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The Guardian - UK
The Guardian - UK
Environment
Sandra Laville and Anna Leach

Water firms’ debts since privatisation hit £54bn as Ofwat refuses to impose limits

water graphic
The scale of debt taken on by the nine main water and sewerage companies in England is raising concerns about their financial stability. Composite: Guardian/Getty

Ofwat is refusing to limit the soaring debts run up by water companies as research reveals the firms have outstanding borrowing of almost £54bn accrued since privatisation.

Customers are paying on average £80 or 20% of their water bill towards servicing debt and rewarding shareholders, according to the Competition and Markets Authority (CMA).

The scale of debt, or gearing, taken on by the nine main water and sewerage companies in England is raising concerns about their financial stability as interest rates rise.

The level of net debt held by water companies is revealed as Guardian data shows the main water and sewerage firms in England have paid dividends to shareholders of £65.9bn up to 2022.

They have been running ratios of debt to capital value from 60% to more than 80%, according to Ofwat data. The regulator has considered inserting conditions into water company licences to limit the debt a water company can take on in order to protect the public from the impact of financial collapse because of high levels of borrowing. But Ofwat has so far rejected the idea.

The Guardian revealed on Wednesday more than 70% of all water companies in England are owned by international investment funds, private equity, banks, the super-rich, and in some cases businesses registered in tax havens.

When the Conservative prime minister Margaret Thatcher sold off the water industry in 1989, the government wrote off all debts amounting to £5bn and granted the water companies a further £1.5bn of public money, known as a “green dowry”. As of this year net debt of the main water and sewerage companies was £53.9bn.

David Hall, visiting professor at the Public Services International Research Unit at Greenwich University, who has updated groundbreaking research by Karol Yearwood, said the evidence suggested the high level of gearing was being taken on in order for the companies to pay dividends, rather than to fund investment.

“It is very different from a more traditional company structure, where the operating expenditure comes out of the flows of revenue from customers but the investment in plant, machinery etc is paid for by investing capital from shareholders and creditors. Dividends are then paid out of the company’s profit, as a return on their capital investment

“With the water companies, since day one there has been hardly any shareholder capital put into the companies. Customers pay for everything, and the companies are borrowing to pay the dividends often to themselves, because their shareholders are parent companies.”

With rising interest rates and a cost of living crisis, the scale of debt is raising alarm about the financial fragility of some water companies. Anglian, Northumbrian, Severn Trent, Thames and Southern have interest cover ratios below the 1.6 threshold that indicates a strong credit rating, according to Ofwat’s most recent financial resilience report.

Southern Water’s Swalecliffe treatment works
Southern Water’s Swalecliffe treatment works. Photograph: Sophia Evans/The Observer

Some companies have been forced to ask shareholders to urgently inject cash to bolster their financial resilience. Anglian Water was given an injection of cash by shareholders to reduce its net debt, in order to protect its credit rating and reduce its debt gearing from 82% to 64.8%.

Thames Water was also given an injection of £1.5bn by shareholders in order to improve its financial resilience.

Ofwat said this summer: “We have become increasingly concerned about the impact of the financing decisions made by some companies on their long term financial position … and how this could affect service to customers. This is a particular issue where companies need to finance a turnaround plan or to improve performance.”

Ofwat can put water companies into special administration to protect services for the public. But Prof Robin Mason, of the University of Birmingham, said this had never happened, even in the most extreme of cases. Citing the example of Southern Water, he said in a paper for the regulator: “Underperformance by Southern Water has continued for a number of years.

“Southern Water’s gearing, including derivative liabilities, has been very high; its credit rating has dropped to the lowest level consistent with (Moody’s) investment grade; and it has recently received the largest fine for any water company and is subject to ongoing investigation by the Environment Agency.

“Nevertheless, the special administration procedures have not been triggered for Southern Water; and indeed, special administration arrangements have yet to be used in the UK water sector.”

Ofwat said companies must do more to better protect customers from the consequences of weak levels of financial resilience. But in its clampdown on water company finances, which is out to consultation, the regulator has stopped short of putting a cap on the amount of debt each company can take on.

Ofwat said: “We are unequivocal that companies have a responsibility to maintain their financial resilience. Where that is not the case, we will not hesitate to intervene. Over the past 18 months we have overseen substantial equity committed to going into three companies, totalling over £3.5bn.

“We are introducing new requirements to raise the bar further on financial resilience across the sector and will continue to monitor financial resilience closely, taking action where necessary.”

Critics say Ofwat is belatedly trying to curb the excesses of the water companies and question whether a regulator is able to control an industry now managed in the interests of offshore investors, not the public and the environment.

Dr Kate Bayliss, of the department of economics at Soas University of London, said: “I can’t see that regulation is going to manage it in the interests of society and the environment when you have these very powerful interests making returns for their investors. The assumptions of the regulator are really quite limited compared to the financial sophistication of these investors.”

Water companies defended their financial controls. Anglian Water said it had made a number of investments in order to improve infrastructure, reduce leakage and improve drinking water quality, made possible by private financing. “The fact that we can finance multimillion pound schemes demonstrates our robust financial platform and the long-standing support we have from our owners.”

Southern Water said: “We operate in a tightly regulated environment and our step up in investment – totalling £2bn between 2020 and 2025 – has been assessed and approved by Ofwat to ensure we deliver the performance our customers want and deserve, at an affordable price, and in a sustainable way.”

Sarah Bentley, who took over as chief executive at Thames Water in September 2020, has spoken about her plan to invest billions in the network, with the shareholders “underwriting a turnaround plan” and urged the regulators “to encourage responsible long-term investment into our sector” by “more patient investors, such as pension funds”. The responses of the other companies are here.

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