Water Works with Feargal Sharkey

Richard Kramer:

Welcome back to Bubble Trouble. I'm the independent analyst, Richard Kramer, and I'm joined by the economist and author, Will Page. And today, we turn our attention to a massive credit bubble that's burst and dump toxic sewage in the form of shell companies and endless debt on public utilities, a scandal is unfolding at Thames Water, London's waterworks that's frankly been drowned in debt by the private equity owners. To twist this up a notch, we're joined by Northern Irish former punk singer, Feargal Sharkey, who's turned his legendary energy to a cause that's deeply dear to his fly-fishing heart, that of England's beleaguered and badly abused rivers and streams. It's a great reminder of how these financial bubbles impact all our lives and Feargal's [inaudible 00:00:42] pursuit of justice on behalf of all of us who like to swim, fish, or just enjoy the site of the UK's precious rivers. We'll be back with Bubble Trouble in a moment.

Will Page:

Now, Feargal, I don't smoke cigarettes and I don't drink coffee, but in a past life I spent a lot of time on Burner Street smoking cigarettes and drinking coffee passively with yourself, but learning about how you solve problems. Back then, it was problems in the music industry, piracy, for example.

Feargal Sharkey:

Yeah.

Will Page:

Now you're solving, in my mind, a much bigger problem that affects us all. Why the energy and why this?

Feargal Sharkey:

Well, as you well know, Will, if there was such a thing at the time, I probably would have been captain of the Irish smoking team, as you're well aware. Listen, the simple truth of the matter is, as you may recall, I retired 10 years ago from the industry, was busy minding my own business, indulging myself in my hobby of fly-fishing, and that invariably puts me into very close contacts with rivers. And particularly here in southern England, we have these incredibly rare, unique river ecosystems called chalk streams. There's about 225 in the entire planet. They're a freak of geology going back 50 to 100 million years ago, and 85% of the world's total supply is to be found here in southern England, and we are utterly decimating every one of them. That made me curious and that made me give me an itch. And as I now explain it, as you well know, when I get an itch, foolishly, stupidly, naively, I scratched it and every time I scratch that bloody itch, I just end up with a bigger itch.

Will Page:

And to use a [inaudible 00:02:37] expression, you don't do half measures.

Feargal Sharkey:

So as you well know, if I decide that I'm going to go and focus on something, it becomes quite intense.

Will Page:

So let's just go back to the basics. The private sector is supposedly more efficient in the public sector because the private sector can go bust. Therefore, it's kept on its toes. That's where the axiom of efficiency comes from. But when you roll a private sector into deliver public sector services at cargo bust, we have an anomaly on our hands. Just give us the wallpaper here in terms of why we have a public sector utility like water, which was given to the private sector.

Feargal Sharkey:

Well, no doubt you remember, but yeah, for your listeners, in the mid 1980s, we had a prime minister in this country called Margaret Thatcher.

Will Page:

[inaudible 00:03:18] was popular in Scotland.

Feargal Sharkey:

Something of a disciple of Frederick Von Hayek and the whole Chicago School of Economics and embraced, and bathed herself daily in that simple philosophy that the private sector was clearly much more capable of delivering much more efficient, cost beneficial services to the general public than the public sector. And one of the big first things she did was privatize telecoms in this country, British BT, and one of the last things she ended up doing was privatizing water industry in the UK or specifically in England. Scotland and Northern Ireland are still basically state-owned. In Wales, whilst it is regulated by Westminster, it actually acts as a not-for-profit company. So apparently and theoretically, any margin raised should be theoretically reinvested back into the business or indeed passed back to the consumer by way of lower prices. Ultimately, what has happened, we now have a situation where 30 years later, England is still the only country in the world I'm aware of with a fully privatized water industry.

Will Page:

Really? The only one?

Feargal Sharkey:

There are some others, but they are invariably some kind of hybrid between local and/or national state government and the private sector. England is the only one where there's 100% privatized industry.

Will Page:

Another quick foundational point I want to make before we get into this very murky, pun intended, subject is, you talked about the cost of water. Now, I remember saying to you a long time ago that you can have a drought for two reasons. One, you run out of water. Or two, it wasn't priced correctly. Water today is three, 400 pounds the average British household. I worked out that the average spend on coffee and croissants at Prep per year is 1,560 pounds. Is water itself from the consumer's perspective just too cheap? I mean, we've got a whole can of worms to open, but get to me on the point of what we're paying.

Feargal Sharkey:

Well, listen, I'm clearly saying this and you guys have greater knowledge and experience than I in using pricing to drive and alter consumer behavior. Not only does it cost three or 400 pounds per year, there is no limit to the amount of consumption available within that three or 400 pounds.

