Here’s the short piece of good news from regulator Ofwat’s annual assessment of the performance of the English and Welsh water companies: overall leakage stands at its lowest level since privatisation. That, unfortunately, was about it – and, note, progress on leaks came with the important qualification that there is a very long way to go to meet 2050 targets. The rest of the annual review was as bleak as any in recent years, especially on the most troubled issue of all – pollution.
Six of the 10 major firms found themselves on the regulator’s naughty step – the ones labelled laggards in terms of operational performance. They are Northumbrian Water, Southern Water, South West Water, Thames Water, Welsh Water and Yorkshire Water. Only Severn Trent of the big water and wastewater beasts got a “leading” rating and it was joined by water-only operators South Staffs and Bristol. The skew towards underperformance was marked and depressing.
“For some companies poor performance has become the norm. This cannot go on,” said David Black, chief executive of much-criticised Ofwat. What, though, is to stop it going on? If the regulatory regime itself is to regain credibility, financial penalties for poor operational performance surely have to be greater than the £120m dished out last year (Southern and Thames, the stand-out dogs of the sector, copped the most).
Two big events are coming down the track. One is an enforcement case examining how companies have complied with rules on wastewater treatment. Have claimed capacities been maintained, for instance? That investigation has already been running for a year and Black said in June that “from what we have seen so far, the scale of the issue here is shocking”.
Ofwat is tight-lipped about when it will conclude its work, but the stench of a possible scandal is unmistakable. If it and the Environment Agency, which is also investigating and has criminal prosecution powers, have the evidence, they have to go to the maximum on this one. The biggest probe since privatisation is a test of regulatory authority as much as anything.
The other challenge for Ofwat is the technical one of changing water companies’ licences. The most critical reform would give the regulator powers to block dividends until a company has put its operational house in order. A pointed example has just been seen: Northumbrian paid a dividend equivalent to 13% of its regulatory capital last year even as it sank into Ofwat’s “lagging” category.
Some companies and some shareholders are said to be resisting the licence reforms, which Ofwat is due to propose formally in the new year. There is already talk of appeals to the Competition and Markets Authority, which hasn’t always backed Ofwat in the past. The water regulator needs to be seen to win and to make its licence changes stick. Public patience is wearing thin. Annual exercises in naming and shaming are no substitute for the tougher regulation we should have had for 30 years.
Packaged for survival
Another day, another company giving us a glimpse into how bad the crisis in the pensions industry could have become after Kwasi Kwarteng’s mini-budget caused an explosion in the gilts market.
DS Smith, the FTSE 100 packaging firm, said it made funding support of “up to £100m” – not small change, in other words – available to its main defined benefit scheme. This included a cash advance “in anticipation of potential margin calls and latterly a liquidity facility”. As at other companies, the margins calls will have been to cover derivatives associated with liability driven investment strategies.
Within a couple of days, of course, the Bank of England intervened with an emergency programme to buy gilts. Yields subsided and the forced-selling pressure evaporated. In its case, says DS Smith, the cash advance to its pension scheme was repaid within days and the liquidity facility was undrawn at the close of its end-of-October accounting period. All looks calm now.
So, yes, it was fair to relegate the pensions saga to one paragraph on page nine of half-year numbers that otherwise related a happy story of a company successfully navigating a high-inflation environment. DS Smith’s revenues rose 28% to £4.3bn and pre-tax profit climbed 80% to £315m. The half-year dividend was improved by a quarter, a rate few Footsie companies will match. It would not be at that level if Kwarteng had not been stopped.