Since privatization water companies’ debts have reached £54 billion

By Justin Jones On Dec 2, 2022

Since privatization water companies’ debts have reached £54 billion but Ofwat won’t impose limits. Research shows that water companies have outstanding borrowing of almost £54 billion that has accumulated since privatization, yet Ofwat is refusing to rein in the soaring debts that the companies have racked up.

According to the Competition and Markets Authority, customers pay an average of £80, or 20% of their water bill, toward repaying debt and rewarding shareholders (CMA).

As interest rates rise, concerns about the financial stability of England’s nine major water and sewerage companies are being raised due to the amount of debt, or gearing, they have accumulated.

The amount of net debt held by water companies is made public by Guardian data that shows the major English water and sewerage companies have distributed £65.9 billion in dividends to shareholders through 2022.

Data from Ofwat shows that they have been maintaining debt-to-capital value ratios between 60% and more than 80%. To safeguard the public from the effects of a financial collapse brought on by excessive borrowing, the regulator has considered adding restrictions to the licenses of water companies that would limit the amount of debt they could incur. However, Ofwat has thus far rejected the notion.

The Guardian reported on Wednesday that international investment funds, private equity, banks, the ultra-wealthy, and occasionally companies with tax haven registrations own more than 70% of all water companies in England.

When Margaret Thatcher, a conservative prime minister, sold off the water sector in 1989, the government wrote off all debts totaling £5 billion and gave the water companies an additional £1.5 billion in public funds, referred to as a “green dowry.” The primary water and sewage companies’ net debt as of this year was £53.9 billion.

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

It is very different from a more conventional company structure, where operating costs are covered by customer revenue flows, but capital investments such as those in the plant, machinery, and other assets are financed by capital from investors and creditors. Following that, dividends are paid from the company’s earnings as a return on investors’ capital.

A few businesses have been forced to turn to their shareholders for an urgent infusion of cash. Shareholders provided a cash infusion to Anglian Water in order to lower its net debt, safeguard its credit rating, and lower its debt gearing from 82% to 64.8%.

Additionally, shareholders invested £1.5 billion in Thames Water to strengthen its financial stability.

This summer, Ofwat stated: “We have grown increasingly concerned about the impact of some companies’ financing decisions on their long-term financial position… and how this could affect service to customers. Companies need to finance a turnaround plan or performance improvement in this particular situation.

Water companies may be placed under special administration by Ofwat in order to safeguard public services. Prof. Robin Mason of the University of Birmingham, however, asserted that despite the most extreme circumstances, this had never occurred. In a paper for the regulator, he used Southern Water as an example and stated: “Underperformance by Southern Water has continued for a number of years.

“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,” said Dr. Kate Bayliss of the department of economics at the Soas University of London. In comparison to the level of financial sophistication of these investors, the regulator’s assumptions are actually quite modest.

Water providers defended their accounting procedures. Anglian Water claimed that thanks to private financing, it had made a number of investments that improved infrastructure, decreased leakage, and increased the quality of drinking water. The ability to finance multimillion-pound projects demonstrates both our sound financial foundation and our owners’ steadfast support.

“We operate in a tightly regulated environment, and our step up in investment – totaling £2 billion 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,” Southern Water stated.

With the shareholders “underwriting a turnaround plan,” Sarah Bentley, who assumed the role of chief executive at Thames Water in September 2020, has spoken about her plan to invest billions in the network. She has also pleaded with the regulatory bodies to “encourage responsible long-term investment into our sector” by “more patient investors, such as pension funds.”