Will Page:

A tragedy of the commons.

Feargal Sharkey:

In other words, I could empty my swimming pool, if I had one, every Monday morning and refill it again every afternoon. So there's no pressure in terms of a price incentive to the consumer to use less water. So we have a situation here in England at the minute where we are pretty much the largest consumers per capita of water in the whole of Western Europe. And on average, it's something like 143 liters per day. To give you a comparison, when you look at the Baltic countries, think more like 85, 86.

Will Page:

Wow. Last foundational question for me before I hand it over to Richard is, again, assume no prior knowledge with our audience. Assume a lot of our audience from the states, can you just give us the hop, skip, jump story of how we got to from a state public utility to Thames Water staring and the potential of us running out of this in a matter of months?

Feargal Sharkey:

Well, the simple fact of the matter is, invariably, particularly when you had... It's very easy to sit here and I would ask the question, how hard is it to completely mess up a state granted monopoly supplying water to 15 million people in the greater London area? That's a pretty big job to mess that one up. But as it turns out, Thames Water have managed to do exactly that. The truth is, and there's a little trick in the middle of it, forgive me for going down a slight rabbit hole, water companies in England operate under a license granted by and issued by government. There is no time limit to that license. And instead what the license says if government wants to revoke that trading license, water companies have to be given 25 years notice.

Will Page:

What?

Feargal Sharkey:

That's just what I said, 25 years notice. So now here's the odd bit. I'm now a huge global venture capital fund.

Will Page:

I want to quit the studio.

Feargal Sharkey:

I've taken over this company. I now know that I can behave pretty outrageously and if the government decide that they want to revoke my license, they have to give me 25 years notice. So guess what? I'm now just going to go and borrow a whole money equivalent to somewhere in the region of 20 to 25 years worth of profit. I'm going to load it up on the balance sheet, pay that loan back to myself as a massive dividend. So I've just basically mortgaged the next 25 years worth of income. Oh, now by the way, I've got the double whammy in that I can now charge that company interest on the loan that I put on their balance sheet in the first place. So I've now had 25 years worth of profit as a dividend in advance and I can now charge. And from some work done by the FT four or five years ago, I think the Macquarie owned Thames Water, they were charging Thames Water somewhere between 16 to 20% a year interest on that loan.

Richard Kramer:

At a time when the financial markets had effectively zero interest.

Feargal Sharkey:

Yeah, yeah. They entered bank rate in the UK was 0.25 or something of 1%.

Will Page:

Last person to have those interest rates was Norman [inaudible 00:08:46].

Feargal Sharkey:

In the big world, if Thames actually needed to raise, which turned out to be the better part of 10 billion pounds, if Thames needed to raise that money, they could have gone out to the bond market. And the market's two or 3% and there'd been an absolute queue of institutions to try and get a piece of that. So the question then becomes, what on earth was a regulator doing when all of this was going on?

Richard Kramer:

That's exactly where I wanted to get to because one of our favorite quotes on Bubble Trouble comes from Mark Twain, "Never expect a man to understand something when his job depends on not understanding it." Now, if we park the question of ownership, public, private, mixed, sovereign wealth funds or rapacious rent seeking capitalists, whatever the ownership structure is, ultimately, these are regulated industries. And there is a regulator called Ofwat whose job it is to both protect the public interest and make sure that we all have clean water to drink, which they've done a terrible job and I know folks in Surfers Against Sewage who are... Do not believe that they've done a good job doing that. But they're also supposed to keep an eye on these companies and make sure that they invest enough. Is this just back to George Stigler's Nobel Prize winning theory, regulatory capture theory, where these companies have captured the regulator that is supposed to be overseeing it. It's if you are in a class and your parent is the teacher, you can coast a little bit because you probably know you're going to get one of the better marks.

Feargal Sharkey:

I can give you a very pertinent and timely example.

Richard Kramer:

Please do.

Feargal Sharkey:

The trading license that I just referred to, if you go and look at Thames Water's trading license issued by the regulator on behalf of government, you will see it was then signed in 2017, the updated version, it was signed by the chief executive of the regulator, a lady called Catherine Ross. Last week, the chief executive of Thames Water stood down, the chairman stood down. There is currently an acting chief executive. Lo and behold, the very self same Catherine Ross that not six years ago as the chief executive of the regulatory body signed Thames Water to operate and license.

Richard Kramer:

But was she put in there to clean up the mess that she created? Or was she actually compromised somehow because of a relationship with the company?

