The expectation in the industry is that Ofwat’s final determination will be only slightly more generous than the draft determination. Ofwat will reveal the outcome on Thursday (26th November). Analysts are pessimistic about the impact on water companies suggesting that Northumbrian Water, Severn Trent, United Utilities., Pennon and Thames Water may have to raise capital to cope with the fall in revenue. In a surprising statement Northumbrian Water Group in their half year results issued today indicated that they felt they would be able to maintain their dividend policy of 3% p.a. real growth and have funding secured for the next two years.
The blog is concerned that the uncertainty is having a very negative impact on the supply chain. It wasn’t long ago that the industry was struggling to find the quality of people needed to handle the investment programme. There has always been a dip in demand through the regulatory review period but usually suppliers have been able to move staff to other more buoyant sectors. This time around with the regulatory review period coinciding in Scotland and England and Wales as well as the recession the situation is much more serious.
Looking forward it is clear that the level of capital investment in AMP5 will be similar or maybe slightly higher than AMP4. In addition Ofwat is suggesting that the water companies need to spend an additional £400m on new flood defences and in light of the Cumbria floods this number will probably increase. The concern is that the supplier base will have been so decimated by the current lack of work that the people will not be there to cope with the upturn when it comes. The supplier base needs some certainty if it is to pull through.
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