The sound of doors creaking closed long after the horses had bolted was hard to ignore when the regulator Ofwat this year unveiled new powers to stop water companies paying dividends if it would harm their financial resilience.
That came on the heels of another belated bout of regulatory bluster when the Environment Agency said water bosses in England should be jailed after overseeing the worst levels of pollution in years.
As Thames Water, the biggest of the privatised water and sewerage companies, teeters on the brink of collapse, the tardy flexing of these regulatory muscles will be the focus of much criticism.
For decades, water firms, which were handed a monopoly with no debts at privatisation in 1989, have been loading up debt to pay dividends, while failing to adequately invest in the infrastructure to fulfil their legal duty: to provide clean water to customers and treat their sewage.
Ofwat has always had the power to put a water company into special administration to protect services for the public – which it is now considering to protect the services provided by Thames for 15 million people.
But until now, not even the actions of Southern Water – fined £90m for the criminal act of dumping billions of litres of raw sewage into protected waters – have made the regulator use this most powerful weapon in its toolbox.
Signs of the precarious financial situation that many privatised water companies have put themselves in have been clear for many years, as they loaded up debt to pay dividends.
Many companies have been running ratios of debt to capital value of more than 80% forcing them to seek equity injections to keep the business afloat. Ofwat has overseen three such equity injections into Thames Water, Anglian and Southern Water, while also warning of the low levels of financial resilience of companies including South East Water and Yorkshire Water.
This perilous state of affairs has been years in the making. But it has been particularly exposed as a result of the scrutiny water firms have been put under because of outrage over their environmental performance; their routine use over many years of raw sewage dumping into rivers to keep their systems running.
For years, no one knew about the raw sewage pouring into rivers, but now they certainly do. The resulting public anger continues unabated, despite promises by the water companies that they will make record investments to fix the problem.
Even as they made those promises, however, they were clear – with the support of ministers – that it would be customers paying to fix decades of underinvestment, not shareholders. As Anglian Water said, without irony: “The money does have to come from somewhere.”
Before she quit Thames Water, Sarah Bentley had apologised for decades of underinvestment, decades of poor decision making and aggressive cost cutting, and said every single day of an eight-year recovery plan would be required to bring the company up to scratch.
Her departure came less than halfway through that eight-year plan as Thames Water was seeking millions more in a bailout from its shareholders and after documents revealed leaks by Thames Water were the worst in five years. Thames said Ofwat was fully informed, and that the company continued to maintain a strong liquidity position.
Leaks, sewage dumping, drought, hosepipe bans, excessive executive pay are all putting pressure on water firms and increasing public anger.
No more so than this month when customers of South East Water had no supplies, despite above average rainfall filling the reservoirs The same company has paid dividends to shareholders in the past two years of £156m, and £76m in interest payments on loans. In its last annual report, South East water warned of its financial precipice as interest rates and inflation soars “making delivery of services … more challenging”.
They are not alone. The latest Ofwat financial resilience report showed some companies’ credit ratings have fallen to their lowest as result of high inflation pressures.
As interest rates start biting for water companies on the debts they took on to pay dividends, the wheels could start to fall off this teetering facade leaving the privatised companies unable to meet their obligations to provide an essential public service.
The economist Prof Dieter Helm said starkly: “It is an accident waiting to happen. The companies are caught between relentless public anger at the state of the rivers, outrageous executive pay, and the debt-based model that private equity and infrastructure funds have developed in the world of near zero interest rates.
“If we get inflation, higher interest rates and environmental failures all together in a high debt context, then the pack of cards collapses.”
• This article was amended on 29 June 2023. An earlier headline referred to the UK when Ofwat covers England and Wales. Also, when the Environment Agency said water bosses should be jailed after overseeing the worst levels of pollution in years, it was referring to England.
