Britain’s leaking water industry is facing a tidal wave of problems. Financial troubles at Thames Water have thrown the spotlight on Britain’s privately held utilities. But much higher investment needs likely in the coming years will mean bigger bills and greater political scrutiny. That could make it hard to maintain ownership models in their current form.
are now valued close to their RCVs, as per Jefferies analysis, implying that shareholders don’t expect returns to get much more generous. In the past, companies have been valued as highly as 1.3 times their RCVs.
Yet even if the regulatory web is tighter, the UK would still look an outlier in allowing private water utilities in the first place. The very existence of return-seeking shareholders loads extra costs onto consumers and creates moral hazard, since owners may be tempted to do what they did before: borrow too much and skip investment. Even within the UK there are other models: the Scottish government owns its own water company.
Putting companies back into public or not-for-profit status wouldn’t automatically mean a much better deal for consumers. Average UK water bills arein the current year, versus 409 pounds in Scotland. Barclays analysts reckon this is lower than in both Germany and the United States. The amount of water lost to leakage has fallen to around 20% since privatisation, from 30%, and is lower than in Scotland as well as other countries likeYet the industry will soon face a much bigger test.
That extra cost will likely lead UK taxpayers and politicians to question the private model. One option would be to squeeze water companies – cutting allowed prices, and imposing bigger penalties on those that allow leaks. Yet if regulators are too tough companies will struggle to raise fresh equity, which may well be needed to fund the extra costs.
An alternative would be to ditch the private model, either by nationalising companies or by forcibly converting them into not-for-profit entities like Dwr Cymru, which is only funded with debt. That would save money. Each customer bill comprises a portion to deliver adequate returns to equity holders’ capital. For the sector as a whole, Ofwat assumes equity comprises 45% of water companies’ 94 billion pound RCV, or 42 billion pounds. Assuming a 6.
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