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The former chair of Ofwat has conceded that the regulator came “very close” to taking Southern Water into special administration, before opting for a market-based approach under which Macquarie acquired a majority stake in the company last year.
Jonson Cox co-led the process of the financial restructure of the water company, which resulted in a £1 billion investment in August 2021.
Speaking at Utility Week Forum, Cox described the situation as a “stark example” of how poor performance can have a material impact on a company’s equity value.
The investment from Macquarie came a month on from Southern receiving a record £90 million fine after pleading guilty to thousands of illegal discharges of sewage into rivers and coastal waters. In 2019 it agreed to pay back £126 million to customers after an Ofwat investigation found serious failures in the operation of sewage treatment sites and evidence of deliberate misreporting of performance.
Macquarie agreed to invest at least £530 million as new equity into Southern’s regulated company, with the remaining funds being used to fix the vulnerable financial position of its holding companies. Some £230 million of the investment in the regulated company was earmarked for projects aimed at getting the company “in a good place for the start of PR24”.
Cox told the Forum: “I had the privilege of co-leading the regulator’s initiative on Southern Water last year – a stark example, in what is meant to be a stable sector, of a very material wipe-out of equity value for poor performance.
“While very close to special administration of Southern Water, in practice we brought about an auction for the control of Southern by a new investor which should ensure much faster progress in improving performance. Moody’s described what we did as a virtual special administration by basically bringing a new controlling owner in.”
In his speech to the conference, Cox warned more widely that the water sector’s reputation has been “trashed” by outrage at levels of pollution in rivers from some companies. He said he was worried that a failure to fix the issue of public legitimacy could prompt a clampdown by government. He questioned if a result of political intervention could be shortening the 25-year notice period to remove a licence.
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