Why are our rivers and seas polluted by sewage?

JO BATEMAN (swimmer): I would be swimming along and realize that ahead of me on this lovely flat, beautiful looking water was a…

slick of filth, a slick of dirty, muddy, mucky water with bits in it. And I didn’t know, I had no idea, what that was.

2024 OXFORD BOAT RACE ROWER: We’ve had a few guys go down pretty badly with the E-coli strain. This morning I was throwing up and I really wasn’t sure there was going to be a chance for me to be in the boat…

It would have been ideal not to have so much poo in the water.

CHARLES WATSON, RIVER ACTION UK, 2024 Parliamentary committee: (8.30-8.42)

I’m not exaggerating, somebody is going to die because of this; these pathogen levels we have in the rivers. Nobody seems to be interested in it.

BALE (INTRO): Welcome to LSEiQ, the podcast where we ask social scientists and other experts to answer one intelligent question. I’m Joanna Bale from the iQ team. We work with academics to bring you their latest research and ideas - and talk to people affected by the issues we explore. In this episode I ask: ‘Why are our rivers and seas polluted by sewage?

Clean water and effective sanitation is essential to human life. Yet every water and wastewater company in England and Wales is under criminal investigation – amid allegations of widespread, illegal sewage dumping. Some have already paid out millions of pounds in fines. And the biggest, Thames Water, is on the brink of financial collapse.

It’s a scandal of huge national significance that affects every single one of us - because it’s threatening our water supply AND devastating our rivers and seas. I wanted to find out why this crisis has developed and how we can clean it up.

We’ll find out: Who really owns our water.

The difference between bread and water when it comes to selling them in an open market.

And why government plans to tackle the crisis might not work.

But first, let’s hear from Jo Bateman, a physiotherapist from Devon. You heard her at the start, describing how she used to swim near raw sewage - without realising what it was. When she found out, she launched an extraordinary one-woman legal battle against her water company.

BATEMAN: I'm suing South West Water basically because I'm sick of the endless sewage dumping into the sea where I like to swim. I moved here specifically to be by the sea. Six years ago, I lived in the Midlands.

I just took literally a week's holiday from my full-time job, which I loved, and walked the south-west coast path from Poole to Lyme Regis. And I just fell in love with being by the sea.

And I literally went home, put my house on the market, handed in my notice, and…

moved down here.But I didn't swim at that time…

My sister's always been a cold-water swimmer…

and she was visiting one weekend, wanted to go swimming in the sea. It was in the winter, and she persuaded me to go in with her and I was absolutely bitten by the bug from that first swim.

BALE: You swim all year round, sometimes in freezing conditions and without a wetsuit. Why do you think you - and many others - love it so much?

BATEMAN: What I discovered was, and this happened the very first time that I went in, is the enormous buzz that it gives you, the boost that it gives to your mental state. That's huge. And if you talk to anybody who regularly swims in cold water, it's the one thing that everybody says is that it's just so good for their mental health.

I can stand on the beach and there I am in my swimming costume and the weather's awful and the sea looks grey and horrible. And I honestly every time think, why on earth am I doing this? But I know that I'll love it and so I just go in and swim and I've never, ever regretted it.

BALE: How has it helped your mental health?

BATEMAN: I've suffered from depression for many years and I've been on antidepressants for many years.

But since I started cold water swimming, for quite a long time now, I've been on the lowest dose of the antidepressant that I'm on. I've basically halved my dose down to the lowest level.

But I don't need to be on any more, which I did need to be before, to maintain my mental health stability.

BALE (V.O): Water companies are legally allowed to discharge untreated wastewater into rivers and seas during exceptional rainfall. This stops sewage backing up into people’s homes. But they are suspected of using sewage overflows more than they should - causing dangerous levels of pollution.

This can expose swimmers, surfers and rowers to bacteria such as salmonella and E. coli - which cause diarrhoea and vomiting. Or viruses like hepatitis A - which can lead to liver infection.

Sewage has even polluted our drinking water. In Brixham, Devon last year residents had to boil their tap water for several days - after an outbreak of a diarrhoea-like illness caused by the parasite cryptosporidiosis, found in faeces.

