Water privateers: ‘Doing what’s in the best interests of shareholders’

Who do you call if your pipes start leaking? Is it (a) a decent plumber or (b) an equity capitalist? If the leaks are on a national scale, then currently the choice that has been made for us all is (b).

Ever since the old Water Board was flushed away in the 1980s, to be replaced by a constellation of regional private monopolies, the provision of water and sewerage services, hitherto considered self-evidently a public health matter for which the state should take responsibility, has been seen primarily as an opportunity to rip off the public with extortionate utility bills whilst letting the existing infrastructure fall to rack and ruin.

Now that giant water company Pennon, out on an acquisition spree after selling off the waste part of its business, is prowling around Southern Water, its CEO Susan Davy says:

“We are looking for growth opportunities in the UK water sector,” adding: “We are going to do what’s in the best interests of shareholders,” failing to mention how it might serve the interests of the public. It seems that Pennon has been exploiting a lot of “growth opportunities” already, enjoying a pre-Covid turnover of £1.39bn. (Speculation mounts that Pennon will make bid for Southern Water by William Telford, Plymouth Live, 16 November 2020)

The likely object of a buy-out by Pennon is Southern Water, responsible for providing water services to 2.6 million customers and wastewater services to more than 4.7 million customers. Southern Water was bought by the Greensands Holding consortium from the Royal Bank of Scotland in 2007 for £4.2bn, with the biggest share staked by financial services giants JP Morgan and UBS.

Financially, Southern Water went on to do very well by its directors and shareholders, paying out £190m over 2016 and 2017 in dividends to Greensands. In terms of fixing leaky pipes and sorting out the sewers, however, Southern Water has been an ongoing disaster, prompting water regulator Ofwat to administer a slap on the wrist, levying fines on the company.

Successive CEOs have promised to clean up the company’s act, then reneged on their undertakings. An article in the Times back in 2019 provided a potted history of Southern Water’s rake’s progress:

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Timeline

Oct 2007: Greensands consortium led by JP Morgan acquires Southern Water for £1.3bn, plus £2.8bn in debt.

Feb 2008: Ofwat confirms £20.3m fine for Southern Water over deliberately misreporting information prior to October 2005 and poor customer services.

Feb 2011: Matthew Wright appointed chief executive of Southern Water.

Aug 2013: Southern fined £200,000 after untreated sewage discharged into the sea off Margate between January and June 2011.

Jan 2014: Court of appeal throws out Southern appeal against the £200,000 fine; judge cites the company’s “persistent record of criminality and offending”.

Dec 2016: Southern fined £2m after “catastrophic” sewage leaks in Kent in May and June 2012 due to failings at Margate pumping station.

Jan 2017: Ian McAulay takes over as chief executive. Mr Wright moves to Dong Energy.

Dec 2018: Pensions regulator orders Southern Water to put more money into its pension scheme and criticises “imbalance” between payouts to investors and pensioners.

Jan 2019: Ofwat says Southern Water’s business plan for 2020-25 “falls significantly short of high quality and the material interventions required to protect customers” and requires “significant scrutiny”.

June 2019: Ofwat announces proposed £126m penalty package over sewage treatment failings and cover-up; Environment Agency says it expects to commence court proceedings “soon”.

(Southern Water’s culture of neglect leaves reputation in a sewer by Emily Gosden, The Times, 26 June 2019)

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But in the rarefied atmosphere of the planet inhabited by the financial services overlords, the stench of the sewer seldom penetrates, money by its nature remaining tasteless and odourless.

There is a complete disconnect between the world of vast fortunes being won on the back of a clever speculative intervention, a raid on a pension fund or a swift bout of acquisitions, and the everyday lived reality of underinvestment, crumbling infrastructure and rising bills dropping through workers’ letterboxes.

And when it looks as if the gross greed and incompetence threatens to get too egregious to be ignored, it’s out with the old CEO, in with the new, issuing heartfelt promises to do better next time – promises that vanish like the morning dew as soon as the next lucrative opportunity to cut costs and pump up the dividends presents itself.

There used to be a rule preventing water companies from raising cash on the bond markets. Ten years ago Southern Water, in company with some others, set up a number of subsidiary companies in the Cayman islands, a notorious haven for tax dodgers. The bond market rule changed years ago, but for some reason Southern still hung onto its subsidiaries, defying Ofwat’s urging of water companies three years ago to close them down in order to rebuild public trust.

Southern, which paid no corporation tax in the year to March 2020, had promised to close them by the end of 2018. Yet in October 2020 it issued a statement claiming it was “in the process” of doing so. Don’t hold your breath. (Three UK water companies hang on to tax haven subsidiaries by Gill Plimmer, the Financial Times, 19 October 2020)