Water companies will be seeking big bill rises as they face huge infrastructure investment demands, the chief executive of the water regulator, Ofwat, has said.
David Black denied that the water industry was badly regulated and defended Ofwat’s role in an industry saddled with debt and facing public anger over poor performance, high dividends, executive pay and sewage pollution.
Black said the £60bn of debt taken on by privatised water firms, including struggling Thames Water, which has the highest gearing in the industry, was “their issue to sort out”.
As taxpayers face having to bail out Thames Water if it fails to secure billions from its shareholders to secure its future, Black said the regulator had not had the right powers to tackle huge dividend payments by water firms, and high levels of debt.
Speaking on BBC Radio 4’s Today programme on Wednesday, Black added that he “completely disagreed” that water was a poorly regulated industry.
He blamed the lack of powers given to the regulator at privatisation more than 30 years ago for the behaviour of some companies, with soaring levels of executive pay, £72bn paid out in dividends, poor performance, high levels of leaks, and the worst levels of pollution for years.
Levels of debt in the industry range from Thames Water at £14bn, more than 80% of debt to capital value, or gearing, to companies whose gearing is at more than 60%.
High interest rates and inflation are hugely increasing costs on the debt companies owe, more than half of which on average is inflation-linked.
Simultaneously water companies face having to fund the biggest infrastructure investment ever to reduce raw sewage dumping, upgrade water treatment plants, build reservoirs and fix leaky pipes. Black told the House of Lords industry and regulators committee most water companies would be asking for significant rises in water bills. “We are very concerned about the impact on bills,” he said.
Black told peers the regulator should have stepped in in 2006 to stop companies as they began taking on huge levels of debt but did not have the powers to do so at the time.
“We now have the powers and we have used those,” said Black, referring to new powers in 2021 under which the regulator says it will stop water companies paying dividends if doing so would harm their financial resilience and stop companies paying bonuses to executives.
Black said Thames Water – which is seeking billions of pounds from shareholders to secure its future – was a long way off needing special administration – the insolvency process for water companies, which secures the services for the public.
“The question is for Thames to come forward with proposals to inject more equity into this business. Thames is talking to their investors.” But he admitted investors in Thames Water were reluctant to provide the money. He said the backstop option was special administration but “we are still a long way off that”.
“Thames are looking for new finance to come to business in the early part of next year,” said Black.
