Financing the private water and sewerage Companies of England and Wales

The net debt of the private water companies of England and Wales

Last update Thursday 15 July 2010

It is clear that, quite apart from the cost to customers in the blatant disregard of the statutory customer protection decreed by Act of Parliament, there is a serious problem in the huge and escalating debt of the private water companies in England and Wales. Indeed, the Government has been well aware of the problem and “the serious financial difficulties” faced by companies since at least the year 2000 when the net debt stood at £12.2 billion - about £500 for every household in England and Wales. In November of that year, the House of Commons Environmental Audit Committee (of which Mr Meacher, then Minister for the Environment, was a member) recorded in their Seventh Report, “Water Prices and the Environment”, paragraphs 233 and 234, as follows -

233.      In 1997, the Government made clear that its aim was for the UK to approach the 21st century with a world class, water-efficient and environmentally sustainable water industry. PR 99 [the Ofwat 1999 price review] presented a key means of achieving this and looks set to deliver a vast environmental programme and welcome price cuts for customers. However, there are certainly likely to be some important after-shocks which need to be kept in mind as we prepare to embark on the next [2004] Periodic Review.
234.      The last regulatory price review has left some water companies, already with high debt levels, with serious financial difficulties. They are finding it increasingly difficult to raise the billions of pounds necessary for investment over the next five years and water share prices have been significantly downgraded since the price review. They are now looking for ways to restructure to create greater shareholder value, reduce their debts and avoid becoming take-over targets.

      Confirmation that the Government was well aware of the problem was given by Pamela Taylor, Chief Executive of Water UK, on BBC Newsnight of Thursday 11 October 2001, in reply to a question about water company debt from Paul Mason, then BBC Business Correspondent, currently Newsnight's Economics Editor -

Quite a bit of the borrowing will have to go on current costs because we are not able because of the regime to raise the prices to customers because the last determination said we had to reduce prices to our customers but of course it didn’t say at the same time “You can reduce expenditure on the environment” or “You can reduce expenditure on the infrastructure, the pipes and the treatment works and so on”. So companies are squeezed, and sometimes pretty close to intolerably, so they need to find a way forward. Long term, companies can’t go on borrowing the way they are if they are the equity model of financing their companies. So what we are having to do is talk closely with the regulator and with Government so that the regulator and Government are aware of this. And they are, because obviously the future long term health of the water industry is vital to every single one of us.

There can be no doubt that in 2000 the Government appeared to be genuinely concerned about the £12.2 billion net debt of the water companies. This despite (or even, perhaps, because of) the decision by the Chancellor of the Exchequer in 1997 that the private water companies were "awash with cash" on the basis of which he imposed a "windfall tax" of £1.69 billion on the parent companies. In fact, payment of the tax was mainly financed by "restructuring dividends" which simply added to the total debt of the water companies. Given the concern about "high debt levels", and the "likelihood of important after shocks", it is astonishing that there was no mention of this debt problem during the debates on the 2003 Water Bill. Even more astonishing, there were no references to this debt during the 2004 and 2009 Ofwat price reviews despite the predicted "serious financial difficulties" and the fact that by 2009 the debt had escalated to £34 billion largely due to the colossal dividends taken by parent companies.

The attitude of the Regulator, in line with the declared policy of "arm’s length regulation" (sic), is that dividends taken by parent companies and levels of debt are matters entirely for the companies and of no concern to the Regulator. There is, however, the problem that the water companies have no disposable assets of any significance (that is, assets not essential to the licensed water and sewerage operations) and cannot be permitted to simply close down even if unable to obtain further credit. In the increasingly likely event of a company losing its creditworthiness, is the Government prepared to step in with finance or even take the company back into public ownership?