The Impossible Task of Regulating Financialised Infrastructure


With most of England’s regional water utilities now owned by private equity investors, the regulator, Ofwat, faces immense challenges in managing the water sector in the public interest. This is the subject of a recent journal paper by SOAS academics.

The Impact of Private Equity Investment on England’s Water Sector

The nature of the investors in England’s water companies has changed considerably since the sector was privatised by listing on the London Stock Exchange in 1989. The type of owner makes a difference to the way that companies are managed. Private equity corporate ownership has been described as ‘termite capitalism’ on account of the way that it extracts resources from previously existing assets to such an extent that the companies are at risk of failure, like termites eating at the foundations of a house. In our paper, we show that the entry of private equity investment into England’s water sector has led to financial engineering to create returns for shareholders with adverse implications for the wider interests of society. Some issues we highlight include:  

Increased debt levels

Private equity investors have restructured company finances, typically leading to high debt levels with part of the cost of buying the water company allocated to the utility itself so that the debt is then serviced by the bills of end users. High debts have been accrued alongside substantial dividend payouts. 

Complex agency relationships

The ownership of water companies by infrastructure funds managed by private equity investment companies creates complex incentive structures, especially when these funds are of a fixed duration. Private equity asset managers are incentivised to maximise financial fund returns in a short timeframe. This is the focus of the investment rather than the long-term prosperity of the company.

Impenetrable financial flows

Funds flow to and from an extensive array of holding companies in the corporate group, some of which are registered offshore, in ways that are difficult to trace so that it is not possible for an outsider to tell where water bill payments end up. 

Lack of transparency

Private equity-owned companies are subject to less scrutiny than companies that are publicly listed. With some owned via parent companies registered offshore such as in Jersey, transparency is further compromised. Southern Water, for example, is owned by Greensands Holdings registered in Jersey. 


Such a system for providing water raises major concerns for social equity as households, many of whom struggle to pay, finance returns to the world’s wealthiest via the consumption of water.

The Marketisation of Water

The system of economic regulation of water utilities was established in 1989 and is based on the notion that the provision of water operates like an imperfect ‘market’. The actions of the regulator, Ofwat, are directed towards steering consumers and companies to operate as if they were in a market in the expectation that this will lead to greater efficiency. Regulation is dominated by a system of price controls where prices are fixed in advance for a five-year period.  This is supposed to mimic a perfectly competitive market with the companies as ‘price takers’. And a substantial share of regulatory energy has been devoted to directing companies to be responsive to water users as if they were customers. 

But these market ‘imperfections’ are more profound. It is not just that these water companies are regional monopolies, but water is not like other goods. It is essential for life and cannot be manufactured, and its use by one party may deplete what is available for others. Over-abstraction and inappropriate disposal of sewage have far-reaching social, economic and environmental effects. Moreover, the interests of water companies, end users and the environment are contested, as indicated by the lengthy and costly regulatory process. Ofwat is required both to protect the interests of end-users and to ensure that companies are able to finance their functions, but these tasks are contradictory as company finance, in the long run, is derived from consumer bills. The regulator’s position is not clear-cut. For example, should the price of water cover the costs of debt service arising from increased indebtedness where this is associated with boosting shareholder returns? This regulatory framework has created a perfect environment for private equity extractive activity not least because the regulator is prevented from intervening in the corporate practices where shareholder returns are made, such as in corporate debt and dividend payments, as these are considered to be ‘market outcomes’.

A Systemic Bias Toward Investors

Regulation is depicted as an external rule-setting process, but as we show in our paper, it is not simply about policies and processes; it is a question of cultures and capabilities as well as politics. Furthermore, our paper shows that the regulator faces an impossible task in mediating across these complex and heavily contested interests in the water supply. A number of official reports, including from the UK’s National Infrastructure Commission indicate a systemic bias toward investors in infrastructure regulation. Regulatory decisions cannot be neutral, and efforts to tilt the balance in favour of consumers inevitably impinge on investors, and this meets with resistance. 

With a regulatory framework which is oriented around correcting imperfections to an imaginary market structure, Ofwat does not have the tools to deal with the predatory practices of sophisticated financial investors and inevitably can only intervene after the event, by which time some of the investors (as with Macquarie in Thames Water) have sold up and moved on. Given these structural complexities, we question whether the socially equitable regulation of privately financed infrastructure can ever be possible.

Kate Bayliss is a Research Associate with the SOAS Department of Economics. She has worked extensively on privatisation, financialisation and social equity in the UK and the global South. Her particular research interest is in the shifting paradigms surrounding private sector engagement in the provision of essential infrastructures and in meeting basic needs.

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