Water, Rents and Revolving Doors: Why Britain Can’t Keep Its Rivers Clean - by ChatGPT

Water, Rents and Revolving Doors: Why Britain Can’t Keep Its Rivers Clean

The British water industry is the sort of textbook case economists use when they want to both shock and depress undergraduates. You take a natural monopoly (pipes, reservoirs, treatment works), privatise it on a wave of Thatcher-style bravado, bolt on a regulator to stop the obvious gouging, and then watch—over three decades—as everyone involved learns to game the system.

The rivers brown, the debts swell, the dividends flow, and the regulator peers sternly over a spreadsheet. Public choice economics could write the script in its sleep.

The Lens: Public Choice, Not Public Interest

Public choice theory begins with a realpolitik question: what if politicians, regulators and industry executives are all just people, pursuing their own interests under the cover of lofty rhetoric? Once you accept that, everything else follows.

The water companies, their investors and their lawyers are a classic concentrated interest. They care intensely. They organise. They lobby. 

The rest of us are a diffuse interest. We care in the abstract, but it’s Tuesday night and there’s football on, so we don’t write to our MP about Ofwat’s cost of capital assumptions.

Layer onto that Tullock’s “transitional gains trap”: that the monopoly rents from privatisation were priced in at the point of sale. Try to claw them back now and you hurt current owners who can claim, with some justice, that they paid for the privilege. Politicians blanch at retrospective confiscation, so the game rolls on.

Meanwhile, regulators live inside a permanent informational fog. The companies know their true costs; the regulator must guess. To extract the truth you have to leave some profit on the table—“information rents” in Laffont–Tirole jargon.

If the regulator makes too much of a fuss they can be punished in future by even less cooperation.

What Went Wrong With Ofwat?

Ofwat was never evil, merely human. It started with decent intentions: cap prices (RPI–X), force efficiency gains, defend consumers. But three things happened.

First, the companies got clever. Price caps became puzzles to be solved: push expenditure from opex to capex (or vice versa), take on leverage to juice equity returns, pay out dividends while pleading poverty on infrastructure investment. Ofwat responded with more complex metrics (TOTEX, outcome delivery incentives). Complexity is catnip to consultants and CFOs; it is kryptonite to public legitimacy.

Second, epistemic capture. Sit in enough meetings with water finance directors and you start to see the world as they do: cost of capital curves, risk bands; not sewage in trout streams. Even if you never take a job with them (and plenty do), your priors drift.

Third, politics. Ministers want cheap bills, clean rivers, private capital off the public balance sheet, and no headlines. That quadrilateral doesn’t close. So Ofwat is nudged—not overtly—to keep the show on the road. Nudge meets nudge, and so here we are.

The Fix-It Fantasies

Now that public anger is finally boiling (brown water helps focus the mind), proposals are flying. They fall into a few conceptual buckets.

Renationalise the lot. Clean, decisive, and fiscally awkward. You either compensate shareholders (expensive) or you fight in court for years. Even after nationalisation, bureaucratic slack replaces shareholder greed unless you design governance properly. Ask British Rail’s ghost.

Nationalise the assets, franchise the operation. The state owns the pipes; private (or mutual) firms bid for 10–15 year operating contracts. This gives you “competition for the market”, Schumpeter’s creative destruction in slow motion. It also gives you periodic disruption, which Olson would applaud: entrenched coalitions must re-apply for their sinecures.

Keep it private, tighten the screws. More fines, tougher dividend locks, stricter environmental targets, maybe a “special administration regime” for the worst offenders. This is incrementalism with teeth. It can work, but only if the teeth actually draw blood—automatic penalties, not performative press releases.

Mutuals, co-ops, stakeholder boards. Sounds cuddly. Sometimes works (see Scottish Water’s hybrid model), sometimes degenerates into insider clubs with nice sandwiches. Without transparency and credible exit threats, governance reforms drift into sentimental pandering.

What Matters Conceptually (i.e. Beyond the Policy Laundry List)

Two things: contestability and commitment.

Contestability is the ghost of competition when actual competition is impossible. If a company believes it can lose its licence—really lose it—it tends to behave (perhaps after trying everything else). That belief cannot rest on ministerial whim; it needs to be embedded: sunset clauses, automatic re-tendering, pre-written failure regimes. Make rent-seeking hard work and not obviously profitable.

Commitment cuts both ways. The state must credibly commit not to expropriate honest returns after firms invest, otherwise you get underinvestment or creative accounting. But firms must credibly commit to meet service and environmental standards, or their investors will get wiped. Commitment is not achieved by speeches; it’s achieved by statute, contracts, and automatic triggers that remove discretion (and therefore lobbying targets).

The Regulator We Actually Need

A regulator that thinks like a mechanism designer, not a moralising Victorian school mistress. One that assumes everyone in the game—including itself—is a bit sly, and writes rules accordingly. Radical transparency (publish the data, all of it), rotating oversight panels, citizen juries for tariff changes, real-time performance dashboards. Make the rent-seeking noisy, public and embarrassing. Sunlight is cheaper than armies of consultants.

And every decade or so, smash the crockery. Reset licences, reopen the structure, let fresh blood in. Olson’s sclerosis is not cured; it is managed, like gout, with periodic purges.

Conclusion: Stop Pretending

We pretend the water companies are motivated by civic duty; they pretend to be regulated to within an inch of their lives; Ofwat pretends it has all the information it needs; ministers pretend you can have Scandinavian rivers on Mississippi tax rates.

Public choice theory’s impolite intervention is to say: stop pretending. Design institutions for the people we have, not the angels we were promised.

Until we do, expect more debt, more dividends, and more euphemisms for sewage.