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

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.

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.

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.

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?

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

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.

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.

OFWAT is toothless like so many so called regulators

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.

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!.

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.

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?

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

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.

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.

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.

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.

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.

Callistemon21

Yes, Why?

It's not chicken manure spreading, it is the number of chicken farms along the River Wye, the manure pollutants from which contaminate one of the most the beautiful rivers in the country.

Chicken manure is a useful fertiliser - so why don't they collect this and turn it into manure pellets for use elsewhere?

I doesn’t need converting into pellets farmers in the midlands and eastern counties would pay for it to be delivered and spread. In the same way they pay for processed sewage solids to use as fertilizer.

Katie59

There is too much waste of water and too much pollution but get this straight it’s not going to be improve without a great deal more investment that has got to come either from higher bills or taxation.

Furthermore, inland freshwater is never going to be “safe” because natural bacteria, fungus, algae, viruses thrive, particularly in warm weather, which is why water we drink and swim in is chlorinated. You would probably be safe in a cold mountain stream but not in lowland rivers in summer.

The River Wye is polluted so why havn’t the Environment Agency stopped chicken manure spreading?. Chicken litter is a dry product easy to transport and use as fertiliser where it won’t pollute.
Why?.

You forgot an important third option in your first paragraph Katie59. - from drastically reduced dividends and further investment from shareholders,

Yes, Why?

It's not chicken manure spreading, it is the number of chicken farms along the River Wye, the manure pollutants from which contaminate one of the most the beautiful rivers in the country.

Chicken manure is a useful fertiliser - so why don't they collect this and turn it into manure pellets for use elsewhere?

There is too much waste of water and too much pollution but get this straight it’s not going to be improve without a great deal more investment that has got to come either from higher bills or taxation.

Furthermore, inland freshwater is never going to be “safe” because natural bacteria, fungus, algae, viruses thrive, particularly in warm weather, which is why water we drink and swim in is chlorinated. You would probably be safe in a cold mountain stream but not in lowland rivers in summer.

The River Wye is polluted so why havn’t the Environment Agency stopped chicken manure spreading?. Chicken litter is a dry product easy to transport and use as fertiliser where it won’t pollute.
Why?.

Excellent article MaizieD, I’m glad I don’t live in the south east, because the situation sounds very precarious.

It is never justifiable to have a privately owned utility which is a monopoly. These should be owned by the people who use them and operated for their benefit, not for private profit.

It is absolutely senseless to have private water companies if the priority is to pay shareholder dividends even though companies are under performing in some of their key roles, which apart from providing clean and safe water, should include protecting the resource and protecting our rivers and seas from pollution.