As we go into the second quarter of the twenty-first century, how can it be that we are unable to tackle the state of the water industry? The Victorians built the sewers of London (and elsewhere), and dealt with the scandal of cholera and contaminated water supplies. Why can’t we deal with the scandal of sewage discharges to rivers or the reckless abstraction of water from aquifers and rivers, and how can we not even reconnect water supplies to Tunbridge Wells in a day rather than a week?
Part of the failure is down to the fact that slow decay is typically politically much more palatable than radical action. For all the foresight of the Victorians, the reality is that the London sewers were built only once the crisis was so great that the status quo was no longer tolerable. The Great Stink was just too much to bear. Cholera cost too many lives. Much later, it took the pea-soup fogs of London (again) to motivate radical action on urban air pollution.
If the situation has to get really bad before anyone does anything radical, it also has to be the case that there are solutions to hand. Bazalgette’s sewers fixed the Great Stink around the same time as the London municipalities started to step in to deal with water supplies. Banning coal domestic fires in cities was an obvious step in the 1950s, not least because other ways of heating houses were available.
Is the state of our water and sewerage bad enough to act now? Are there solutions to hand?
Despite the rhetoric and the performance politics from the current government, it does not think that the water situation is sufficiently bad enough yet. It plans to tinker: more of the same with a bit more money. It drafted in Cunliffe to provide the fig leaf that stuff is being done that would “halve” the sewage discharges by 2030. Perhaps building lots of tanks to store storm waters might buy time? (In parliamentary terms, five years is all that is needed.) Things may have to get worse to spur serious action. Each Secretary of State has an even shorter time horizon: for more than a decade there has been roughly one Secretary of State a year – long enough to promise to get serious, and short enough not to be held personally responsible for inaction.
The latest White Paper, “A new vision for water”, sets out the usual spin and guff. It is a “once-in-a-generation plan to overhaul the water system”. If only… The press release tells us that this great reform is going to be spearheaded by appointing a Chief Engineer, instigating an annual MOT, and promoting smart metering. Besides the obvious question of why all these things are not already being done, the press release does not even bother to highlight the new regulatory army of supervisors to treat each company separately, and hence open up the maximum scope for capture. What the White Paper really does is take another step towards “taking back control”. As with rail, ministers should recognise the obvious consequence: they are also taking back responsibility too. “Guidance” is to be enhanced, and it is a matter of time before guidance means what it does in rail already – capping the bills.
On the second question, help is at hand. It is perfectly possible to sort out our rivers and water supplies and sewerage, and to do it in ways that will fix the problems for decades to come. Bazalgette’s sewers have lasted more than a century. He and the London authorities did not have the technology that we have, and the economy was extremely small compared to ours. That a much richer economy and one endowed with massive technological advances can’t crack these problems is testament to the lack of imagination and the disregard of our responsibility to protect and enhance our natural environment.
The Victorians, having tried all the other options, were forced to be radical and long-term. Would a radical solution be beyond our means now? Is it just unaffordable? The current approach is unsustainable, and the latest White Paper at best packs in lots of sticking plasters to get to the next election. Because it is unsustainable, it will not be sustained. Governments will keep having to come back to have yet another “once-in-a-generation reform” until finally the failures overwhelm them.
A “once-in-a-generation reform” is in fact perfectly possible. We can do great transformations and we are doing them elsewhere – for example, with fibre and broadband and mobile phones and the internet and now AI. These are mostly new infrastructures. Less successful but certainly ambitious, the sheer expense of doubling the capacity on the electricity system with wind farms and solar panels and doubling the grid is another example. It is this sort of transformation at scale that the water industry now requires.
It would be a long-term undertaking, so the costs can be spread. Bazalgette’s sewer took 17 years to complete. The costs are not all upfront; there is a generation to spread the costs of this water transformation and perhaps a century of benefits.
The existing programme is spending money badly on patching up the crumbling existing water systems, wasting money that could be better directed to permanent solutions. It is the equivalent of filling in potholes rather than repairing the roads properly, buying time whilst realising that the radical changes will be needed anyway. Spend the existing sums properly and it might even cost less.
Look to the fundamentals
Imagine you had tried all the conventional approaches – that the sewage spills could be fixed by building bigger tanks. That the sewers could be upsized to treat more sewage more quickly. That the sewage could be piped closer to the sea. That the water supplies could be augmented by building new reservoirs. That leaks could be fixed.
That is pretty much what is proposed now. Will these approaches work? Will they buy time? Probably. They will make things better than they otherwise would have been. Like patching up the potholes, it can be done, but eventually the roads still fall apart.
A better way to think about all this is to start the other way around. Not with the current status quo and applying lots of ever-bigger sticking plasters. Rather, start with a blank piece of paper, addressing the exam question: what would a sustainable water and sewerage system look like, starting from scratch? Then we can work out how to get from here towards there. Call it the “Bazalgette approach”.
