Memorandum by Kelda Group plc (DWB 15)
May Kelda Group offer its support for the Sub-Committee
initiative in setting up a pre-legislative inquiry into the draft
Water Bill, and moreover welcomes the opportunity to make input
in that process.
Kelda's basic contention is that there is a
need for a Strategic Review of the UK water industry aimed at
achieving more balanced and cohesive relations with all financial
stakeholders, customers, regulators and the community.
The water industry is now facing the need to
respond to strong external pressures particularly:
The need to raise large sums of capital
at low cost.
The certainty that equity markets
will not provide additional funds for water or waste water investment.
The need to generate efficiencies
through competitive forces in a way that does not put at risk
the safety of drinking water supplies.
The fundamental issue to address is long-term
funding of investment and the need to find a structure going forward
which provides the maximum possible capital at the lowest cost.
On current plans, the water industry needs to finance investment
of £16 billion over the next five years. This is in a period
where quality and environmental obligations are rightly increasing
but average bills have more recently declined by 12 per cent in
The regulatory price cut has dented investor
and lender confidence in the industry. Although equity prices
have to an extent recovered, having fallen by more than 50 per
cent early last year, providers of private capital upon whom the
industry will rely for all future investment are still reluctant
to lend money to the industry. In the meantime the major credit
rating agencies have downgraded their assessment of the industry.
This investment issue and consequent pressure
has resulted in a number of companies making proposals for re-structuring.
Although Kelda's first proposals for restructuring
its water business into separate asset and operating companies
did not meet regulatory approval, they helped increase the focus
on longer term issues in the water industry, particularly the
need to raise the significant capital sums required at the lowest
cost of borrowing. The recently announced "Not for Profit"
ownership structure in Welsh Water, Glas Cymru, is similar to
the proposals made by Kelda.
Further evidence of the need to change was given
by Thames, who opted to sell itself to a major overseas company.
Such companies have the benefits, outside the UK, of a more stable
long-term commercial environment, are allowed more attractive
rates of return, can more easily finance investment and have the
financial strength to take a longer term strategic view.
There is increasing recognition that the combination
of historic privatisation structures, inappropriate "one
size fits all" models of competition and a punitive interventionist
regulatory approach does not, in the long term, best serve the
interests of the consumer, the industry or the wider environment
and the community. This is particularly true where long-term capital
expenditure is necessary. Recent events in other industries have
helped reinforce this general point. There is now more regulatory
sensitivity to and acceptance of the dynamics of the linkage between
capital markets and equity markets in the UK.
The water industry in general and Kelda in particular
has made substantial progress on many fronts, such as cost reductions,
water quality and service delivery improvements. We look forward
to a greater recognition of these achievements, and believe now
is the time for an overall review of all options open to the industry,
with a new regulator, and opportunity for a more balanced regulatory
We would wish to explore with the Committee
two of the above issues in particular, namely the need for a Strategic
Review and the means by which the lowest cost of capital can be
secured for the industry.
It is against this backdrop that we reiterate
our support for the Sub-Committee initiative, and if invited,
would be delighted to make an oral submission to the process through
our Executive Chairman, John Napier.