Before she swims now, Jo checks an app run by the campaign group, Surfers Against Sewage. This tells her when sewage is being discharged into the sea near her favourite South Devon beaches. I was talking to Jo back in July when rainfall was relatively low.

BATEMAN: So in Exmouth last year there were over 120 days when I couldn't swim, and that was across the year. It happens more in winter because it is related to heavy rain, but it isn't only caused by heavy rain. At the moment in Budleigh-Salterton, which is where I have swum, but won't swim this year…

there have been discharges, dumps of raw sewage in Budleigh constantly, I mean with breaks, but almost every day this year since January that are still going on now, because I believe it's due to a problem with the holding tank.

BALE (V.O.): Water companies are accused by campaigners of failing to invest in infrastructure. This has left sewage systems unable to cope - even in normal weather. Campaigners argue that customers’ money is being used, instead, to pay billions of pounds in bonuses to company bosses, and in dividends to shareholders.

Ofwat, the body that regulates the water industry jointly with the Environment Agency, refutes those claims. It insists that over £200billion pounds has been invested since the industry was privatised more than 30 years ago. It does agree, however, that change is needed. The water companies say they can fund the necessary improvements by increasing bills. But proposed price hikes have outraged consumer watchdogs - and campaigners like Jo.

BATEMAN: Literally millions and millions of pounds are paid every year in dividends, in bonuses. That money should have been going into the infrastructure and it hasn't been happening.

BALE: So why did you decide to pursue a legal case? It’s a bit of a David and Goliath battle.

BATEMAN: It is. It didn't really seem like that, but the more time's gone on, it does seem like that.

Early last year, I decided to stop paying the sewage element of my water bill. And so of course I was then threatened with county court judgments and bailiffs and all of that sort of thing. So I actually gave into it because it was quite frightening. I didn't want those things and I thought, ok, pack it in, you've made your point.

But I then went through the summer and even though it was summer and it didn't rain as much, there were still sewage spills, not as many, but they still went on. And so towards the end of the year I thought, right, don't be a wuss, go for it. Do it again. Don't cave in. So I decided again, I would stop paying the sewage element. But it just wasn't enough.

I still felt something bigger needed to be done. But at that point it was really only about me, it didn't seem like this huge thing, and I finally issued my claim just through the Small Claims Court.

BALE (V.O): It cost Jo £50 to make the claim, asking for £379.50 compensation for not being able to swim due to sewage. She says it’s obviously not about the money, but about making a stand. Her case, which is ongoing, soon attracted national media attention and thousands of supporters on social media.

She now has backing from the legal campaign group, The Good Law Project, and leading law firm Leigh Day. She has also inspired a group of residents in Exmouth, her home town, to launch their own legal action against South West Water.

BATEMAN: I have never in my wildest dreams anticipated anything like that happening. So it is sometimes stressful, but at the same time it's happened and I feel like I just have to keep going with it for as long as it takes now. I'm not backing down now.

As well as threatening our health, sewage pollution is also causing environmental damage to our waterways - devastating many areas of natural beauty. Lake Windermere in the Lake District has turned green in some parts due to an overgrowth of toxic algae. And the once crystal-clear waters of many of England’s rare chalk streams are now murky and grey.

I wanted to understand more about how this extraordinary scandal has developed.

The story begins with Margaret Thatcher back in 1989 insisting to a rowdy House of Commons that privatising water will be a success:

To find out what happened next, I arranged to meet two academics in the LSEiQ studio. It’s a small room on top of a 12-storey tower block – with spectacular views across London. It was a clear, bright day and as I waited for my guests to arrive, I could see the River Thames glistening in the distance. It was a sobering thought that Thames Water had pumped 14.2 billion litres of sewage into it the previous year.

Joining me in the studio were:

Professor Gwyn Bevan, an LSE policy expert, whose latest book is called ‘How Did Britain Come to This? A century of systemic failure of governance’.