Stand back from the details and consider some of the basics. Here are some starters to consider: sewerage and water are two separate but related problems; storm water and sewage are separate but related problems; storm water runs off ever faster because the surfaces it falls on are increasingly impervious ones (houses, industrial and warehouse buildings, roads, car parks, hard garden surfaces, and so on); sewage contains multiple pollutants (and some resources); what goes into sewerage works depends on what goes into the sewerage systems – including what gets flushed down the toilet and the sinks in domestic households and businesses; many sorts of sewage can be treated (and in some cases used) at source rather than at the end of pipes, notably “grey” water; and industrial chemicals should not go near rivers or sewers, but should be treated at source.
Sewers are responsible – notably through storm overflows – for only part of river and watercourse pollution. Farms and domestic septic tanks account for a considerable amount, as do industry and transport, with pollution from roads associated with vehicle tyres and emissions and spills. Most of these should not go into rivers and water systems. They should be treated at source.
Pharmaceuticals, PFAs (per-and polyfluoroalkyl substances), veterinary medicines as well as microplastics are hard to screen out in sewerage works not designed to deal with them. These are all at-source problems; they should not generally go into the sewerage systems.
Water abstraction from rivers, aquifers and wells is currently priced at well below costs or even at zero. In areas and times of scarcity, irrigation and non-drinking water users face little to no constraint, and typically farmers and industry are exempt from restrictions applied in extremis. Treating raw water as a scarce resource and pricing it as such would radically reduce demand and hence the need for reservoirs.
This blank-sheet-of-paper approach can be summarised as follows: separate out storm waters from the sewerage system; deal with storm run-offs at source; deal with grey water and multiple pollution at source; deal with agricultural and other industrial pollution at source; and price scarce water resources at source.
The key point is that these are almost all the opposite of what we do now, and what the White Paper proposes to continue to do. Furthermore, all of these receive at best a bit of lip service. The overwhelming consequence of the Water White Paper is more and more end-of-pipe solutions, and more reservoirs. Concrete to tackle the consequences, rather than the other way around.
These steps would transform our water industry. To these, there are two additional steps: use natural capital options to slow the flow in rivers; and use nature to clean up nutrients and some other pollutants once in the water system.
None of these measures would negate the need to fix the current water and sewerage works and the pipes. All of this is necessary, whatever the overall approach. It is what we the customers have already largely paid for. Leaking pipes and decrepit sewers need fixing, but it is completely naive to think that patching them up will make the fundamental problems go away. They at best help to kick the problems down the road (and, for the government, it hopes to kick them far enough to get beyond the next election).
Separating out the systems
Combined sewers – storm water and sewerage – fitted with the mindset about rivers back in the nineteenth century. The rivers were themselves treated as sewers: they were waste disposal systems. Anything could be dumped into rivers – carcasses, industrial effluent, raw sewage. Rainwater went the same way.
Cleaning up water for drinking became a priority because people became ill and died. Cleaning up the rivers from pollution was a lesser priority, and indeed in itself not taken seriously until the late twentieth century. Biologically dead or severely damaged river ecosystems were not a priority almost anywhere where there were urban populations and industry. Water did become a serious health problem in the mid-nineteenth century, to be solved by finding cleaner and usually more remote sources of supply, including from aquifers, rather than cleaning up the rivers (although the stink of the River Thames eventually had to be reduced).
Storm waters are and were a flooding and drainage problem. Flooding in urban and rural areas is and was a problem for houses and roads and other infrastructure. Drainage was a form of flood defence, as well as being used to open up land for development and agriculture.
Both sewage and surface water were treated as disposal problems, and for Britain with its coastline and its tides, this meant getting the sewage and storm waters into the sea. Storm waters diluting the sewage helped, so it could be discharged untreated into rivers. Residual sewage and other wastes could also be loaded onto barges and taken out to sea, notably from London, to be dumped in the North Sea.
Combining water drainage and sewerage was not a mistake at the time, as is sometimes suggested now. It was the rational answer to the questions of the mid-nineteenth and the first half of the twentieth century. Now the question has changed, and so too should the answer.
Imagine two separate systems: one for sewage, and the other for drainage and storm waters. How these systems are configured and scaled depends upon what goes into them. In the case of drainage and storm waters, this depends upon how the land is managed, how pervious that land is, and where development is located and expanded. In the case of sewage, it depends on what goes into the sewerage system. Both points are obvious, yet most of the discussion about separating out the systems assumes that the flows remain the same as now. That assumption is a costly mistake.
