Ofwat allowed the water companies to take on massive debts, the big question is WHY?

Dividends paid to investors may or may not be excessive I don’t know but investors are going to want a return on their investment. Currently it is OFWAT that controls the spending and Thames Water alone is £4bn in debt, it’s time the government got control of the industry and managed it properly.

Water companies can't fail as they are essential services, so the banks don't take a risk if they allow them to over extend their debts. So the banks make lots of money, the sharesholders get their dividends and are happy to sanction ludicrous pay deals, the actual customer comes way down the pecking order! Having heard the regulator interviewed yesterday he sounded as about as much use as a chocolate teapot. We, the customer of a monopoly pay the price,just disgraceful.

MaizieD
I heard this scam ( because that’s what it is but wrapped up in flowery words) being discussed on the radio 4.
I couldn’t quite take it all in but now I can slowly digest it.
I know how many beans make 5 but im slow with figures.

I wonder how many over extended businesses will fail as a result of the rise in interest rates and how many of them will need bailing out by the tax payer because they supply essential services. An article in the Guardian suggested the cost to the taxpayer of energy companies going bust was £2.7bn and that was back in June 2022.

The EA do not have unlimited powers. There is much they would like to do to clean up the rivers and beaches but are prevented by the government.

These companies are no longer in British hands.

www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjkpP7sy_n_AhUIS8AKHfRDBP8QFnoECCUQAQ&url=https%3A%2F%2Fcorporatewatch.org%2Fwho-owns-your-water-and-how-theyll-try-to-keep-it%2F&usg=AOvVaw0XLz_t2A-T-apDDW2b1OMM&opi=89978449

Sago

These companies are no longer in British hands.

www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjkpP7sy_n_AhUIS8AKHfRDBP8QFnoECCUQAQ&url=https%3A%2F%2Fcorporatewatch.org%2Fwho-owns-your-water-and-how-theyll-try-to-keep-it%2F&usg=AOvVaw0XLz_t2A-T-apDDW2b1OMM&opi=89978449

This makes me so angry, Sago

Who remembers MacMillan warning about 'selling off the family silver'?

Who could have thought that selling off public utilities to companies whose prime interest is making money for their shareholders rather than providing an effective public service was a good idea?

It goes right back to Thatcher. The fact that the performance of the water industry in Wales and Scotland is not good either, despite the fact that they aren’t in the hands of shareholders is an indication that what actually needed to happen was much more investment in the 1980s and 1990s, because now all that’s affordable is patching up of failing systems, and the longer it goes on the worse it will get. I think we are all going to be paying a lot more for our water soon.

The government could nationalise the whole industry at a stroke if they wanted to, just buy back all the shares, the cost would be massive, then they would have to find more cash to make the improvements needed.

I’m not expecting that to happen!.

Katie59

The government could nationalise the whole industry at a stroke if they wanted to, just buy back all the shares, the cost would be massive, then they would have to find more cash to make the improvements needed.

I’m not expecting that to happen!.

I'll c & p from Richard Murphy's analysis of yesterday:

So, how much are these companies really worth? It depends on a) how long inflation lasts, as it is ruining them with excessive loan interest costs right now b) how long it is before the government acts before nationalising them and c) who blinks first.

The last is important. There is no precise science to company valuation (whatever the textbooks say). At the end of the day it comes down to who is the more desperate to do a deal. If the shareholders panic - and they might - then all the cards are with the government. And vice versa.

Either way, by the time anyone gets near to talking nationalisation of these companies their value will have fallen considerably, is my suggestion. Nationalisation is not going to cost £96bn, in my opinion.

But whatever happens, nationalisation need never have a cash cost. Let me repeat that in another way. It is complete nonsense to suggest that so-called taxpayers' money will ever be used to pay for nationalisation of the water companies.

How can I be so sure? Three reasons. First, I have looked at the nationalisation of industries like the railways in 1947. They too were run down, under-capitalised and in dire need of investment. How did the government pay for them? With bonds.

Technically those bonds used to pay for the industry were repaid thirty years later but actually they were simply replaced with replacement bonds, and so cash has never been paid for that nationalisation as yet.