And Dr Kate Bayliss, an economist from the School of Oriental and African Studies, University of London. She has been researching the UK water industry for the past ten years.

I started by asking Kate how well the state-owned system had been operating before Mrs Thatcher’s radical programme of privatisation.

BAYLISS: These regional water authorities were facing financial problems. There was a huge need for investment in the sector…

And there was considerable pollution. So we needed investment in the water sector, but the government was reluctant to commit more government borrowing or to increase taxes.

So privatization was happening in other sectors. And so privatization of water came to the fore as a suitable policy. It was supposed to make companies more efficient because of the profit motive, and private companies would then borrow to invest in it, would take the debt off the government's books.

But also there was a political agenda to create a new class of Conservative voters that would be share owners, because some of the shares were reserved for water company customers. So it was a deeper cultural shift in the economy that the water privatization was part of.

BALE: Gwyn, you talk about this in your book, about neoliberalism and the radical changes made to public services.

BEVAN: The key idea of neoliberalism at the heart of Margaret Thatcher's governments is that the best form of organising things is private ownership in markets. And she firmly believed that state run enterprises and public services, they lack the incentives for efficiency.

The confidence trick that neoliberalism performed is to persuade people that markets and private ownership are the solution. But actually there are very stringent conditions, which is what my book explains, where markets work. I mean, they work really well for simple commodities like bread. We buy it often, it's cheap. You don't write a contract: if quality's terrible, you stop buying it. Failing providers exit the market, a whole set of things. And the key thing that make markets work is competition and failing providers exit.

Now, the water companies are always classically the exemplar of where markets won't work because you've got a natural monopoly. And of course water and sewage are vital for life and health.

BALE: Can you just explain ‘natural monopoly’?

BEVAN: Basically the water comes from one set of reservoirs, through one set of pipes. And if you wanted to have competition, another company have to develop new reservoirs and a new set of pipes, and it would be hugely expensive. So we just see that as a natural monopoly. It's unlike say in private markets where a firm manages to achieve a monopolistic position, but actually there are other firms that could easily enter the market.

BAYLISS: Plus the fact it's water and it's homogenous as water's water. Other than having good quality water, it's not much to define different types of water.

BALE (V.O.): We all need water and sanitation in our homes. But there is only one company in each region that can provide it. So it’s a monopoly business with captive customers. This means there is no competition - so less incentive to invest in infrastructure and provide the best service. It seems obvious now that this might create problems – but at the beginning, it all ran smoothly.

Gwyn told me that privatisation seemed to work at first. Each water company in each different region appeared to be operating responsibly - overseen, as they are today, by the regulator, Ofwat.

But it didn’t last long.

BEVAN: In the early 1990s I was working for a firm of economic consultants that was doing really well on the back of consulting for privatization. And they described Ian Byatt, the regulator of Ofwat, as ‘Chief Executive UK Water PLC’. And it's felt he had this iron grip on those companies.

There were these ground rules for financial probity of those companies - that then disappeared through private equity.

BALE: So can you explain what changed and why?

BAYLISS: Initially there was a lot of investment…

But since privatization, we've seen a major change in ownership structures. So we have 10 regional water and sewage companies in England and Wales. I have to emphasize; we're not talking about Scotland and Northern Ireland. They have their own separate public companies. So initially these were all listed on the London Stock Exchange, and so we had a dispersed set of shareholders.

BALE: So ordinary people could own shares?

BAYLISS: Anyone could buy a share…Initially, there was a golden share held by the government until 1994, which was specifically to guard against hostile takeovers.

BALE: What does ‘golden share’ mean?

BAYLISS: It's not a controlling share in terms of value, I think it was 15%, but it has properties, which means that they can have a say in takeovers. So it was to protect against hostile takeovers. So that was in place for the first five years.

But after that was sold, there was quite a quick process of consolidation. So quite a few companies were taken private, meaning that all the shares were bought by one investor or a consortium of investors.

BALE (V.O.): The government had prepared the water industry for privatisation by cancelling its debts and injecting cash into it. So, even though it was sold for £7.6 billion, the net proceeds to the Treasury were roughly zero.