Feargal Sharkey:

Oh, they... I have no doubt Thames Water hired her about a year, year and a half ago to try and help them deal with the increasing public exposure and public scrutiny they were coming under.

Richard Kramer:

Right. So this is a problem of the revolving door of regulatory capital.

Feargal Sharkey:

Oh, and I have reason to believe, and I can't go into the detail, it'll be in a major Sunday newspaper here in two days' time, you are thinking well into double digits, that revolving door of executives and senior figures within the regulator ending up in senior positions within the water companies themselves.

Richard Kramer:

Right. Now, in advance of this podcast, I did a little background reading, for example, today in The Economist, they had a long section on this whole mess with water companies. And it reminded me of something that happened in the global financial crisis when, if you recall, at that point, the former CEO of Goldman Sachs, Treasury Secretary, Hank Paulson, got down on his knees to beg Nancy Pelosi to make whole the terrible debt that was one of the largest US insurance companies, AIG, had incurred. And one of the questions at the time down the road was, why didn't the major bond holders in AIG, who were actually Goldman Sachs and Morgan Stanley and other big investment banks, just take a hit of 50 or 70 or 30 cents on the dollar? They're the bond holders, they assumed the risk, they failed in their duty to properly manage that risk and they're the ones who should get whacked. The Economist article today, we can debate their neoliberal economic position until the cows come home, let's not do that, but why don't we... Is suggesting, and I think properly, that the bond holders should get wiped out?

Feargal Sharkey:

Oh, well, here's the thing. Thames Water, you are right. As you may know, sovereign wealth funds, there are a number of sovereign wealth funds involved in Thames Water, including the Chinese government. Now, why on earth should we as Thames Water's customers care whether or not the Chinese government take a bath over their 10% holding in Thames Water? Well, there's no reason at all. One of the sensitivities that's been highlighted in the last few days, the academics and universities and lecturers, their pension fund is USS. They're in there for 20% of Thames Water. They went in and took a chunk in 2017 when the scandal was beginning to break and went back for a second chunk in 2019 when it was front page news. And when people have been asking me about it during the week, I take your approach, my normal response is, "Two words, due diligence."

What on earth were you doing? And why did you go back in 2019 and take another bite out of this, bringing your equity up to just over 19%? Or were you foolish enough and fixated enough that the level of return you were seeing was just too much and you were too greedy? And all it actually took, because you weren't paying enough attention, was where we are now. Actually, in the big scheme of things, a relatively small minor increase in inflation and in the interest rates and now the whole house of cards has come tumbling down.

Richard Kramer:

Right. And this is a classic Bubble Trouble theme for us in the sense of, if it's too good to be true, it probably is.

Feargal Sharkey:

It probably is.

Will Page:

I think maybe what I... Reflecting on a past podcast, Richard, The Chicken Shit Club. Do you want to introduce Feargal to the concept of The Chicken Shit Club?

Feargal Sharkey:

Go on.

Richard Kramer:

There's a book by my good friend, Jesse Eisinger, called The Chicken Shit Club, in which he references a statement by James Comey when he was running the Southern District of New York, talking about prosecutors, federal prosecutors who only took cases that they could win, and were inclined to take deferred prosecution agreements where companies admit no wrongdoing, but say, "We'll pay a fine," and sort of let them off the hook. And where is the rubber hitting the road here? Where is the ferocity of public anger going to be focused and exercised against the rentiers, the rent seeking, private equity owners who have drained these companies of their investment capital but left them in a terrible state? And something that it does come close to home because last summer when my wife and I were in the countryside and she's a wild swimmer and she saw a river and she wanted to swim there and she was told, "No, don't do it," because we're routinely getting agricultural sewage dumped in this water.

Feargal Sharkey:

That is a really easy question to answer simply because here in the UK, there is an enormous public research company called YouGov. The last bit of research they ran, which was three weeks ago, 69% of voters in England think the water company should all be nationalized at this point in time.

Richard Kramer:

Yes. And the fascinating thing about that poll is that it is equally split between the left, who is very against ideologically this whole privatization we've seen over the last 40 years, and the right, who is small C conservatives, the ones who ordinarily identify with preserving the countryside and the way of life.

Feargal Sharkey:

Over the last, I think three months, I might need to check this, but this is the illustrative, the National Audit Office here in the UK clearly also does its own monthly polls and forecasting on issues of significance and importance and interest to the general public to help advise government.

Richard Kramer:

Sure.

Feargal Sharkey:

I think for the last three months, bar one, sewage in the water companies was polling at number three behind the NHS and the cost of living crisis. So in terms of public interest and fury, it's out there, it's over. I've lost control of this. Government's lost control of it. The water industry certainly lost control of it. The general public know all about it and they are full of a righteous rage and anger and deservedly so.

