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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