It is also not an “all-or-nothing” separation, at least not in the short term. If the question is how to reduce storm overflows at sewers, then it is about making sure that storm water surges don’t reach the sewers so quickly, but not necessarily whether the regular drainage flows do so. The urgent problem is about peak surge management. A plan to gradually separate out the two systems can start with the places where there are limited at-source options to slow storm flows and where there is some capacity already to handle them. For new developments and major refurbishments of the existing systems, the separation can be built in immediately, but not everywhere and not necessarily always urgently.
At-source options and solutions
Gradual separation of storm waters and drainage from sewers reduces the problems at sewers, but its impacts will depend upon what happens at source.
For the storm waters, a major reason for this problem is artificial impervious surfaces. Roads, large-scale industrial developments and warehouses, household gardens and new housing developments all exacerbate the speed of flows. The radical approach is to require surfaces to be pervious, unless there are special reasons to the contrary. That would be transformational.
Land management practices and farmland drainage have typically been designed to get water off farmland quicker than it otherwise would. To slow the flow, the land needs to hold storm waters and for longer. This would have added benefits in slowing and limiting the run-off of soils, fertilisers and pesticides too. Simple measures, like cover crops, help in this regard, whilst, on moorland, blocking up peatland drainage ditches has additional multiple benefits, including to biodiversity, but also by containing carbon in peats and thereby limiting emissions.
Integrating agricultural policies, including conditionality to the Sustainable Farming Initiative in the subsidies for ELM (Environmental Land Management), can contribute. Farmers wash their hands of water once it is off their land, but the speed it leaves impacts on the sewer systems and on flooding for others. Holding water rather than getting the Environment Agency (EA) and others to increase drainage might be more costly to farmers, but it reduces costs elsewhere.
The roads are designed to remove water quickly, especially from motorways and A roads, for obvious safety reasons. They are also sources of major water pollution, exacerbated by fast run-off. The ability of the road to absorb water through pervious surfaces is just one aspect of how to design road policies to minimise the impacts on water systems (as well as to reduce the risks of surface waters to drivers.) Pervious surfaces may be more costly, but they reduce costs elsewhere.
Since both farmers and the highways contribute to flooding and to storm overflows and sewer spills – and hence cause these costs to the water industry – both should pay for the externalities they are thereby causing. Ditto for housing and for new industrial developments, the impact of hard surfaces in displacing water should be built into these developments, as part of the planning requirements.
Storm water is not all costs. It has considerable potential benefits. Part of storm water management includes storing the rainfall at source. This has multiple benefits. Not only is the flow slowed, but the stored water can be purposed for future drinking water and for “grey water” uses. It is extraordinary that treated drinking water is used to water gardens, for irrigation and for a host of industrial activities, including cleaning. It is also relevant in times of water stress to the system for droughts. Providing these services helps incentivise at-source water storage.
Of the above examples, the obvious place to start is with new warehouses and industrial developments and housing. The collection of rainfall from roofs and guttering can go straight into storage tanks. In some cases, this can be below the building. This stored water can then be integrated back for use. For example, a data centre can use this storage water for cooling (and some plan to do so). For houses, the stored water can be used for household cleaning and washing, as well as gardens.
To make these opportunities work, the rainwater needs a pipes system that is separate from clean, treated drinking water.
To this are added the opportunities to manage grey water resulting from its uses and to recycle it at source. Water from showers and baths, washing machines and dishwashers can be used for irrigation and for flushing toilets. It will need some pre-cleaning filters, screens and settling tanks to remove debris. As with rainwater, it has to be separated and stored, but, because it is grey, it typically has a short storage life. The result is not only that this water does not necessarily have to go into the sewerage system pipes and all end up at sewerage works, but also a quite radical reduction in the demand for clean drinking water. Together with the impact of pricing and metering discussed below, this separation can substantially both increase the resilience of the drinking water system and offset the need for some of the proposed new reservoirs.
Before storm waters reach the sewers
Although the UK has short and typically quite fast rivers and the distance to the sea is short, the time taken for storm waters to reach sewers is an opportunity to slow the flow and thereby reduce sewage spills. Where rivers have been straightened and in cities canalised, water flow accelerates. It can be slowed by doing the opposite: re-wriggling rivers to their natural pathways. Almost every developed country is realising the folly of the large-scale straightening of rivers. Re-wriggling rivers has all sorts of additional benefits too. Soil erosion can be slowed, biodiversity increased, and pollutants filtered out.
The pay-offs are not just to sewers and biodiversity, but also in reducing the need for hard flood defences. Just as salt marshes absorb storm surges on the coasts, so does floodplain natural capital management. This can be very local, or it can be on major catchments like the Rivers Severn and Thames. In the case of the Severn, the upstream catchment tributaries offer lots of natural capital absorption opportunities; whilst, for the Thames, it is about limiting the flood risks to Oxford, Reading and London. In the London case, this is all the more important because the river has been substantially narrowed – it was much wider downstream before the modern city was constructed and the river in effect hemmed in London.