Richard Kramer:

And I think this is a great place for us to wrap up part one and to say congratulations because I know you have been at this for a very long time.

Will Page:

From the heart.

Richard Kramer:

And to elevate this to public consciousness and not just be something that is waved aside as a noisy complainant, but it's something that is embraced by all sides.

Will Page:

Unifying.

Richard Kramer:

And we all care about it. I'd like to think the next wave of it is Mums for Lungs and all the people looking at our very our environment, but fantastic job. Feargal Sharkey, we'll be back in a moment with part two of Bubble Trouble to go deep down the rabbit hole of what we can do about this mess and how we can prevent the next one from coming.

Will Page:

Welcome back to Bubble Trouble, myself, Richard Kramer and my dear old friend Feargal Sharkey who is fighting a wordy fight on behalf of, as Richard pointed out in part one, the left of the political spectrum, the right of the political spectrum. We all have taps, what comes out of it matters and this podcast is going to matter to you. Now, we're dealing with a mess and we're going to be in part two calculating the size of that mess. But I thought what we could start doing is trying to understand how water companies work because it can't be that tricky.

And every second year or so, I go down to Oxford, I meet up with a company called Sera, do a two-day course in competition law. And on one occasion I met the water companies. I thought, "This is the most dull conversation ever." I'm sitting with a bunch of water companies. And they all said to me, "We're just debt mongers. All we do is accumulate debt, pay out dividends and provide water." I was like, "It's got to be more complicated than that." They said, "It ain't. If you actually break it down to two or three moving variables, that's all that's happening here." So again, it's an audio content podcast here, but try and help the audience visualize with the sort of ingredients, cook a dish for me about what these companies have been doing for the past 20, 30 years since being privatized.

Feargal Sharkey:

To give you some top line kind of figures, we now know these companies have taken 72 billion pounds in dividends out of these companies, leaving them about 60 billion pounds in debt.

Will Page:

That irks me. There's two similar.

Feargal Sharkey:

Give you an example. Now, there's a little company here called Southeast Water. They serve some of the outer fringes of London. There's an article in the FT, as it turns out, over the last two years, three years, they've spent more in paying out dividends and more importantly, servicing their debt than they actually spent on the infrastructure and keeping the taps supplied and running in southeast London.

Will Page:

So let me come back on that. We economists use this horrible wonky term called the marginal pound or the marginal dollar. A water company has that marginal dollar, it chooses what it wants to do with it. Does it spend it on improving the infrastructure of the water systems or does it pay itself out in dividends?

Feargal Sharkey:

Well, it's supposed-

Will Page:

Give me the decision itself for mindset.

Feargal Sharkey:

Well, here again is when we go back to the regulation. Now, I am going to disappear down a bit of a rabbit hole, so bear with me.

Will Page:

That's what part two is for.

Feargal Sharkey:

Two years ago, the regulator wrote to the water companies. You can go out and Google these letters, they're out there on the internet. And what the regulator was trying to explain to the water companies who were coming under increasing public scrutiny as to what was going on, and the regulator reminded the companies of their statutory obligation in this country. They had a legal duty to build, operate, and maintain sewerage systems-

Will Page:

Maintain, maintain.

Feargal Sharkey:

Correct. Sewage systems capable of dealing with the contents of those sewers, i.e., if it's in the sewerage system, it doesn't matter how big the population's growing, it doesn't matter how much it rained. You were supposed to actually run a system and develop a system and maintain it that if something ends up in the sewage system, you have the machinery, the infrastructure, and the wherewithal and the ability to actually properly clean, deal, and dispose of that sewage and whatever's in that system.

They wrote a second letter six months later, come to your point, in the regulator's opinion, water companies in England for 30 years have been provided with all of the funding they needed and that it was necessary for the water companies to meet all of their legal obligations, including building, operate, and maintaining a sewage system that is efficient for the 21st century. Something the water companies have to certify annually to the regulator that they do-

Will Page:

So there's no excuse. There's no excuse.

Richard Kramer:

But can we pause for one second? Because many people listening to this won't know that a 30-mile stretch of beach is currently closed in the UK because the water companies have been dumping raw sewage into... And there is E. coli bacteria that was found in the water at the Henley Regatta in the Thames that is normally one of the showpiece events of the British sporting calendar. And there are so many examples of failure that the idea that the water companies could sign up and certify that they can handle that, well, what we're seeing is massive regulatory failure.

