Public water services in England and Wales are provided by private sector companies, each of which is required to meet their customers’ needs and statutory obligations efficiently, within price limits set by the regulator, Ofwat.
They also have to ensure that they maintain their investors’ confidence, by delivering a fair return on the investments made. They do this by paying interest and dividends from their profits.
Getting this balance right between performance and returns allows them to access funds at competitive rates. The cost of borrowing directly affects customers’ bills, and it is in all parties’ interests to keep it as low as can be achieved.
Within the annual price limit that Ofwat sets for water services, is a declared amount of profit that they judge companies will need to finance all that they do sustainably, whilst keeping bills at levels customers will accept. At the moment, companies are judged to need a return on their assets of around 5%, meaning that for every £100 that their investors put in, they should expect to get approximately £105 back.
By investment standards, the return is reasonable but not high. The stringent regulation of the water sector, complemented by the record of achievements by the companies, does though mean that, when compared to an uncertain investment climate around the world, it is currently low-risk. With many billions of pounds being borrowed by water companies each year – just like a mortgage – the bondholders, banks, pension funds and wider investors all expect to see the collective sector keep the risk low, and water companies give them a fair return on their money.
Profits and investment in the water industry
How the industry is investing in services