What's the point of privatisation of Thames Water?

The recent default of Thames Water on loans in the past few days has highlighted how the funding of the water industry and infrastructure has fallen apart. There is talk now of renationalisation or some degree of government intervention.

Privatisation of water back in the late 1980s was done because of the need to raise capital to invest in and modernise the water supply service. After decades of neglect in the public sector, starved of money by governments which had other priorities, the transfer to the private sector relieved the government of the need to stump up the capital needed to move the industry on from its decrepit state. Private companies could raise the capital needed by borrowing at commercial rates or issuing new shares or a combination of both. Pension funds in particular were interested in becoming shareholders as water was regarded as a good long term investment. But of course, in the case of Thames Water, it has all gone horribly wrong.

Add to the financial crisis the impact of climate change and the company is facing a battering. Climate change with increased rainfall will lead to a drainage system that is already unable to cope becoming an even bigger problem. The country has made the mistake of draining rainwater into the sewers so the risk of sewage pouring into overflows and water courses is now a national scandal.

There are no easy solutions to this. One of the most touted is full nationlisation. I believe this is a non-starter. It would mean public money would be used to buy out the other shareholders leaving little if anything to invest in the infrastructure. And nationalisation without compensation would mean stripping the pension funds that have invested in the company of their capital - remember that is cash that belongs to you and me, future or current pensioners.

Do nothing is also an option but is not realistic. It seems to me the only realistic option is a part nationalisation of Thames Water. The government would need to stump up the cash but it will be in the form of new shares in the company. There would be no dividend for years but a recovery by the company could lead to the sale of the publicly owned shares.

It is not ideal and would require public sector investment. At least it keeps the water supply service on its feet rather than crashing and sinking under a flood of debt and sewage.