Polls showed a big majority of the population were opposed to the policy. But that didn’t stop more than 2.5 million people applying for shares. The offer was nearly six times oversubscribed. And the average gain to investors on the first day of trading was 40% - in line with the large premiums from previous privatisations.

As small investors sold their shares to cash in their big profits, the water companies were bought up by global enterprises. They are now owned by a complex web of foreign investment firms, wealth funds and tax haven-based businesses. A guaranteed income from customers and light regulation has made the industry very attractive. It has enabled investors to load the companies with debt and pay out large dividends to shareholders – rather than invest in sewage infrastructure.

Kate and Gwyn say water companies have become financial assets for global private investment - rather than operations for the delivery of a vital resource. They call this the ‘financialisation’ and ‘securitisation’ of the water sector.

BAYLISS: So now the 10 big water and sewage companies, we have one Welsh Water, which is owned by a not-for-profit company.

Three are still listed on the London Stock Exchange. That is Severn Trent, United Utilities, and South West Water is owned by a company called Pennon, and that's listed on the stock exchange.

We have two that are owned by what I call Asian conglomerates. So Wessex Water is owned by a Malaysian company called YTL. So this is a sort of family controlled big company with a global portfolio in utilities. And Northumbrian Water is similar. It's owned by CKI, which is owned by a Hong Kong family-based company, but a huge global company.

(11.22-12.08) And then we have four of these water and sewage companies owned by consortia of financial investors. So these are pension funds, private equity funds, sovereign wealth funds. These come together for the specific purposes of buying a water company. They set up what's called a special purpose vehicle, SPV. So they set up this company. Out of the four of them, three of these are registered in Jersey. So this company is set just for buying the water company. And these types of investors have led to a different type of financialisation of the water sector.

BALE: At the beginning, ordinary people bought shares and then it all changed. So was that always going to happen, do you think? Is that what normally happens with these things? Has that happened with other privatization?

BEVAN: Yes…that's the trend that happens…

The criticism made of Ofwat as a regulator is they assumed that these companies would be looking after their financial balance sheets, therefore they would only pay out dividends if they could afford to do so. And they would also make prudent capital investments. So they would be run the way a normal trading company would. And the point about the securitisation, specialist purpose vehicles is you've got these enterprises, they're not interested in supplying clean water and doing a good job on sewage in Britain. Their sole purpose is to make as much money as possible for the investors. And you can do that by paying out dividends and running up debt and not investing in pipes or sewage.

And so you get this horrendous thing about the sewage is everywhere in our rivers and seas.

I mean it's still privatized. We still have the regulators. So from the outside it looks if nothing's changed, but this securitization, financialization has fundamentally undermined what was set up.

BALE: But why don't the regulators do something about it? What's going on with Ofwat and the Environment Agency?

BAYLISS: So obviously private ownership of water, it's such a vital resource, regulation is absolutely crucial to if it's going to be managed in the public interest….

Since 2009 we've had a system of operator self-monitoring where companies report their own pollution leaks and then the Environment Agency is supposed to audit this. They also provide a set of metrics on environmental performance. And then this feeds into the price setting process, which is the remit for Ofwat. Ofwat is the economic regulator.

So the main focus of regulation is this process of setting prices.

BALE I was talking to Kate and Gwyn last year when Ofwat were still deciding on prices that water companies can charge customers, based on their performance. (announcement due Dec 19).

BAYLISS: So prices are set in advance every five years. So at the moment we have what's called a price review, PR '24, because it's 2024, they're going to set prices for 2025 to 2030. So this goes on every five years. And the two main elements of setting prices are the anticipated costs and the performance against a whole set of targets, which includes pollution, which includes water quality.

BALE: But it just seems to be more biased towards the finance rather than the quality of the product that they're producing. I don't really understand why that is. Can you explain that?

BEVAN: I think there are two issues here. One is that, with the Environment Agency, Liz Truss, when she was environment secretary, savagely cut the budget. And the thing that Kate says about, it's this thing where you ask these companies to mark their own homework and report to the regulator who's then massively under resourced to check that. This is like a gaping hole really.

