What is a fair return for
investors in the water industry? The recent announcement that water bills are
going up again at above inflation rates for many water companies, brings into
stark relief what is a reasonable rate of return for investors?
This is no doubt that
massive investment will continue to be needed in the water industry and that if
water companies are to continue to invest they need to be rewarded. But is the
balance right between investors and customers? Perhaps the best way to judge
this is whether the water companies are having difficulty in raising funds or
attracting investors.
The water industry offers
some unique benefits, it is inherently an extremely low risk business with no
chance of losing its customers. Each water company is still a monopoly. The
probability of customers in say the London area ceasing to want water is zero.
In fact it is quite the opposite, demand is steadily growing driven by
population growth and changing lifestyles. They are not many businesses that
have guaranteed sales.
The water industry is very predictable. With the
Ofwat regulatory regime prices and incomes are fixed for 5 year periods totally
independent of what might be happening in the wider economy. Secondly the industry
is driven by legislation and this is visible many years ahead. So water offers
a very low risk investment with predictable and steady income. Its not
surprising that there is such demand from pension funds and infrastructure
investment companies to invest in the sector.
Every time a water company ownership changes the previous owners walk away with a windfall, just look at Thames and the money RWE made from their investment. With the recent divestment by Veolia Central, there were a large number of potential bidders, This does suggest that returns on investment may still be too high.
