Water is “a service where the shareholders never lose and the public never win,” Andy Burnham, the prime minister, told the Labour party conference last week, reflecting the popular feeling towards the English industry.
And, of course, his big-picture point is familiar: the £80bn, or thereabouts, that has been paid in dividends over the past 35 years represented over-the-top rewards for investors in many cases. It is easy to agree the public was taken for a ride.
But the idea that shareholders never lose is not correct – and has been out of date for a while. For starters, the current owners of Thames Water have been wiped out. Their shares are worthless whatever the outcome of the interminable talks over whether to put the company into administration or opt for a recapitalisation by the creditors (who will get a sharp haircut on their debt in all circumstances).
Meanwhile, the owners of Southern Water have been obliged to shove in cash on dilutive terms. Now comes something similar at Pennon Group. The owner of South West Water, Bristol Water and Bournemouth Water is tapping its shareholders for £550m via a rights issue to fund, in effect, the cost of clearing up past failures.
The new-ish Pennon chief executive, Keith Haslett, outlined an extra £1bn of capital investment on top of the existing £2.6bn in the current five-year period. Of the new £1bn, only £400m represents spending on new infrastructure that can be charged to bills (an extra £10 a year for South West customers if Ofwat gives a thumbs up). The other £600m hits shareholders directly and is the catch-up cost of fixing things that should not have gone wrong in the first place.
Reading between the lines, Haslett seems shocked by what he found. The rights issue document talked about sustained improvement requiring “a fundamental change in how we plan, deliver and maintain our assets” and how previous efforts have been “held back by the way accountability sits within the organisation and gaps in the capability”.
Mr Fixit is not saying it’s an overnight job. All the biggies of water companies’ performance – pollution, leaks and supply interruptions – got a mention as items in need of improvement. The plan is merely to reduce regulatory penalties by 50% in the current period. Haslett’s hope is that, come 2030, Pennon will be closer to earning a few rewards via Ofwat’s incentive mechanism.
The point is that none of this will feel like a case of “shareholders never losing” if you’re unfortunate enough to own Pennon’s shares. Anybody who bought at virtually any point in the past five years has lost a packet. The price was £13.30 in July 2021. Now it is 361p, down 20% on Wednesday with the rights issue to a 22-year low.
For good measure, the dividend is being cut by 30% on a per-share basis to reflect the new equity issuance. Reality has arrived at Pennon. Burnham might reflect that private investors can have their uses: the capital has to come from somewhere and shareholders can sometimes be forced to swallow some financial medicine.
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One could take the view that those investors deserve something even sourer, such as outright nationalisation. It’s a point of view but, since Burnham has pretty much ruled it out for water as a blanket policy (we wait to see what happens at Thames), the argument feels academic at this point.
If Burnham, despite it all, is going to live with a privatised system, he could do everybody a favour at this point by hurrying up and deciding what he means by his “public control” overlay. Keir Starmer’s water bill, based on Sir Jon Cunliffe’s 2025 review of the water sector and including a stronger regulator, would have been published about now. Instead, we’ll get Burnham’s “strengthened” version some time next spring, according to the Westminster whisper.
Given that it could take 12 months to become law, that will be four years for the Labour government to reform the water sector. That is shockingly slow. As Pennon’s fund-raising demonstrates, even the current rickety system is moving faster.