Feargal Sharkey:

On a national level, every single river in England is now polluted and one of the biggest sources of that pollution is the water industry. There's where we are.

Will Page:

Let me just bring this to a close-

Feargal Sharkey:

So the question becomes, you've had the money. You've owned up and you certify to the regulator annually, we, the bill payer have given you the money. You've clearly not delivered the service. So A, what happened to the money? And B, since you've not delivered the service, would you mind terribly, we'd all like a refund, please, on that element of our bill.

Richard Kramer:

Is there any clawback provision?

Feargal Sharkey:

None.

Richard Kramer:

And does the regulator have any power to... Because I know, again, in doing some research here, I do understand that there is a discussion between the regulator and the water companies about the level of investment that on top of which they get a guaranteed rate of return, the level of investment that they are obliged to make to bring the system up to scratch. And clearly, that has been inadequate, we know that, but what is the penalty for failing to do your job?

Feargal Sharkey:

Well, here's the thing. The regulator in this country has the ability to effectively issue a thing that's called an enforcement order. And to a degree that the regulator's content with, they can actually seize control of those companies and legally demand that they do their bidding. Now, whether that's the level of investment you're going to make, that's the level of return you're going to give to your shareholders, that's the amount you're going to pay down your debts, that's what you're going to do to fill the deficit in your pension fund, and you're going to do exactly what we tell you. And if you fail to comply with that enforcement order, the regulator then has the power to fine water companies up to 10% of their annual turnover.

Richard Kramer:

Well, the fines are okay. I mean, park that for the moment. I don't even see that as a real solution. What I would like to see is wipe out the bond holders, wipe the slate clean so that they aren't burdened with debt and therefore can take the future cash flows that are very dependable. We know that Will and I are going to pay our water bills. We're going to pay it. The water bill comes in bi-annually, I pay it. I pay it right away. I don't delay to pay. I'm appreciating the service. They know they have those future cash flows. I would like to see them invest against those instead of pay the bond holders. So can... Before we get to the point of enforcement notices and fines, can we just wipe out the bond holders and wipe the slate clean on the debt?

Feargal Sharkey:

Oh, listen, there's any number of ways you can do this and one of the ways is certainly yes, that. We could actually buy nothing more than a quick amendment to the audits regulations and accounting regulations, make them declare the liability for fixing all of this and the cost as a liability on the balance sheet. Everyone would be insolvent within a heartbeat. And guess what? I'll buy them all back off the receiver tomorrow morning for a pound each. There's a whole range of issues. You are right. I'm very much against the nationalization actually simply because of the cost to the taxpayer.

Richard Kramer:

Correct.

Feargal Sharkey:

Because we're just going to pick up the tab on that one. And particularly in the UK over the next 10, 15 years, the economy's going to be under enough pressure without wiping out the water industry. Do we need to get the bond holders to feel a bit of pain and suffering? Damn right we do. They've made off with 72 billion pounds worth of our money and we've not had the service we were promised and pay for.

Richard Kramer:

Right. They didn't make the investment. Now, we didn't answer Will's question. Can you walk us back with shell companies?

Feargal Sharkey:

Yeah.

Richard Kramer:

Macquarie or some other infrastructure fund buys Thames Water or it's privatized and what do they do? They create layers and layers of layer cake on top-

Will Page:

With a 25-year safety net.

Richard Kramer:

Yeah. So talk me through how it works that there ends up being seven companies, the last of which owns all the other seven in turn, which own Thames Water.

Feargal Sharkey:

It was exactly that. In fact, if you go on Thames Water's website right now, and again, if you do a search for corporate structure Thames Water, they lay it out for you with the little boxes and interlinking links between. In total, I think there's eight, nine shell companies involved with Thames Water.

Richard Kramer:

Are those all on shore or offshore?

Feargal Sharkey:

Oh no, they're all... Most of them are offshore.

Richard Kramer:

Okay.

Feargal Sharkey:

No, no, we think Cayman Island.

Richard Kramer:

So Thames Water is owned by one of the Crown Protectorates.

Feargal Sharkey:

Yeah. And this is oversimplifying it, but it's kind of a good illustration as any. I buy Thames Water, I set up a holding company in the Cayman Islands. I assign the ownership of my company-

Will Page:

Wait, can I just get a clarification here? Are these shell companies in tax havens?

Richard Kramer:

Absolutely, yeah.

Feargal Sharkey:

Yeah.

Will Page:

It gets worse.

Feargal Sharkey:

Of course, yeah.