Stopping the pollution going down the drains and toilets
Following on from the historical approach to rivers, the practice of treating them as waste-disposal systems has increasingly been applied to industrial and residential activities. Industry disposes of polluted water down drains, and households flush all sorts of detritus down toilets and drains. Take a trip to any sewerage works and look at the primary screens to see what accumulates. To these visible wastes that go into the sewerage systems are added the invisible ones, including beauty products, pharmaceuticals, and the chemicals that pass through people.
The costs of removing these, and the costs of the pollution that comes from those that are not removed easily, can be offset by stopping many of these going into the sewerage systems in the first place. Toilets can be for “black waste” only. Where they are connected to the sewerage systems, they can be used as if they were connected to septic tanks. Households with septic tanks typically have signs through their properties to dispose of faeces, urine and paper tissues only. Imagine if these restrictions applied to all toilets. Our sewerage pollution problems would be radically transformed.
The wastes that would otherwise go down the drains and toilets would still need to be disposed of, but they would no longer be mixed into the sewerage system. Apply producer responsibility to all the producers of these chemical wastes, and a further transformation would take place as the costs reduced demand.
Addressing pollution going directly into rivers
As with slowing the flow to limit the speed and volumes of storm waters going into the sewers through intermediary steps to re-wriggle rivers, the intermediary step for pollution is to limit or stop direct disposal into rivers.
Agricultural pollution is on a par with sewage discharges in polluting rivers. A transformation of our rivers would not only reduce the discharges of untreated sewage from the sewerage works, but also reduce the untreated pollution dumped into rivers. The combination of the two together is what makes the state of UK rivers so polluted, and it is this combination that damages their ecosystems and biodiversity.
Stopping agricultural pollution at source offers multiple benefits. In addition to the simple measures, like planting cover crops, there are several natural capital options. These include buffer strips along rivers to hold back and absorb fertiliser and animal waste run-offs. Imagine if the default for any river bank is a buffer strip of trees. These would hold back run-off, cool the rivers with shade, increase biodiversity, and offer opportunities for walkers and others who benefit from the physical and mental health gains.
Amongst the most potent agricultural pollutants are slurry spills and run-off, and chicken faeces going into rivers. There are simple answers in both cases: they should be illegal. In the former case, slurry storage should be properly controlled, and the management of the application to land not only regulated but enforced. In the case of free-range chickens¸ these should be located far away from waterways.
For industrial pollution to water systems, the release of pollutants is typically licensed. To this are added lots of illegal discharges, and weak enforcement allows this to continue.
Catchment systems and mapping
All of the above is best defined on a catchment basis. Catchments are the natural systems within which water and sewerage management is set, and catchment-based solutions are inevitably cheaper because they integrate all the players and hence the least-cost options. Instead of trying to supervise companies to meet the existing company-based licence obligation, a ”once-in-a-generation” transformation should start with catchments and catchment regulation, and not simply add these on as an extra layer, as the Cunliffe Review did and now the White Paper is doing. That approach should be turned on its head, not slightly tilted towards catchments.
The potential to plan on a catchment basis has received a massive upgrade in recent years, as digital mapping moves from isolated examples towards being possible across any land area and in real time. The paucity of data is being replaced by a cornucopia, with satellite mapping down to fine resolution, augmented by drone data and detailed monitoring. All of the data can be spliced together using the great advances in AI. Any, and all, catchments, including tributaries, can now be mapped.
This great technological advance enables not just the existing infrastructure and state of the rivers and aquifers to be monitored, but also the hypothetical mapping of alternatives. For example, a digital map can be created which assumes that storm water is separated from sewage, that many dimensions of pollution are managed at source, and where water demand and storage are developed at source, as well as at new reservoirs. This offers the tantalising option of multiple digital twins for each catchment.
The options and outcomes for at-source approaches can be compared with the status quo, and strategies designed to get from here towards much better outcomes. Specific projects can be simulated, as can the companies’ business plans, and the alternatives that customers and users, as well as other stakeholders, might advocate.
This is a massive step forward, and should in due course become the norm. Modelling catchments and the resulting multi-layered digital maps in real time will become the core tools for catchment planning and regulation.
As a result, catchment regulation and greater public engagement are opened up. Instead of siloed approaches to water company assets, farming and flooding, as well as the impacts of new development, these can be seen altogether in the catchment simulations. Since the catchment as a whole is a natural monopoly, the catchment plans can (and should) be simulated on open-data platforms for all to see and play with alternative options.
This is the basic tool for my proposed Catchment Regulator and associated Catchment System Operator model. The Catchment Regulator carries out the planning exercises on the basis of the catchment maps and comes up with the preferred catchment options. It is analogous to the activities of the National Energy System Operator (NESO) and the Future Energy Scenarios and spatial energy maps that it is developing.
