Select Committee on Environment, Transport and Regional Affairs Memoranda



  The following underlying drivers are leading companies to make proposals for separating the ownership of assets from operations:

  Current ownership is in publicly quoted and shareholder controlled companies. There is a need for continued high rates of capital expenditure but at the same time equity markets continue to take a negative view of the industry. When Kelda developed its proposals in the summer there had been a fall in the share price of water companies of over 40 per cent in the previous calendar year. There has been a recent recovery but this is clearly driven by speculative factors such as the continuing moves for changes in ownership and takeover bids, such as that by RWE for Thames Water. Shareholder pressure is forcing change in the sector. Current constraints on large-scale water company or multi utility mergers could, if restructuring proposals are not allowed, bias eventual ownership to large strategic, and most likely overseas (as demonstrated by the RWE bid for Thames), players who have the financial strength to accept lower returns and borrow money in cheaper overseas capital markets.

  A change of ownership brings into focus the essential nature of the water business. The water industry has many unique characteristics compared with other utilities:

    —  on the drinking water side it is in the food industry and has to be safe and continuously available

    —  on the human waste disposal side it is in the health business

    —  in the long run it has major environmental impacts

    —  services have to be provided on a regional basis.

  Potential changes of ownership awaken realisation of these factors and we believe they will become an increasing factor where consumers are not just customers but they also have concerns about local ownership, and the environment.

  Water privatisation and the legitimate payment of dividends to reward shareholder investment is subject to continuing criticism. Separation and, in particular, the one hundred per cent funding of assets through debt finance, provides an alternative basis of dealing with current issues of shareholder value in a broader context of customer and community. Customer, regulator and company interests can become aligned through proposals such as those previously made by Kelda, and as developed by Glas Cymru, thereby removing conflict for the benefit of all.

  Capital enhancement programmes have been debt financed, with no new injections of equity, since privatisation. A survey carried out by SRU[20] on behalf of Yorkshire Water, as part of the 1999 Periodic Review, provided evidence that there is little scope for raising new equity to finance regulated investment. Regulated businesses are being forced to consider new approaches to obtaining debt finance more cheaply following the 1999 Periodic Review. This is brought into focus by the recent experience of North West Water whose recent bond issue cost 7.3 per cent, which is higher than has been allowed for in setting prices and follows a trend of recent increases in bond yield.

20   SRU research to gain an understanding of City expectations and requirements presented to Yorkshire Water in April 1998. Back

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