I cannot stress this point enough. Just as most company takeovers are paid for by the issue of news shares in the acquiring company, so too can any nationalisation be paid for with the issue of government bonds, which then in effect stay in issue in perpetuity.

Cash needs play no part in a nationalisation in that case. What is open to debate is what the fair compensation for shareholders and maybe bondholders might be - because this has to be paid and has been in previous nationalisations.

www.taxresearch.org.uk/Blog/2023/07/04/its-time-we-took-water-nationalisation-seriously-it-is-the-only-viable-option-for-the-industry/

The whole article is worth reading.

OFWAT is toothless like so many so called regulators

I think the answer to the initial question is that privatising water was a way of getting the required investment for future development - better sewage, etc. - off the government's accounts so that it did not require tax rises. It's rather like PFI. So the investment requirement was to be met by private borrowing. But what no-one foresaw was that the desire to pay the shareholders large dividends could not be met if the cash flow from customers was used for improving the service. Hence large scale borrowing occurred. The shareholders have done very well out of all this and they should bear the cost of liquidation or nationalisation, not the customers or the taxpayers.

Grantanow

I think the answer to the initial question is that privatising water was a way of getting the required investment for future development - better sewage, etc. - off the government's accounts so that it did not require tax rises. It's rather like PFI. So the investment requirement was to be met by private borrowing. But what no-one foresaw was that the desire to pay the shareholders large dividends could not be met if the cash flow from customers was used for improving the service. Hence large scale borrowing occurred. The shareholders have done very well out of all this and they should bear the cost of liquidation or nationalisation, not the customers or the taxpayers.

If the company goes into liquidation they will loose the lot, they are betting on the government continuing with the current system.

Murphy comparison with the railways is misplaced, the railways are still grossly unprofitable, the real cost of a ticket is still 3 times its face value.
The water industry could improve standards and break even with a 50% increase in income, either with higher charges or taxation support.
Nationalization is not a realistic option, OFWAT needs to get off its fat backside and manage the industry properly

Am I missing something here? Surely executive salaries and shareholder premiums should be funded by profits? How does that sit with the Companies carrying billions in debt? I'm also staggered by the way in which Banks have loaned such vast sums to an organisation which clearly has such a toxic balance sheet. What happened to credit checks? On a personal level, my credit score would be the first thing my Bank would check if I asked for a loan. Is it so different in the Corporate world? If so, why is that?

Katie59

Murphy comparison with the railways is misplaced, the railways are still grossly unprofitable, the real cost of a ticket is still 3 times its face value.
The water industry could improve standards and break even with a 50% increase in income, either with higher charges or taxation support.
Nationalization is not a realistic option, OFWAT needs to get off its fat backside and manage the industry properly

Murphy was analysing the cost of post war nationalisation of the railways, not about current operating costs.

You are very good at making assertions, Katie but I would like to see a source for your claim about ticket prices. You have been known to be incorrect..

The House of Lords has estimated cost of £260 billion for rectifying our water problems. Where on earth do you think these over leveraged (heavily in debt) companies are goingbto get that sort of money? We've already seen that Thames Water, set to raise £1.5 billion this year has barely managed to raise a third of that.

And the companies still have to pay interest to their creditors and dividends to their shareholders. There is no way this is ever going to work.

NanaDana the banks are really only interested in how safe their money is and basically an essential service is totally safe as the govt can't let it go bankrupt. TW took on huge debt when it was owned by Macquarie, it also paid out massive dividends out of the money it borrowed! However, the current head of Ofwat says until recently Ofwat had insufficient powers to do the regulatory job properly. We can't even blame the current govt for that failure as in 2006, when Macquarie bought TW, Tony Blair was PM! We've been let down by successive govts whilst the rich get richer and the poor get poorer! Honestly, how can anyone justify the huge salaries and bonuses that people are paid. It's just greed and opportunism.

NanaDana

Am I missing something here? Surely executive salaries and shareholder premiums should be funded by profits? How does that sit with the Companies carrying billions in debt? I'm also staggered by the way in which Banks have loaned such vast sums to an organisation which clearly has such a toxic balance sheet. What happened to credit checks? On a personal level, my credit score would be the first thing my Bank would check if I asked for a loan. Is it so different in the Corporate world? If so, why is that?