Richard Kramer:

Well, but by the way, as we know and we've covered in other Bubble Troubles, those tax havens are under the province of the crown protector. And so the law could be changed in those tax havens to wipe them out, but it would just require a king to-

Feargal Sharkey:

Here's a hypothetical. I've just bought a company in the UK for 6 billion pounds. I could put the debt straight onto the balance sheet, but the regulator goes, "Well, you can't do that because then that's going to become a liability to the bill payers and the bill payers will actually end up paying the cost of that deal and not your shareholders, who are the ones that actually should be borrowing the exposure on that 6 billion quid." So you leave it a couple of years until the regulator's not looking anyway, and then you actually loan from the Cayman Islands to the eight company 10 billion pounds, which includes not only the original 6 billion pounds you used to buy it, but another four billion on top. You then basically pay all of that money back in a dividend back to the Cayman Islands. So in effect, you've now got this company in the Cayman Islands that sent out on paper 10 billion, but it actually got back 10 billion pounds in cash the next day, leaving this notional debt sitting on Thames Water's balance sheet in England.

Will Page:

Oh, no.

Feargal Sharkey:

Then I get to do something really special. The Cayman Islands company can now charge the UK company interest at an utterly exorbitant rate on the debt. Just to add to Will's fury, because these are interlocking companies that actually is registered as an intercompany loan and intercompany loans in the UK are paid the interest payments are tax-free. So I've now just found a way to offshore a huge amount of money every year and this loan that I'm charging 16 to 20% a year interest on when the bank rate is 0.25 of 1%, and all of that interest payment, I've now just offshored several hundred millions of pounds a year completely tax-free.

Richard Kramer:

Right.

Will Page:

And none of this... Just to bring it back to street level, none of this very complex activity and incentive mechanisms has got anything to do with kids swimming on British beaches and not either swallowing or swimming in sewage.

Feargal Sharkey:

The first person who said it, and I have to give him credit for it, is Jonathan Ford, the city editor at the FT back in 2017.

Will Page:

I love the FT. What they've done in this subject is phenomenal.

Feargal Sharkey:

When Jonathan was first beginning to unpick this, and it was Jonathan first used that phrase, "The water industry is an organized ripoff." I would go one step further and go, in the modern world, it's actually a Ponzi scheme. That's all it is, a bloody Ponzi scheme.

Richard Kramer:

Vampire kangaroo.

Feargal Sharkey:

The vampire kangaroo. Hence, that little company in southeast London just before Christmas, the week running up to Christmas, 260,000 homes in London and the surrounding area had no running water because this company is so desperately underinvested.

Richard Kramer:

Right.

Feargal Sharkey:

Not a month ago, 6,000 homes, including four schools had to close in the greater London area because the schools had no running water.

Richard Kramer:

So let's talk about some of the ways that we might fix this mess because you've made it crystal clear it's a mess and we can get incensed. We're all incensed about this on every different level from the environment to the human impact to the cost and so forth. Does Ofwat have the powers it needs? Does it have the people that are willing to hold these companies to account? And why not put a simple requirement on the companies that if they fail to meet these KPIs, for example, all the sewage discharge and storms, which are always exceptional events except they happen all the time, could you say, "You can't pay any dividends or interest payments until you meet your KPIs."?

Feargal Sharkey:

Ofwat already has the power and authority to do that and has since 1991 since the industry was privatized.

Richard Kramer:

And why have they not exercised it?

Feargal Sharkey:

There's a very good question. And the people at Ofwat, and it's one of the things I'm trying to tease out in public right now, because of what is a public body, ultimately, it's the board that makes up the legal entity and is responsible for approving signing off strategy and policy. The chief executive and the staff, they're simply doing what the board the public tells them.

Richard Kramer:

And who's on the board of Ofwat?

Feargal Sharkey:

People appointed by the Secretary of State.

Richard Kramer:

And are they people that have ties to the water industry?

Feargal Sharkey:

They don't, but are they people that have ties to running a big complex industry that they're talking about the global machinations of venture capital and the intricacies and projections of the bond market? There's no sign of it as far as I can see. It's just a bunch of people were actually developing portfolio retirement plans and they get paid 20, 30,000 pounds a year for attending half a dozen board meetings. They're the ones that parliament, in my opinion right now, should be holding scrutiny hearings and dragging the board of Ofwat kicking and screaming into public hearings to start exposing what questions they were asking. Because in my opinion, they certainly weren't off on enough questions and clearly weren't asking the right questions.

Richard Kramer:

But we do need some... Before we get into the UK predilection to have an inquiry about inquiries about other things that drag on and on, before we get to that, my issue would be that we need to do something dramatic and quick about restoring investment. So can there be something that, since you've elevated this to public consciousness, forces the government's hand to say, "Look, no more dividends. Interest will be charged at, unfortunately, very high Bank of England rates now, but a heck of a lot better than 16 to 20%."

