Ofwat calls for more transparency on use of public money

The chief executive of Ofwat says the regulator has been encouraging water companies to “shed much more light” around the use of the public’s money.

Speaking on BBC Radio 4’s Today programme earlier this morning (22 February), Rachel Fletcher said: “Ofwat has been beating a drum to make the water companies understand that they must show they are working in the public interest and to shed much more light and transparency around where the public’s money is going.”

Business presenter Dominic O’Connell referenced a study by the University of Greenwich which found that water companies over the past decade had “paid out as much in dividends as they made in profits – about £18 billion” and the debate around nationalising the water industry.

He said: “Some think the industry’s economic regulator Ofwat needs to get tougher. Michael Gove has written to the regulator asking it to look at executive pay, payments to shareholders, offshore companies – all sorts of things. And he is ready to give the regulator new powers.”

Asking Fletcher what the regulator has been doing to address the concerns of the public he challenged if Ofwat has been “asleep at the wheel for the previous 10 years”.

Fletcher stressed there have been “improvements” in the way companies are operating their businesses and defended Ofwat’s role stating the regulator has some “hard levers” it is using.

“We’ve seen real improvements in terms of performance and those improvements come in whilst keeping costs flat for customers in real terms.”

She said the regulator “cares” about offshore structures and dividends because such issues are “striking at the heart” of public concern that water companies are “primarily being run in the interest of the shareholders”.

“There are some serious questions for companies to ask themselves, particularly around whether they have got the financial structures in place to meet what is, after all, going to be a very tough regulatory settlement going forward,” Fletcher said.

O’Connell suggested water companies have been able to pay out so much in dividends and meet their investment because of “cheap debt”.

“How is it that Ofwat has been unable to see that debt is cheap – [water companies] are able to keep [their] investment credit rating much more easily by loading up with debt – and really you should have been tightening rules when debt got cheap round about 2007.”

Responding to the criticism, Fletcher said the important thing is what Ofwat is doing now and how it is “challenging” companies.

“I think there is a real challenge for the companies to respond to the public concern that public interests are being overshadowed by the desire to maximise returns for shareholders.”

Talking about the concerns surrounding offshore structures, Fletcher said Ofwat’s understanding is that “all of those offshore structures are UK based for tax purposes” but she said it’s about “public perception”.

O’Connell argued public perception “seems a very strange yard stick for an economic regulator to work to” suggesting it’s “not hard and fast and not written down anywhere.”

But Fletcher said: “It’s really important that people around the board table of these companies are going in and making decisions with interests of the public front and centre.”

She said the regulator is not “currently exploring” introducing a dividend cap, instead it is “pushing” companies to be transparent around where customers’ money is going and how much is going out in dividends.

Asked if the economic regulator is relying on “name and shame”, Fletcher said Ofwat is making the point that these companies are “serving an essential public purpose”.

“I think the public understand if there are shareholders they will expect a return, but that needs to be kept in balance and be shown to sit aside the public purpose these companies are serving.”

A spokesperson for Water UK, said: “Water companies understand the importance of transparency, which is why we are working with Ofwat and others on a number of projects such as Discover Water, a European-first website that provides unparalleled levels of detail on what customers are paying for and the high quality of services they get.”