Now comes the smart bit. Once the outcomes are defined in the preferred plan, in theory anyone can bid to the Catchment System Operator for any aspect of the delivery of the plan. Farmers can bid to reduce pollution and flooding. Water companies can bid for management functions, including capital maintenance, and construction and other businesses can bid for the major capital projects. The monopolies of the water companies can be challenged.
This is an evolution on current plans. Water companies contract out many of their functions. Farmers are already engaged in bilateral deals with water companies, and water companies are engaged with farm advisers acting to develop ELM funding applications and in particular farm plans. The EA in its flood defence works is engaged with various groups to develop re-wriggling opportunities.
The Catchment Regulator and Catchment System Operator model is further set out in my earlier papers.[1]
Capital maintenance
Much of the necessary catchment works are currently described as “investment”, whereas in practice they are capital maintenance. Investment is about enhancing the system assets; maintenance is about ensuring that the assets remain in a good and resilient state so that the service can continue to be provided.
This distinction matters for several reasons. First, it requires the charges for maintaining the assets to come from current income and hence out of current bills. Second, since both water and sewerage services are required in perpetuity, there is no capital depreciation. Third, by confusing capital maintenance with investment in one bundled capital expenditure (CAPEX) programme, the priority of capital maintenance is missed.
An example of this confusion is the treatment of new reservoirs. These are enhancements, and hence investments in the strict sense, but the alternative is fixing the pipes, metering, and at-source storage, much of which is maintenance. Since “investment” can be financed through borrowing, the bias is obvious: future customers can be made to pay for current maintenance. Introducing an annual MOT on the state of the existing assets adds more (in this case necessary) sticking plaster, but it is not sufficient. What really matters is that capital maintenance should be taken seriously and not pushed off to future bills and taxpayers. Undoing the damage of the financial engineering which it encourages would be a painful part of a “once-in-a-generation plan”.
The digital mapping described above extends to the network assets. Whereas Thames Water in particular claimed not to know very much about its sewerage works (and hence spills from these works), digital mapping gives a much clearer picture of what is going on – similarly for leakage and farming pollution incidents. All of this can now be seen on layered asset maps, and again these should be open data and in the public domain.
The Catchment Regulator and Catchment System Operator can see what is going on, as can the management of the companies and the customers and other interested parties. There can be no escape from the proper maintenance of the assets. In turn, this reduces business and financial risks: if Thames Water’s assets had been mapped in this way, and published on the Catchment Regulator’s website, the company is unlikely to have got into the mess it is in. It would not have been allowed to do so. The sorry state of the assets is the result of failure to maintain them properly, and that is ultimately why the equity investors got wiped out and why the debt is exposed to write-downs and write-offs. Financial engineering would not have been possible on the scale that Thames Water has exploited had the true state of its assets, and its management failures to maintain them properly, been widely known – by the managers themselves, as well as the regulators and the other interested parties.
Digital mapping of the assets has an added advantage if the separation of the storm waters from sewage and the at-source storage of water and use of grey water, and at-source pollution are to be addressed. Creating new infrastructure with separation requires careful attention to the timing and configuration, and creates a new baseline for catchment management into the future. Having scenarios not only of the separated and at-source management systems, but also the ability to have millions of scenarios of transition and continuous monitoring of behaviours and asset performance using AI would be transformational.
Getting serious about natural capital
Natural capital is an asset, not a liability, and it is a serious mistake in current economic growth strategies for housing and development to see nature and environmental regulation as a “blocker”. Nutrients, in particular, matter, and without proper management at source and if the building is in the wrong place, natural capital will get damaged.
In the catchment approach, natural capital is central. It is the primary asset, delivering water, handling nutrients, slowing the flows to benefit flood management, and helping to limit sewage spills. The soils in the catchments are reservoirs of carbon, and management of riverbanks offers opportunities to sequester more carbon. Allowing peat bogs to deteriorate, allowing ploughing right up to the riverbanks, and especially for maize crops, are all generally environmentally damaging and specifically bad for climate change.
In the current approach, hard concrete and end-of-pipe solutions have been the default option, and natural capital management opportunities in catchments have been generally small-scale and underutilised. This should all be turned on its head. As with the treatment of sewage at source, and storage at source, natural capital options should be the default, unless there are strong reasons for adding on concrete solutions. Storm overflows should first be managed by slowing the flow and implementing porous surfaces, cover crops, and other vegetation and tree options.
Why has this not happened? Because the multiple benefits of natural capital options are largely uncaptured, and because the hard-concrete options add to the regulated asset bases of the privatised companies and give a superficial sense of certainty. End-of-pipe solutions are typically treated as investments, whereas natural capital projects are usually treated as current costs and don’t go on the balance sheets. All of this is wrong and inefficient: we can have much more for less.
