The cost to fix the water industry is expected to run to hundreds of billions of pounds and is almost certain to fall on households.
(Bloomberg) —
One fifth of all water supplies lost to leaks. Over 800 sewage spills on average every day in 2022. More than £60 billion ($76.4 billion) of debt built up by the water utilities. There is no shortage of numbers to help tell the story of Britain’s failing water industry. But there is only one that really matters: how much will it cost to fix the system.
Even partial estimates suggest hundreds of billions of pounds will be needed. And the bill will almost certainly fall at the feet of households in the form of higher prices or additional taxes.
The industry has been under pressure for some time. But the threat that Thames Water Ltd. — Britain’s biggest water utility with 15 million customers — may require a government bailout to stop it from collapsing under more than £14 billion of debt, has made everything more urgent.
“The next five-year regulatory period will likely see higher levels of spending across the industry, with likely bill implications,” said Martin Young, analyst at Investec Bank Plc. “The Thames Water crisis brings this all into very sharp focus for politicians, regulators, the companies, and all other stakeholders. Legitimacy is imperative.”
The government has tried to shift responsibility on to the regulator Ofwat and the companies but for Prime Minister Rishi Sunak the fate of Britain’s water industry has in recent days become intrinsically linked to his own short-term political future. With a general election due in the next 18 months, he has to balance the risk of inflicting higher water bills on consumers already reeling from the cost of living crisis against the danger of punishing debtholders and deterring future investment from overseas.
The water companies must submit their investment programs for the period 2025-30 by October. When the spending was last negotiated Ofwat approved a figure of £51 billion over five years. This week the regulator said that number could rise by 40%. But £70 billion over five years would still fall well short of what most in the industry believe is needed to repair its century-old infrastructure and deal with myriad other problems from climate change to sewage discharges. October is also when Thames Water’s next debt repayment falls due.
“Ofwat will continue to keep companies’ financial resilience under close scrutiny,” said a spokesperson for the regulator.
Raising the money needed to invest has been made more difficult by the financial fault lines exposed at Thames Water, sending investors fleeing.
Read more: Rising Inflation Means British Water Companies Are Leaking Money
Water companies amassed piles of debt when interest rates were low with much of it linked to inflation. Now both those measures are surging the sector is feeling the squeeze. The cash was supposed to be used to fix leaky pipes but utilities including Thames Water have been slow to make investments all-the-while paying shareholders generous dividends for many years.
The Green Party MP Caroline Lucas told the House of Commons on Wednesday that the industry had paid £72 billion in dividends since privatization in 1989.
The prospect of a government bailout or possible nationalization at taxpayers expense is provoking anger among consumers. We Own It, an activist group that campaigns against privatization, has started a petition calling for Thames Water to be taken permanently into public ownership.
Even the Institute of Directors — which represents British business leaders — has been critical. “In several cases, companies appear to have taken on excessive levels of debt in an effort to square the circle of providing shareholders with attractive returns whilst still fulfilling public expectations for significant investment in the sector,’’ the IoD said. “The apparent inability of private sector companies to balance such competing demands on a sustainable basis is leading to calls for either a stringent tightening in the regulatory framework or a return to public ownership.’’
Thames Water bonds tumbled on June 28 after Ofwat, the Department for Environment, Food and Rural Affairs and the Treasury began talks about the possibility of bringing the utility company into a so-called special administration regime. Water stocks more broadly took a hit the following day with investors worried about the stability of the rest of the sector. All the publicly quoted water companies ended the week down.
Putting Thames Water into a special administration could mean a 25% haircut for some bondholders, according to Bloomberg Intelligence. That would be a blow to investors, but prioritizing paying back the debt would increase the cost of any bailout and risk provoking anger among voters.
Water utilities in England and Wales had about £60.6 billion in debt as of March 2022, according to Ofwat, which regulates both countries. The crisis has called into doubt whether water companies are going to be able to raise capital in future.
“Thames Water’s current unstable financial position and infrastructure problems will likely have a bearing on other sector participants,” said Tom Li, vice president of energy, utilities, and natural resources at DBRS Morningstar, “adding to sector credit risk and the ability for companies to raise capital at a reasonable cost.”
Even before the debt problems of the water sector were laid bare this week, companies were already under scrutiny for allowing sewage to discharge into rivers and waterways during storms. Anglian Water Group Ltd. scrapped a dividend for most of its investors after the company was fined £2.65 million in April for allowing raw sewage to flow into the sea.
The cost of fixing the sewage problem alone is immense. To separate wastewater and stormwater systems would cost between £350 billion and £600 billion, increasing annual household bills by as much as £999, according to a report commissioned by the Storm Overflows Taskforce — made up of Defra, the Environment Agency, Ofwat, and other water industry bodies.
That does not take into account investment needed to fix leaks in pipes some of which have not been upgraded in more than a century. Expansion of the network is needed to meet the demands of a growing population and supplies need to be secured in the face of climate change which is already starting to increase water use and reduce supplies. The UK uses about 14 billion liters of water per day and demand will increase by almost a third by 2050.
“Without action, the risk of not having enough water to satisfy our customers’ demand is very real,” Water UK, the industry trade body, said in a report modeling the sector to 2050.
In a recent letter to the National Infrastructure Commission, Ofwat said the rate of renewal — how much of the mains network is renewed each year — had dropped from 1.4% before 2008 to 0.5% in the years since. More focus is needed to ensure companies are “meeting their duty to maintain an efficient and economical system of water supply,” the regulator said.
Ofwat also revealed that companies had spent just 68% of what they could have on upgrading infrastructure between 2020 and 2022. Yorkshire Water, South West Water and Affinity Water’s investments have been less than half of their allowance. The utilities said they’re phasing the outlay over a five-year period.
This has left many consumers wondering where the money has gone.
Ultimately the cost of investment comes back to customers, but over a long period of time. Companies have to pay new investment upfront, so they need to secure funding to pay for this. Finding that capital in debt and equity markets is looking like a more difficult and more expensive option.
Household bills have increased 363% since privatization in 1989, more than double the rate of inflation. Charges jumped 8.9% in April, according to the Office for National Statistics, the steepest increase in 18 years. Higher water charges at a time when the cost of everything is rising for consumers will be difficult for many households.
“Nearly one in four households say they are currently struggling to pay their water bill amid the cost of living crisis and this will add to their worries,” said Mike Keil, senior director for policy, research and campaigns at the Consumer Council for Water. “Large scale investment must come with a strong safety net to protect households.”
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