sector stands at a pivotal moment. Recently, water providers addressed Ofwat’s preliminary decisions regarding their five-year investment strategies.
The regulator is now faced with a crucial decision: maintain the current trajectory, which risks failing to address public expectations, or pivot towards a fresh approach that facilitates investment and initiates a new phase of growth. Water UK, the representative body for the sector, cautioned that failing to revise its stance on company plans could lead to severe investment challenges across the industry.
While the industry acknowledges its past missteps, Thames Water openly accepts its share of responsibility. It’s a challenging reality that some of the fundamental issues we face are self-inflicted. However, there are signs of progress: Thames is now under new leadership, equipped with a capable team and a solid plan to rejuvenate operations.
Investment is vital as water providers strive to deliver essential services amidst outdated infrastructure while catering to an increasing population and an increasingly volatile climate.
Thames Water operates an extensive network, managing 20,000 miles of water pipes and 70,000 miles of sewers. We oversee some of the oldest infrastructure in the UK, servicing the most densely populated area in Britain. Nearly 40% of our assets are more than a century old, with an average asset age of 79 years—significantly older than the sector’s average of 56 years. Our service area now supports 30% more residents than four decades ago.
Ofwat appropriately emphasizes delivering value to customers. Yet this focus has reached a point where fulfilling future water and waste demands necessitates an increase in consumer bills. For the past two decades, the average billing for our customers has remained stable at approximately £1 per day, once adjusted for inflation.
While raising bills is never an easy choice, we are amplifying our support for customers in financial distress, providing discounts to about one in ten households, typically reducing their bills by 50%.
We are repairing our infrastructure at twice the rate of our peers, and we anticipate spending £2.7 billion more than our allowed budget over the last 15 years. Despite this, the majority of our work has focused on repairs rather than full asset replacements.
This gap between our authorized charges and what we need to invest has hindered our ability to maintain and upgrade our assets. It has also forced the company to borrow funds in expectation of future financial adjustments that have not materialized.
The outcome is a struggling sector subjected to frequent penalties. While accountability is essential, many perceive Ofwat’s measures as increasingly punitive, lacking a roadmap for genuine improvement. As noted by the latest chair of the environment select committee, ongoing penalties could heighten the risk of further failures.
To escape this cycle, we must enhance our infrastructure to better serve both customers and the environment. Our new investment blueprint outlines a plan to allocate over £23 billion towards addressing leaks in aging pipelines, decreasing river overflows, and tackling the pressures from population growth and climate change.
We seek to attract fresh capital through new equity and debt sources to distribute costs more equitably, easing the financial burden on consumers throughout the five-year regulatory cycle.
Everyone must acknowledge that securing new investment in the sector will be challenging, as no easy sources of funding are readily available. Ultimately, the necessary financing will emerge from a fair compromise between customers and investors.
The nation requires a revitalized water industry capable of restoring public trust, drawing private investment, and efficiently managing the delivery of clean water and wastewater services. The responsibility for shaping this future lies with Ofwat.
Sir Adrian Montague is the chairman of Thames Water