Feargal Sharkey:

You betcha.

Richard Kramer:

"The bond holders are wiped out. Sorry. You knew this would be a risk. And until you restore the level of investment and the service we require, i.e., not discharging raw sewage into our rivers, no more free lunch."

Feargal Sharkey:

There's another element to this apart from, but equally running in parallel with the sewage in our rivers. London is now on a list of one of the global cities most likely to run out of drinking water. We're now on a list along with the likes of Cape Town, Jataka, San Paulo, and Mexico City.

Richard Kramer:

So we need conservation as well.

Feargal Sharkey:

According to the National Infrastructure Commission, simply now to secure London's water supply for the next 30 years is going to cost 20 billion pounds. So they're straight away. We can put the sewage thing aside briefly, but if we want to keep the taps running in London, it's going to cost somebody 20 billion pounds over the next 30 years. So guess what? One way or another, the government can't afford it. The taxpayer can't afford it. So we're going to have to find some mechanism. And I think personally, the mechanism and the rules and the legislation are all there because we are going to have to go out into the markets and find 20 billion pounds simply to keep London's taps running.

Richard Kramer:

And plus, that 20 billion, we know if HS2 is any guide, it'll be 40 billion by the time they finish with the damn thing.

Feargal Sharkey:

Correct.

Will Page:

It'll be 40 billion before they start the actual station. But just to reiterate on top of that, the politics, the optics of this gets a little tricky. 20 billion of capital expenditure infrastructure, current expenditure, wages. When you have public sector strikes happening all over, the schools are out today, the hospitals are out next week, politically, it's going to be very hard for whatever government comes into power to manage this one.

Feargal Sharkey:

Well, listen, I'll give you a quick... And this is really the back of a you and I standing outside our office on Burner Street scribbling in the back of a five packet once that was still running the Irish smoking team. On the basis that these companies have to be given 25 years notice, in round numbers, that's 60 billion pounds worth of income right there. On the basis they're carrying 60 billion pounds worth of debt, well, they're not going to write that out voluntarily. So there's another 60 billion. So just off the top of my head, to nationalize the water industry in that manner, you're looking at somewhere short of 120 billion pounds at a point in time when you've got nurses looking for 3% in increasing their payment and salaries. So politically, you're not nationalizing the water industry under any circumstances whatsoever.

Richard Kramer:

Right. At the same time, the way to cut that cost is to say to those 60 billion bond holders-

Feargal Sharkey:

Here's the thing. Due diligence, two words.

Richard Kramer:

Right. And if the superannuation scheme of the universities made a bad investment, don't wear it.

Feargal Sharkey:

As it turns out, 24 hours ago, the pensions regulator in this country has now announced that it is now going to look and investigate exactly what that pension fund was up to.

Richard Kramer:

Okay. So I think since we've gone through many topics, I think we need to move to smoke signals. Will?

Will Page:

I think smoke... We've referred to smoking on Burner Street. Before we do smoke signals-

Feargal Sharkey:

It's a filthy, disgusting habit.

Will Page:

Can we just... One of the favorite stories about your career before we get to smoke signals, is was it true you were told as a sort of teenage kid getting your kicks, to stop smoking or it'll ruin your singing voice?

Feargal Sharkey:

I believe it was, yes. Look what happened.

Richard Kramer:

In the end, it all-

Feargal Sharkey:

Yeah. All these things work out okay in the end.

Will Page:

Croaky voices help sell records.

Richard Kramer:

Yeah.

Feargal Sharkey:

There you go.

Richard Kramer:

So the final section of all of our podcasts are where we ask our guests for those smoke signals, the premonitions that you have about terrible fires about to be unleashed, the kind of things that you hear and you go, "Uh-huh, no, no, that's not a good thing." What are the few things you've heard and sinking yourself into this deep debate, into the mire of this deep debate that have just set your hackles off, have just set you on edge and you say, "Look, when someone says that, they're misdirecting, they're dissembling, they're trying to obfuscate the issue. Watch out."?

Feargal Sharkey:

Let me do two things here. When it comes to the water industry, I have found myself forcing myself to become a walking encyclopedia of the detailed [inaudible 00:37:02] machinations of the financing of the water industry, simply because every time early on when I went to have a conversation with the industry or the regulators, I quickly realized if I was being polite, what I was getting was a half-truth if not an absolute downright lie.

Richard Kramer:

Right. And I take it you did not study corporate finance for five years at London Business School to figure all this out.