According to Murphy (and I have no reason to believe him to be wrong) the debts are not bank loans, they are index linked bonds (which he explains).

Company finances are no more like household finances (where one would expect one's debt to be repaid either asap, in the case of a credit card, or over an arranged period in the case of a mortgage, than they are like a national economy. In theory, it seems, companies borrow to invest to grow the business; the cost of the borrowing is a business expense and comes out of operating profit but the loan itself doesn't.

The current shenanigans with the water companies don't give one a great deal of confidence that capitalists (for want of a better collective term) are particularly responsible people who have the interests of their consumers at heart. Entrusting our public utilities to them hasn't turned out to be a spectacular success.

Maisie

www.gov.uk/government/statistics/rail-factsheet-2022/rail-factsheet-2022

Under rail finance.

2019/20 £12bn subsidy 12bn revenue
2021/22 £20bn subsidy 6.5bn revenue

Katie59 I doubt if the 2021/22 figure is typical because the railways were badly hit by lockdown and people working at home.

I wonder what is meant by the "face value" of a ticket. As a fairly frequent rail user, they vary enormously in price for the same journey.

MaizieD

NanaDana

Am I missing something here? Surely executive salaries and shareholder premiums should be funded by profits? How does that sit with the Companies carrying billions in debt? I'm also staggered by the way in which Banks have loaned such vast sums to an organisation which clearly has such a toxic balance sheet. What happened to credit checks? On a personal level, my credit score would be the first thing my Bank would check if I asked for a loan. Is it so different in the Corporate world? If so, why is that?

According to Murphy (and I have no reason to believe him to be wrong) the debts are not bank loans, they are index linked bonds (which he explains).

Company finances are no more like household finances (where one would expect one's debt to be repaid either asap, in the case of a credit card, or over an arranged period in the case of a mortgage, than they are like a national economy. In theory, it seems, companies borrow to invest to grow the business; the cost of the borrowing is a business expense and comes out of operating profit but the loan itself doesn't.

The current shenanigans with the water companies don't give one a great deal of confidence that capitalists (for want of a better collective term) are particularly responsible people who have the interests of their consumers at heart. Entrusting our public utilities to them hasn't turned out to be a spectacular success.

I'm not an Economist, MaizieD, so thanks for that explanation of how Company Finances work. Nevertheless, I'm still persuaded to sympathise with Dickens' Mister Micawber, who said: “‘My other piece of advice, Copperfield ... you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” Mind you, I'm also aware that Micawber ended up in Debtor's Prison. Perhaps if the odd, exploitative, parasitic Capitalist suffered a similar fate, it might give a few others pause for thought.

^Perhaps if the odd, exploitative, parasitic Capitalist suffered a similar fate, it might give a few others pause for thought. )

Well, they don't, do they? Look at Philip Green & BHS.

Company law is structured to avoid any penalty for business failure because it's the business owners and financiers who have the ear of government (all those 'donations') and lobby to have the law made to their advantage.. Which is fair enough in some ways, but when a company has had the maximum amount of money taken out of it and is then loaded with debt' one wonders why the owners get away scot free when creditors, employees and shareholders suffer.

When the water companies were sold off , the directors salaries went up x 10 at least but there was no money to increase the wages of the workers. I have my own personal water supply company fortunately.

Isn't the main reason for all this mess the fact that we cannot CHOOSE our Water supplier, as we do our Energy providers. We don't even have access to our water meters so cannot check that the readings taken are accurate,

Hence none of these suppliers have any competition and can sit there smugly and let the public's money roll in.

As far as I know there is no obligation for companies to pay their shareholders' dividends solely out of profits. They could pay them out of borrowing. But its hard to track the money through accounts, I think. As Katie59 says if TW goes into liquidation the shareholders will probably lose the lot hence TW can press shareholders for a cash injection to keep going which seems to be happening. They can also soak (!) the customers. I doubt this will turn out well in the long run and TW will eventually need restructuring as a not-for-profit company or simply nationalising, in both cases implying a taxpayer cost.