Pricing and metering
The at-source approach will work if the main parties have the incentives to follow this path. This requires several aspects of incentivising via pricing. First, water is a scarce resource in the long run, and a seasonal-scale resource in the short run. Pricing water can incentivise efficiency, in ways that the absence of appropriate pricing does not. It can encourage demand behaviours that are more consistent with the good of the catchment as a whole, and in particular, encourage water companies to better manage their existing assets before reaching for large enhancements like reservoirs and new tanks. Pricing water makes customers active players in the catchments.
Pricing sewerage has a more limited role for the catchment and the sewers. The better incentives are directed via regulations on what can be put into the sewerage system. Where households throw polluting stuff into the toilets, there could be a fines system to deter this behaviour. It should become as unacceptable as throwing litter out of the car window. Where companies do so, again regulations and fines are appropriate. The fines need to be high enough to offset the initial difficulties in detecting pollution behaviours. Similar approaches should apply to farm pollution, including not only fines, but also the conditionality on ELM subsidies.
The tricky bit of water pricing is that the marginal costs vary widely between seasons, according to use and locations. For much of the time for a given system, the marginal cost is effectively zero. During droughts, it is much higher. Conversely, there are times when more water in the sewerage system may be desirable, and others in heavy rain periods when it may not.
A simple volume-based charge is a very crude way of reflecting costs. In practice it is just a general charging mechanism. Pricing water requires smart metering, and not just volumetric simple meters. A smart meter allows the time of day to be recorded, and the pressures. It allows for smart charging in real time.
Smart metering not only helps customers, but it also assists the supplier (and the Catchment System Regulator) to manage the overall system, notably in times of water stress.
A smart water-metered system could have two charges: for capacity and for volume. The capacity charge is related to the long-run marginal costs of the system and the trade-off between capital maintenance and enhancement investment. The volume charge relates to short-run marginal costs, and is mostly close to zero but rises sharply at times of water stress. It is adjusted by the supplier (and the Catchment System Regulator), who has the smart data to use this option to manage the system under stress.
In the case of sewerage, the smart meter is about measuring what is going into the system, detecting pollution and prohibited items. This is as yet very much a technology in the making. But it is another technological advancement coming down the track. At the non-household level, pollution incidents can already be measured, and in real time, and this should cover pollution from farms, industry and sewerage works. In all cases the polluter should pay.
Funding and finance
To recap, the water industry is at one of those pivotal moments in its history, comparable to the mid-nineteenth century when river pollution and waterborne diseases meant that the status quo was no longer sustainable. The current structure and regulation of the industry is no longer fit for purpose and the failures of governments, regulators and the companies are now sufficiently great to motivate a more radical reconsideration, so that the industry can address the mid-twenty-first-century challenges it faces.
The steps are underpinned by profound technical change, notably in data, mapping and AI. These include the possibilities of gradually separating water from sewerage, separating sewerage from drainage and storm waters, the adoption of natural capital solutions, and the inversion of the industry from end-of-pipe to at-source approaches. These can be facilitated by catchment regulation, adopting the catchment regulatory and system operating model, and replacing OFWAT. Water should be (smart-) metered and priced by short-run marginal cost for volumes, and long-run marginal cost-based capacity charging. Polluters should pay for the pollution they cause.
The funding and financing of a programme is distinct from the approach in a piecemeal and ad hoc project-by-project way. The programme as a whole needs a framework for the costs to evolve over time, and an extra decision about the balance between current and future customers and taxpayers. This is independent of, and prior to, questions about whether it is public or private funding and finance.
Before privatisation, capital maintenance and enhancement investments were paid for largely by current customers. It was pay-as-you-go. The reservoir build-out after the Second World War up to the end of the 1970s required little borrowing, except to smooth out the cost burdens. Some of this came initially via local government, before the regional water boards were set up in the 1970s. Current local government taxpayers contributed alongside the customers.
The model went awry at the end of the 1970s, and as a result the development of new assets, like reservoirs, ground to a halt. Privatisation was justified by the need to use private balance sheets to borrow to invest (and effectively borrow to do capital maintenance). The model became pay-when-delivered. Ironically, this replicated some of the features of the Victorian model, where borrowing featured as the industry rapidly invested in new assets, such as the long-distance supplies of clean water and the sewers. The difference was that the Victorians added genuinely new assets, whereas since privatisation virtually no genuinely new assets have been added.
The principles are clear: borrowing should be for new and enhanced assets only. Capital maintenance should be paid out of current income and hence current bills and, where appropriate, current taxes. Additional current revenues come from applying the polluter-pays principle, on a pay-as-you-pollute basis.
