Southern Water may not be able to guarantee that water comes out of its customers’ taps but, credit where it is due, it does know how to lay on a metaphor.
On the day almost 60,000 Hampshire residents faced having to queue for fresh water until the weekend the company, already carrying £6bn of debt, was told it can increase bills by 53% in order to borrow more.
The supply interruption for households, schools and hospitals near Southampton summed up the challenge of fixing a system tested almost to destruction by Britain’s 35-year privatised water experiment.
On the one side are customers sick, sometimes literally, at paying higher bills for what looks like failing services and rising tides of sewage. On the other, investors and creditors without whom the financial model collapses, demanding a greater return to pour good money after bad.
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In the middle is Ofwat, a regulator many blame for creating the current mess through laissez-faire oversight, whose five-yearly “price review” process concluded this week is, by common consent, the most consequential since publicly owned regional water companies were sold off in 1989.
What’s been announced today?
After decades in which the regulator’s focus was keeping bills down, public outrage at pollution and equally toxic financial engineering has changed the politics and priorities of water, but not the solution.
In its settlement, Ofwat has come close to meeting companies’ full demands to spend, borrow and charge more, on the condition they improve performance, cut sewage outflows and expand the network to cope with population growth and climate change.
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Water companies to increase bills
Spending will almost double to £104bn over five years, with £44bn going on new infrastructure and resources.
In exchange, bills will be permitted to go up by an average of 36%, with an allowed return to investors of just over 4%, an increase on Ofwat’s first settlement earlier this year.
To deliver all that, companies already collectively carrying net debt of £70bn say they will need to borrow 60% more in the next five years than the last and raise an estimated £12bn in fresh equity.
They will also face a tougher penalty regime for poor performance.
Will it work?
Whether this settlement works will be measured not just by the health of waterways, but of the balance sheets of companies that now have two months to decide whether to accept Ofwat’s determination or appeal to the Competition and Markets Authority.
None will be looking more closely than Thames Water, which earlier this week was in the High Court trying to secure a £3bn loan to keep it afloat, while its creditors scrap for control ahead of an inevitable restructuring.
Ofwat approved a 35% hike in bills for Thames’ customers, but it was accompanied by an £18m fine for making unlawful intercompany dividends of more than £190m.
The regulator will also claw back more than £130m in bill reductions, a £150m hit for a company already on the brink.
Ofwat says that is evidence it will more closely police executive pay and dividends to prevent future excess, but this settlement acknowledges that the privatised system only works if investors, and those running the companies, are rewarded.
For bill payers that remains hard to swallow.
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