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Water companies are safe investments – and too important to be driven by profit

  • Water companies are safe investments – and too important to be driven by profit
    Shutterstock/Flystock

About the blog

Kate Bayliss
Research Associate, Department of Economics, SOAS, University of London
Schneider Electric

Themes

Kate Bayliss, SOAS, University of London

The business of running water companies is not always as pure and clear as many of us would like it to be. It is often a world full of wasteful leakages, harmful pollution and debt.

Perhaps this is why the recent announcement that one of the UK’s biggest water companies would be “rescued” by an Australian investment bank, has been welcomed by some as an opportunity to improve things with a £1 billion cash injection.

But we should question why Southern Water, which provides water and treats sewerage for 4.7 million customers across Kent, Sussex, Hampshire and the Isle of Wight, needs rescuing in the first place. Water provision is surely one of the safest investments imaginable – they are monopoly providers of an essential service, within a well established regulatory regime ensuring highly predictable cash flow.

In short, Southern Water should not be in financial difficulty. But it has been one of the most indebted of the country’s water utilities and its financial situation has been exacerbated by record fines for poor performance, releasing illegal discharges into rivers and coastal waters and deliberate misreporting of information.

The failings of Southern Water should be grounds for a major public inquiry rather than brushed under the carpet by a corporate takeover.

The bank set to take on the company, Macquarie, also has a highly questionable track record. As owner of Thames Water from 2007 to 2017, it revolutionised company finances to the benefit of shareholders, who in 2007 received a special dividend of £535 million despite profits that year being only £190 million.

In fact, during the decade of Macquarie control, Thames Water paid out dividends of more than £2.5 billion. Over the same period, debts increased from about £3.6 billion in 2007 to £10.2 billion by March 2016. The company was also responsible for widespread negligent sewerage leaks and a sharp increase in the company pension deficit. When Macquarie sold their final stake in Thames in 2017, company finances were severely depleted.

The sector regulator, Ofwat, sets maximum prices that water utilities can charge. These are fixed every five years in advance. Within this boundary, companies are free to make their own decisions on things like debt levels and dividend payments.

But regulatory transparency is lost in the density of the process. The latest price review, in 2019, ran to hundreds of reports, some of which were thousands of pages long. While customer engagement is seen as an important part of regulation, this is largely framed in terms of consumer perceptions of water services. There is no public consultation on important issues such as corporate takeovers.

Transparency is also compromised by complex corporate structures partly held in offshore jurisdictions. In some cases, numerous holding companies sit between the regulated licensed water utility and the ultimate parent company. We cannot tell what funds are flowing where, for what purpose, or who is benefiting.

Still waters, deep debt

Finally, these water financing structures contribute to social and inter-generational inequality. Ultimately water consumers are the only real revenue source in the sector, and water affordability has declined in the past two decades. Almost a quarter of households has difficulty paying their water bills.

This translates into real difficulties for the poorest households. Yet around 20% of the average household bill of £400 goes on water company interest and dividend payments. In 2021, Southern Water accounts showed accumulated net debt of £5.1 billion, and a remuneration package for the CEO worth over £1 million (including a bonus of £550,900). The average annual Southern Water dividend payout over the last ten years is £57 million.

Tap with £ sign drop pouring out.
Reliable cash flow. Shutterstock/sirtravelalot

While Southern Water’s finances will be boosted initially by the Macquarie takeover, in the long-term, investors will be seeking repayment with a profit. Indeed, Macquarie describes the investing fund as “yield focused”.

More than 30 years since privatisation, the arguments in favour of private ownership of water are far from compelling. There is little evidence of superior efficiency, financial engineering has weakened company balance sheets and environmental pollution is on the increase.

Water is not like any other commodity. It is essential to all life and to most social and economic processes. Water companies do not just provide water but are responsible for protecting fragile ecosystems. It is vital that their operations are governed in the public interest. The recent performance of Southern Water should be seen as an opportunity for a major reconsideration of the way the entire industry is managed.

The Conversation

Kate Bayliss, Research Associate, Department of Economics, SOAS, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original.

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