Feargal Sharkey:

Funny [inaudible 00:37:25]. Shall we just say, you don't need a particularly finely tuned bullshit detector to know when you're being bullshitted.

Will Page:

I think we've got the title of our podcast.

Feargal Sharkey:

The bit for the kind of broader thing, and I have said this to my children and I say to young people generally, as an adult, I'm really sorry, and particularly here in the United Kingdom because the mess that we've created and the state this country's in and the state our public service is in, and the unbelievable catastrophe that's about to befall the environment and the budget and the world of finance in this country, I'm really sorry. I apologize in advance. We've completely screwed this up. If I was 24 years old, I would be in Whitehall right now building barricades. Those kids should, and I suspect in time, will be filled with an unresembled, ununified fury and anger at what they're about to inherit from us growing up. So once again, I apologize.

Richard Kramer:

And any other smoke signal that you picked up where you say, "Okay, we know we're dancing around the issue here. We know we're really not on it. We're talking about something that's nonsense."?

Feargal Sharkey:

No, nothing more than a 48 hours ago when the chief executive of what was on the big breakfast political radio show here.

Richard Kramer:

Yes, it's a day show. I heard that. Will I both heard that and listened with great interest.

Feargal Sharkey:

Trying to persuade everybody, "It's all perfectly okay. There's nothing to see here. Move along, please. There's nothing going on you need to worry about."

Will Page:

The consumer is protected then we'll be paying more for their water.

Richard Kramer:

Yeah.

Will Page:

The tax bill.

Richard Kramer:

Yeah.

Feargal Sharkey:

Put it this way, Will, I think that question that you asked and that I asked you and that you came up with, do we have droughts here in southern England because we run out of water or because water's too cheap? We all know what the answer to that is. I think the general public here in England are about to discover the brutal, harsh reality of what that answer is.

Richard Kramer:

And is there... Maybe as a last question, is there a cognitive dissonance moment for the neoliberal orthodoxy that has been accepted? We had Kurt Anderson who wrote a brilliant book about the way in which free market thinking was adopted as orthodoxy. Is there a cognitive dissonance moment, especially for all those conservatives who believe privatization was the solution of appreciating that this has led to an unmitigated disaster?

Feargal Sharkey:

Oh, well listen, that's in this country. Unfortunately, we don't have to rewind that clock back that far. I simply go to yet look for the premiership of a lady called Liz Trusts and what the hell it did to the bond market in this country and what-

Richard Kramer:

Briefly, briefly. She didn't take long.

Feargal Sharkey:

... And what we're going to have to do and what we're going to have to live with.

Richard Kramer:

It was the lifespan of a lettuce.

Feargal Sharkey:

It was the lifespan of a lettuce and part of why my children and the next generation should be utterly furious. That simple calculation, and again, it goes back to that regulations distort the operation of free markets. So as a matter of dogma, we have to get rid of any form of regulation whatsoever and leave these markets completely unfettered. Problem was, the bond markets took one look at that, and I think overnight this country dumped the better part of 30 odd billion pounds worth of value off the bonds market. I think the end result was, what, we're down 54 billion points or something?

Richard Kramer:

Yeah. Well, that's interest payments that we now have to pay, the most expensive guilt we've ever had to issue were issued the other day.

Feargal Sharkey:

And add to that 54 billion and the cost of service and that to the cost of Brexit, to the cost of Covid lockdown. And that's why I'm looking at my children going, "You know what, by the time all this is done, we're probably talking well over a trillion pounds by the time somebody pays for all of this." And it's my children and your children and their children's children are probably still going to be paying that debt for decades to come.

Will Page:

So when you mentioned Liz Trusts, I believe that every Prime Minister has a portrait in number 10 down the street on the stairwell.

Feargal Sharkey:

They do.

Will Page:

And under the one of Liz Trusts, you'd be the words, "The only thing that's trickling down is the piss I'm taking."

Feargal Sharkey:

And with that.

Richard Kramer:

Yeah, I think that's a great moment to close on. Thank you so much, Feargal Sharkey, for coming in.

Feargal Sharkey:

Pleasure's mine.

Will Page:

I want to put wind in your sails, Feargal. If this podcast can put wind in your sails, so be it.

Richard Kramer:

And keep doing the yeoman's work of fighting for something we all desperately care about, which is having decent, clean drinking water and safe rivers to swim and fish in.

Feargal Sharkey:

That's very kind of you and thank you for the invitation, the opportunity.

Richard Kramer:

A very special thanks to Oliver Bloice and Stella Massone at Platoon Studios in London. If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Newsom, Jesse Baker, and Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time.