Black urges water companies to explore financing models

Water companies should heed lessons from the past and consider a range of financing options for future infrastructure, Ofwat’s chief executive has warned.

He cited Thames Water’s recent high-profile challenges and stressed the need for financial resilience, which he iterated is the responsibility of each company and their shareholders.

David Black said companies “need to learn the lessons of the past and consider the role of equity as well as debt, to make sure they are resilient financially. And companies might do well to consider different routes, beyond private investment.”

This might include funding raised publicly through the listed route, or other models such as the RAB model which funded the Thames Tideway project.

Reflecting on the focus on Thames’ finances, and by extension of the wider water industry, Black said debt had been a low-cost source of finance that allowed necessary investment without burdening customers. However, he noted “some companies borrowed too much, most obviously Thames Water. The risk for this – and for correcting this – belongs to the company and its shareholders.”

The sudden departure of Sarah Bentley four weeks ago sparked speculation about Thames’ position, however many of the problems are not new. Black noted it is a company “with deep-rooted problems of persistent poor performance and too much debt.”

The regulator said Thames needs to improve quickly. “The company’s owners and executive are responsible for sorting out the business’ problems and they need to do so with urgency,” Black said and noted that although the business has reserves of around £4.4billion, it needs to develop and execute a turnaround plan.

In a blog post, Black defended the privatised sector model, stating it was always intended that the investment required to upgrade water networks would be, at least in part, financed by debt.

“There has been huge investment totalling around £190 billion of capital expenditure by 2022: about double that of the period before. Just to bring that to life, the current investment programme runs at the equivalent of £27 million every single day.”

That investment has gone into the system and water networks, Black explained, as evidenced by growing asset value from £9 billion to £85 billion. The debt raised over the same period is about £57 billion, and the equity is a touch under £20 billion.

“Major investment is needed and companies must fund it without compromising their financial resilience. We will be keeping company finances under close scrutiny and will exercise our new powers on dividends and financial resilience if companies do not act responsibly,” Black concluded.