Market Update 17th August 2026

Pushing water uphill

It feels like the sun has spent more time behind the moon than any clouds this year. Despite being at least partially blocked out for a couple of minutes, we’re on track for the hottest summer since records began. The previous record was 2025. It seems the trend for hotter, drier weather is indeed here to stay.

We don’t hear so much about action on climate change these days. Which is surprising as large swathes of the country are on fire. But from an economic perspective, the UK economy might well be in line for at least £4bn loss of output as a direct result of the heat. If we remain on this path, the annual impact will most likely stretch well into the tens of billions in the near future. Some projections have the cost increasing to the equivalent of around half of the defence budget.

I happen to believe in the science that identifies the factors behind the changing climate as man-made, but that is beside the point to a degree (or 38 – the record high in London this year). We need to adapt and create solutions regardless of the cause.

Upgrading the UK’s infrastructure is an absolute must. Take the water sector, for instance. Millions of people are under a hosepipe ban in England and Wales, yet we lose close to 3 billion litres of water a day as a result of leaks, around 20% of the total pumped. That is a damning statistic.

Over £100bn is set to be pumped into the sector over the 2025-30 regulatory period to fix problems. Unfortunately, the public is unlikely to turn a blind eye to the additional cost this comes with. Affordability is entrenched as an issue and increases to bills act as a regressive tax. If we ditch the economics-speak and go with a plain English translation, the impact of higher charges is felt most keenly by the poorest in society.

So, what’s the solution?

One popular argument is to nationalise the water companies, and recent political discourse is veering this way. The case for this usually highlights how the water providers have paid a steady flow of dividends, resulting in a pool of cash ending up in shareholder pockets rather than in much-needed infrastructure. Additionally, questions are often asked about whether essential services should be in private hands, especially with the inherent lack of competition in the sector.

But it is also worth highlighting the issues associated with government ownership. The state is already burdened by a spending deficit of over £100bn a year. The chancellor does not have a magic wand in their briefcase, and there is not a magic money tree in the garden of number 11. These limitations sit on top of what was a very poor set of outcomes the last time the government was at the wheel.

With that in mind, we should maybe take a closer look at where it is going right and what’s going wrong in the private sector. You may think the former will be a slim list, but according to Ofwat there has been progress in some areas. I accept there is a degree of marking one’s own homework here, but there are few other reliable sources available. They say leakage is down by a third since privatisation, and the number of beaches classed as excellent has more than doubled to two thirds of the total.

The detail is where it gets interesting. Ofwat scores the sector on all manner of metrics, and inevitably there is a degree of variability in performance across these. However, outcome delivery incentive (ODI) performance is a useful catchall metric as it is, in Ofwat’s own terms, calculated by aggregating a range of factors that are “directly impacted by performance delivered to customers and the environment”. The three publicly-listed water utilities in the UK are Severn Trent, Pennon and United Utilities. They collectively own 6 of the 17 water boards under Ofwat’s jurisdiction, and 4 of these are in the top 5 when it comes to earning ODIs. If the system is working anywhere, it is closest to doing so at these listed groups.

In contrast, many of the laggards are owned by private investors directly. Southern Water is a distant 17^th, racking up net fines equivalent to around 6% of its regulated equity. Unsurprisingly, given the volume of media coverage attached to its travails and mountain of debt, Thames Water is another in the red. Ofwat offers a scathing review of the current state of the business. The company “is currently in our turnaround oversight regime which covers (among other aspects), improvement in key areas of operational performance. It needs to deliver material improvements across multiple areas including leakage and internal sewer flooding.” Ouch.

What is the point of this ironically rather dry content, I hear you ask. While these companies may be suitable for some clients, not least for the dividend potential mentioned earlier, it is not to highlight the appeal of the sector for investors. It is also not to bemoan injustice around its much-publicised failings. These are numerous, and in places, serious.

Instead, my point is to highlight that not all private ownership models are the same, and the debate between privatisation and nationalisation shouldn’t be black and white. A market-listed structure has heightened disclosure requirements and democratic voting processes, and therefore has significantly more accountability and scrutiny than the private ownership models at many of the worst performing water companies. It also probably unlocks much more spending power than that available from a fiscally hamstrung government.

So perhaps the government could consider giving a much-needed boost to the London market by requiring all water companies to be floated? That, or give the regulator a good shake up. But that’s a story for another time…

George Salmon – Senior Research Analyst

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