It pays to cheat?
- Ash
- Apr 21
- 6 min read
According to Thames Water, upgrading Oxford Sewage Treatment Works (STW) to cope with an extra 29,000 people will cost the same as building 1,549 three-bedroom houses, buying 725 brand new Combine Harvesters, or buying 8048 Range Rover plug-in hybrid SUVs.
We don't believe it. The incentives to cheat are massive, and that is what we think is happening. Here's why.
This is a simple informative blog if you want it to be, and a deeper dive into a more complex issue at the heart of the sewage scandal if you want that version. Read the black text for the quick read and add the blue if you want more.
It wasn't just the epidemic of ridiculous and unbelievably high costs that inspired WASP to investigate water company pricing, it was also the casual approach the entire industry has to adding eye watering increases that, in the Oxford case, started at an already alarming £40M in 2021and rocketed through £130M, £337M and now to £435M without a credible explanation.
How come Denmark, a country with a higher cost of living, completed a state of the art sewage works for 100 - 150K people for £29M?
How come quotes from a USA company website show building a new STW for 10,000 people, including buying the land, should cost £3.6M, but simply upgrading a small sewage works in Oxfordshire from 5000 to 6400 people will cost nearly 10x that, at £35M, when Thames Water does it?
The full WASP report into this bizarre tale is available here. It's an easy read.
Our report underpinned a great article by Gill Plimmer in the Financial Times. All links are for a free view of the same article, so please just click on one to share the views.
Why does it cost about £390K to buy three specialised concrete tanks to upgrade Witney Sewage Works but by the time some groundwork, plumbing, electronics and filtering is added, the price has got to £17M? What is really happening here?
We sent the WASP report to Ofwat and the Environment Secretary, Steve Reed, on Friday, 11th April.
We asked Ofwat to investigate.
To establish an accurate valuation of water companies, including their rate of gearing (asset values/debt).
To review the potential cost of taking the companies into public ownership.
To include the true impact of 'impairment' assessments which are required under accounting rules but seem to be ignored.
To undertake a project by project reality check on Thames Water's proposals for the past 5 year spending cycle and the next (known as Asset Management Periods -AMP7 and AMP8).
To establish what the claimed £200Bn investment across the privatised water sector since privatisation actually bought.
We asked for this to be done transparently and with our engagement; after all, it is entirely billpayers' money that has been spent.
To the Regulator's credit, by Tuesday 15th, Ofwat was in touch with WASP to arrange a meeting, so we know that its CEO and staff recognise what this report means and not just for the super fragile Thames Water.
Defra remains silent - but there is nothing new about that.
Why are we asking Ofwat to investigate?
Our findings cut to the heart of the customer exploitation exercise that privatisation has become. Ofwat uses a notional figure called Regulatory Capital Value (RCV) to represent the regulatory value of a company's assets; reservoirs, sewage and clean water treatment works, pipelines etc.
Renowned Economist Professor Sir Dieter Helm has written extensively about the water industry and abuse of the regulatory model. Here is a link to his latest paper and his website.
Behind the inflated costs, WASP is looking at the devil in the detail. Precisely, how are we and the regulators being duped?
How is RCV calculated?
Each company was given a starting figure after privatisation in 1989. Since then, it should have been adjusted by additions, like new reservoirs (none) and sewage or water treatment plants, and subtractions like land sales, closing and selling reservoirs (plenty), and the depreciation of decaying assets (plenty).
Efficiency adjustments are also used by Ofwat to adjust the RCV to penalise overspending and reward savings but we don't know what they look like yet.
Julie Bygraves, an expert on the Regulated Asset Base,, including the RCV:
"Subsequent investment in ‘hard engineering’ – pipes and treatment plants – has added to the value of physical assets, thereby increasing collateral to allow yet more borrowing." Full article:
We think Ofwat's approach to regulation has distorted the way that companies have used their funding and reported their spending. The Regulator's hands-off approach to auditing and detail has allowed companies to game the system.
It may explain why Thames Water will spend excessively high amounts on small failing sewage works like Clanfield and South Leigh in Oxfordshire, rather than close them down (even sell them off) and pump the waste to larger STWs nearby. They would lose the value of the small STWs from the RCV (and the Regulated Asset Base), and we think they have added some or all of the money spent on 'enhancement' that is really maintenance, to the value of those assets. Smoke and mirrors abound in this process, so we will try to clear some of it away in the coming weeks and let you know what is really going on.
Why does a high RCV matter?
Regulatory Capital Value (RCV) effectively forms a water company's collateral and a higher RCV means a higher regulated (dividend) return allowed by Ofwat and that means higher bills can be charged. Contrary to popular myth, shareholders don't put equity into the companies and then get a fair return on the injection of that 'cash', they get a return from the ticket they bought to own the slice of the RCV and can sell that ticket again, mainly at a profit, after taking a return on it.
A higher RCV also allows companies to borrow more - and it has been shown they have used that borrowing, not for improvements but to extract bigger dividends, and now they (especially Thames Water) are using the debt mountains to deter governments from taking them back into public ownership.
Prof David Hall has written extensively on how privatised water companies have really been funded entirely by billpayers.
"The idea that a privatized system can deliver new capital from shareholders for investment is a dangerous illusion: it does not happen."
A high RCV improves the gearing (RCV/debt) percentage that some companies, like Thames and Yorkshire Water, have pushed to unhealthy levels, so they need big numbers to offset the loans.
Most importantly, right now, a high RCV is being used by the government (after initially relying on a similar false and debunked figure, paid for by water companies from a think tank in 2019) to claim that taking the entire water industry into public ownership would cost over £100 billion. A high RCV has also been used to prevent the 'independent Water Commission' from considering the merits of privatisation v public ownership, so its veracity is very important indeed.
We can see why it would be tempting for companies that know its economic regulator takes a very trusting approach to what they do and say, to exaggerate and play games with the figures - and we think we know how some of it is done. Exagerrating fees and adding operating costs and total expenditure to capital expenditure looks like one of the tricks.
RCV is the most important number in town and that is why our report and suggestion that the number has been grossly exaggerated has rightly got Ofwat's attention.
So will Ofwat let us and the public see where our money went and see what is going on in companies like Thames Water? Its own independent valuer said:
"Post-privatization, Thames Water focused on shareholder returns and managed its operations in a way that delayed long-term infrastructure investment. The Company deferred necessary maintenance, which led to aging pipelines, higher leakages, and less efficient systems."
Yet somehow, the company's RCV has increased and was reported as about £ 20 billion in 2023 against a debt currently around £18.5Bn reported in the independent valuation.
As Thames Water moves to add another £3Bn to its debt mountain, it will need a much bigger RCV to keep its gearing under control, so is that why we are seeing such high costs quoted for the capital upgrades?
And, on that final note, we ask the question: Will Sir John Cunliffe, Chair of the 'Independent Water Commission' keep endorsing the dubious 'too expensive' claims being used him to keep him away from the real cause of the sewage scandal or will he finally get curious?
That's another story - coming soon, but for now we are keeping are eye on the ball - the RCV and the crazy numbers.
Thank you for all your hard work uncovering these details ! Without your investigation we are kept in the dark and fall victim to being exploited .