Applying these principles to the programme of works to deliver the step changes outlined above requires a proper accounting framework, based on assets-in-perpetuity, and a separation of capital maintenance from enhancements. Since the services – providing clean drinking water and dealing with sewage – remain unchanged, but to be delivered by a different combination of provision via at-source and natural capital, most of the programme can be classed as capital maintenance, maintaining a set of assets capable of delivering the continuing services.
At the sources, there will need to be some new assets as well as remedial measures to make good what should have been provided and maintained, but patently in some cases has not been. These include upgrading household plumbing systems, at-source storage and more upstream pollution treatment works at industrial sites. New housing developments will need enhanced water and sewerage systems, analogous to local heating systems and micro-grids and own-generation in electricity.
Taking a catchment approach extends to taking a whole catchment approach to the customer charging. There is a total catchment revenue which is equal to customer bills, plus business bills, plus abstraction, plus pollution charges. Given that in both water and sewerage – and flood defence – there are multiple beneficiaries, multiple users and multiple polluters, using water companies’ customer bases, plus ELM scheme subsidies plus Treasury funding of the EA for flood defence, current charges are poorly correlated with these. Better to raise money on a catchment basis, parcelled out between the users and polluters.
The Catchment Regulator can provide the focus for bills and pollution incomes, as local authorities once did. Like the fire services and the police, water and sewerage were once listed on the council rates bills to local citizens. There would need to be a catchment charge and a catchment fund into which the monies flow. This is effectively what local municipalities once did.
The key word here is “fund”. There is no borrowing at this point: finance is relevant only with respect to the few genuinely enhancement investments. It is for the Catchment Regulator to allocate these monies to the capital maintenance tasks required. A major recipient would be the water and sewerage companies and their successors in the separation model. There would also be other players and recipients, including land managers and flood defence bodies.
Finance comes in only for enhancing new assets. This could be raised as borrowing by private (or public, if nationalised) companies, or some combination. The borrowing applies to the works to build the assets, and then the funding of that borrowing comes from the revenue fund described above.
A national programme with a long-term fund
We now have all the main building blocks in place and can turn to the programme for the transformation of the water industry from its current sorry state to the separated and at-source model.
A programme is more than a series of projects; it is a process, requiring skills and practical knowhow. It requires construction, plumbing, household design and management, architecture and mappings skillsets that build on knowledge gained as expertise in this process. It is the antithesis of the British approachnot just to water but also to other major programmes like nuclear power stations. One at a time, by different competing contractors is a recipe for minimum process knowledge acquisition and maximum costs, as the wheel is reinvented again and again, rather than having a wheel-making industry delivering repeatedly essentially the same thing, and investing in skills on the job as the programme unfolds.
A programme is a national effort with an agreed end point. But not all programmes are well-designed. Net zero is a case in point: it has the wrong target, the wrong cost assumptions and the wrong timeline. In the case of water and sewerage, the starting point is a clear set of objectives and a catchment plan, and a set of institutions designed to deliver it. It is the opposite of high-speed trains, and in particular HS2, which started without a coherent plan, budget or a body capable of delivery. Perhaps the best example for the water case is the rollout of the national gas transmission system under British Gas.
With a clear set of objectives first to catch up with the capital maintenance of the existing assets, and second to do the separation and at-source investments, any plan needs a clear strategy for the supply chains and the skillsets. At present, almost all of this is contracted out to generalists. There are few, if any, large specialists in water asset maintenance and capital investment projects. This is a general phenomenon in the British economy. Privatisation broke down the in-house skills and process knowledge the incumbents had built up in the state sector and replaced it with (mainly short-term) competitive tendering and contracting on a project-by-project basis. Water companies followed electricity and transport companies in shedding much of their in-house workforce and going down the contractor route.
There were advantages in this model, and it did also help to break up monopoly controls and practices within the nationalised industries (though not in the railways case). But it destroyed the longer-term management incentives within the privatised companies, and, with it, the process knowledge. In developing a programme for a transformation of the water industry, there needs to be a strategy of concentration on specialist companies and ensuring that the long-term costs are at least as important as one-off, short-term gains from project-by-project outsourcing. Key strategic partners with long-term contracts are important so that these partners can invest in the skills and equipment, product development and innovation, sure in the knowledge that there will be a demand for them.
Not all the skills required will be provided by the companies. The state has a role in providing education and R&D. With a programme, it can plan this out, and designate training colleges and appropriate sector education and apprenticeship supports. It can promote centres for water sector research. In the UK, this sectoral focus is largely absent, with an ill-founded faith in generalist education for all. Industry-wide water research was closed down after privatisation.
A programme requires that all these elements are coordinated, which in turn requires an institutional focus. In Britain, this is delegated to the utility companies. The business plans are designed to meet the short-term requirement on a five-year basis. They are not designed with the supply chains, the skills and training in mind.