And the other thing that comes through in this…

is that basically what you're asking these regulators to do is to make political judgments over how much you're prepared to pay for investment to stop leakage in reservoirs and protecting the environment.

BALE (V.O.) According to Gwyn. the Environment Agency has lacked the resources to properly monitor pollution – so the water companies were able to freely discharge sewage. And Ofwat has been under political pressure to prioritise lower bills. So there has not been enough money to encourage water companies to invest in infrastructure - when their priority has been to pay dividends to investors.

BEVAN: These are political judgments and you can't ask regulators to do that. And what the regulators have done, particularly Ofwat is, of course you're in the firing line, increasing prices is extremely unpopular. So the easy thing for them to do is to keep prices low and to hell with the rest. And of course, if you've got a damaged, vulnerable Environmental Agency, what's happened is perfectly predictable from that.

BALE: So in a nutshell, you’re saying that the regulation is underfunded and...

they don’t want to increase prices, so therefore they are making political decisions. And the companies, all they’re concerned about is profit and borrowing, mortgaging their assets and paying out huge dividends.

BAYLISS: We had this idea, as Gwyn saying, of this kind of benign company that will increase productivity and the gap between revenue and costs, that will be the profit and that will shape what they pay shareholders. But we've had them operating in a really different way and completely unanticipated.

BALE: Why wasn't it anticipated? Wouldn't any economist be able to predict that?

BAYLISS: With hindsight, you think it seems so obvious. So what we've had is companies have financed all investment pretty much through borrowing, pretty much all surplus funds has gone to shareholders. Huge increase in debt. Debt for the whole sector is now over 60 billion, 78 billion has been paid to shareholders since privatization and not enough investment in sewage infrastructure.

But the failings in the environmental side I think are slightly different in that we didn't know. The Environment Agency wasn't doing the audits it should have been, and companies were not reporting. So now we have this criminal investigation that's been going on for two years. So Ofwat and the Environment Agency is looking to see if companies have been deliberately misreporting what they've been doing.

…It's been ongoing for some time, because the sewage only really came to light through environmental campaigners and people checking to see. It was realising what was wrong from what they observed.

BALE (V.O): After the scale of the sewage dumping scandal began to emerge, the Environment Agency instructed water companies to install monitors on thousands of sewage overflow pipes by the end of 2023. So it’s only recently that we’ve been able to calculate how much is being spilled.

BAYLISS: Now that this has come to light, it's become clear that what was happening with self-monitoring maybe wasn't entirely accurate. And there's various informal whistleblower accounts of things being manipulated to suit the figures and the targets. So this criminal investigation is huge.

BALE: These companies, do they have a defence? Do they say, well, we’re hamstrung by whatever?

BAYLISS: The sewage situation, it's pretty much all down to underinvestment in infrastructure.

Water UK, which is the industry body for the water system, actually issued an apology for this last year. And they said they're going to invest, I think 96 billion pounds in sewage infrastructure, which is great. But investment that they put in is financed by bills. We mustn't forget that. They say they're going to bring investment; we will pay for it. We're paying for debt service for these highly indebted companies, we're paying for dividends, we're paying for chief executive salaries in the millions.

BALE (V.O) I asked Kate why Thames Water, our biggest water company, is on the brink of collapse. It is owned by a group of investors spanning four continents. She explained that it is largely down to inflation and the rise in interest rates. This has raised the costs of servicing the company’s huge debts.

BAYLISS: I just worked with The Guardian looking at the share of revenue going on debt service, and it was highest for Thames Water.

About 28% of revenue was going towards debt service costs. So there's a kind of fragile structure was put in at a time of low interest rates, which maybe would not have been so disastrous if we hadn't had the increase in interest rates in inflation that followed. But it was obviously quite a fragile structure if it's not able to withstand these…

external events.

So Ofwat's trying to push them to perform better, put in more shareholder funding. But the shareholders are reluctant, because they want to see that they're going to make returns as investors. They want to be allowed to put up prices as you would as an investor.

