13/01/2014

Water - is it value for money?

Photo: HPH plant for sludge treatment
It is inevitable that the financial structure of the water industry will again come under the spotlight this week with File on Four (Radio 4 Tuesday 8pm) focussing on the water industry. The cost of capital is one critical factor in the financing of the water sector. More than two decades ago the water industry was privatised to solve the issue of chronic underinvestment and the constraints of short term Government funding. It has been a huge success in that it has enabled about £100bn of capital investment over the last 25 years.

But it has come at a price - water bills rising significantly above the rate of inflation. Water bills have now risen to the extent where politicians can no longer ignore the impact on household expenditure. When Ofwat was established its primary duty was to scrutinise the investment plans of the water companies to ensure what they were proposing was reasonable and then to ensure they could finance the investment and remained viable businesses. There was no duty to minimise prices for customers. It is inevitable that with any regulated industry overtime the regulator and water companies develop a close working relationship. The question is has the regulator been sufficiently rigorous in ensuring the best deal for customers as well as the water company’s investors?  


One way to judge this is whether new investors find the water industry an attractive investment opportunity. Here the answer is undoubtedly yes. The water industry is very low risk. Unlike a ‘normal’ business the water companies have a fixed customer base as each is still a monopoly (for domestic customers) and the prices they can change are not fixed by the market but by the regulator. With the long term steady income stream that water companies can provide they have been a very attractive investment opportunity for pension funds. The key question is whether the pendulum has swung too far in favour of investors rather than customers? 

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