Getting from here to there
The gap between where we are and where we need to be is on a scale last seen in the mid-nineteenth century. Sticking plasters are again being applied, but at high cost and with very limited chance of success.
Once it is clear where we want to get to, and the funding and financing and institutional frameworks are in place, there is the practical question of prioritising and shaping the timetable.
Some aspects are no-regret; they need to be done anyway. At the head of the list are two things: the digital catchment mapping; and the creation of Catchment Regulators and Catchment System Operators. The two are related: some organisation has to own the catchment maps and the associated public websites.
After the Cunliffe Report and after the government announcement that it wants to abolish OFWAT and merge it into the EA, the institutional structure is now in play. The suggested regional forums that Cunliffe proposes are not well-defined on catchments, but they could be. Better now to replace this idea with proper catchment institutions. This is the moment to move from OFWAT to catchment regulation. The White Paper flirts with some of this, but in the end falls back on the muddled Cunliffe model.
Whilst water companies are all individually edging towards digital mapping, they are hamstrung by their own interests and the narrowness of their focus. The EA is also digitalising, but again to its own agenda. The result is haphazard and idiosyncratic. Lots of money is being deployed to consultants, and the costs are much greater than they could be in both the case of institutional change and the new digital opportunities for mapping. The result is that it is slow, piecemeal and costly. Now is the time to put all this on a better footing, and it is largely no-regret. Both the digital side and the institutions are in play, ahead of legislation scheduled for later in 2027.
At the company level, splitting water from sewerage is reasonably straightforward and some companies have toyed with the idea. In the particular case of those interested in taking over Thames Water, these options have been seriously analysed. It is not hard to do. Initially, it just needs the licences to be separated, as there is little by way of shared services and overlaps between the two activities.
Splitting storm water out from sewage is inevitably an incremental activity. The key to success is to have a plan, and someone has to own this. It is probably beyond the capabilities of DEFRA to design this, and EA is not equipped for the purpose. Catchment maps before and after, and prioritisation, need to be assigned, and again the Catchment Regulator and Catchment System Operators are necessary to make this work. There then needs to be a supply chain strategy and integration with education, training and research.
Having collaborative working and partnerships instead of piecemeal competitive tendering raises significant competition policy issues. Other countries manage this, and although it would be possible to get around the current challenges to contracting design, there will probably have to be a revisiting of the wider relationships between industrial strategies and competition policy. Part of the difficulty is that the internal capabilities have been lost. Internal partnership does not raise competition issues in the way that open repeated contracting does.[2]
Polluter-pays requires a reconsideration of the way agricultural policy works. The ELMS framework offers up the opportunity to use the farm plans to address agricultural pollution at source, as do pollution taxes for pesticides and fertilisers.
Creating the funding and financing frameworks starts with the role of government. In electricity, the government is the contractor for almost all new electricity generation. The system is operated by a combined system operator and planner: NESO. In water, it is the companies that issue the contracts and it is OFWAT that forces customers to pay under its duty to ensure that the companies can finance their functions. The Catchment Regulator and Catchment System Operator model shifts these functions from water companies to the regulator, and it is competing companies that get the contracts to carry out the catchment set requirements. This challenges the current roles of the water company monopolies, and shifts the setting of charges and the responsibility for ensuring that the contracting is efficient to the Catchment System Operator.
Legislative changes would be required and this is what the Water Act in 2027 could and should address. The key bits would be to establish the Catchment Regulator and Catchment System Operators, specifying their powers and duties. There should be a national planning framework and a clear statement of the outcomes.
The role of housebuilders, developers, farmers and other parties would have to be expanded, which links to the wider planning and infrastructure legislative frameworks. It also relates to the National Planning Policy Statements.
Conclusion
Now is the time to act. There is the opportunity to make a radical shift in the direction of travel and the moment is right because the sector is in crisis – analogous to the way it was in the mid-nineteenth century. It could be a Bazalgette moment. The public has lost trust in the water companies. Thames Water, as the biggest water and sewerage company, is in deep trouble, failing on most fronts. The technology is changing fast. The government has legislation in mind.
Because the current system is unsustainable, it will not be sustained. It is just a question of when and how bad it all has to get to motivate radical action. The government can act now, or face the industry unravelling in the next few years. The proposed Water Act 2027 is a “once-in-a-generation” opportunity to get this right. Sadly, the Water White Paper suggests that the government will duck this opportunity. But there is no escape. Dithering and political spin about a chief engineer, MOT test and smart metering will not prove sustainable, and as a result it will not be sustained.
[1] Helm, D. (2015), “Catchment management, abstraction and flooding: the case for a catchment system operator and coordinated competition”, and Helm, D. (2019), “The Systems Regulation Model”, 12 February.
[2] The Competition and Markets Authority (CMA) is currently investigation contracting and supply chains. See CMA (2025), Civil engineering market study.