So yes, we have the regulator attempting to push them to perform better, but it's not working. That's the problem with regulation. It's a fine line that you're treading if you start trying to squeeze companies more to perform better. This is completely unravelling with Thames.

BALE (V.O) So how do we clean up the sewage crisis?

Keir Starmer ran for leadership of the Labour Party insisting that the water industry should be re-nationalised. But this has now been ruled out. Here’s Steve Reed, the Environment Secretary, explaining why:

Instead, the government has introduced legislation to give regulators new powers to block the payment of bonuses to executives. And bring criminal charges against persistent lawbreakers.

I asked Kate and Gwyn if they thought this will bring about the change that’s needed.

BAYLISS: Well, as I was saying about Thames, it's difficult, because you want investment. We rely on private investment in infrastructure in this country, and as quite a few investors have been saying, we don't have to invest in UK water, we can take our money anywhere in the world. So if we get too tough on companies, there is this kind of

perceived threat that companies will just go elsewhere.

So I don't see that tweaking regulation is going to make very much difference…

The other problem with regulation, I just wanted to say, is that we've only started acting on sewage once it's become visible and it's become visible and the problems are huge. We didn't know this was going on.

BALE (V.O.): Kate then explained that rules introduced by Ofwat to try to stem borrowing and huge dividends to shareholders also came too little too late.

BAYLISS: We've got new rules now about financial controls, but only once companies have become massively indebted. So the private sector surprises us and we don't know what's going to come next. And what we are doing now is thinking of putting on regulations to stop what we've seen, but we can't put in place what might be down the road because we don't know. So we can patch things up and limp along, but I think there'll be another disaster down the road with the current system.

BALE: If you were running the country, would you just bring it all into public ownership?

BAYLISS: Well, one indicator of this is that nowhere in the world has copied our system. Public water is absolutely normal in the rest of the world. So people say nationalisation would be like going back to the 1970s, but absolutely not. It would bring us in line with the rest of the modern world. So there's good reason for that. This is a public resource and needs to be publicly managed. Public ownership might not always work perfectly, but at least it's a starting point where we know what's going on, we know what the issues are.

BEVAN: I just think you have to look upon this as an experiment that failed…

So putting it together under state ownership with ministers responsible for…

making judgements about how much we're going to increase prices…

that just seems to me the natural way of doing things.

BALE (V.O): Kate and Gwyn say government plans to tighten regulation on private water companies could deter investors and push up prices. They argue that the only way to clean up our waterways and keep prices reasonable is to re-nationalise our water industry. This would mirror government policy for the railway network and, to a lesser extent, energy, where a state energy company is planned.

BAYLISS: The Environment Agency is currently conducting its largest ever criminal investigation to assess whether there's been widespread and serious non-compliance of environmental permits of wastewater treatment works.

I think that's potentially quite significant in what happens next, because these companies seem to quite clearly be in breach of their license. So we should really be on solid ground to just revoke their licenses and take them into public ownership.

BEVAN: The temptation is to keep these flawed systems in place.

I mean privatization of British Airways…

that made sense, they were competing in an international market.

But there are things like water, railways, energy that are so fundamental and which these markets have failed.

We've learned a lot from how you regulate and assess these companies. And we can develop systems to hold state nationalized companies to account.

BAYLISS: We tried this model and it really hasn't worked.

Because we were just putting the wrong people in charge. These companies, these shareholders are only going to try and make money for their investors. That's the reason that they're there and that's really incompatible with the supply of this essential resource that we need to manage so carefully.

But I don't think that much has to change. I think we have really great people working in these companies. They do brilliant stuff. It's just that layer at the top of the financialization and the shareholders, that just creates the wrong incentives for operation. So that's, I think, all that we would need to change and then we could end up with something that works far better for the environment and for society.

IQ MUSIC

BALE (OUTRO): This episode was produced and written by me, Joanna Bale, with script development by Sophie Mallett and editing by Oliver Johnson. If you’d like to find out more about the research in this episode, head to the show notes. And if you enjoy iQ, please leave us a review. Join us next month when we ask:

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