Writing in the Telegraph newspaper yesterday, Ofwat chairman Jonson Cox said he would “lift the veil” on UK water companies’ “practices that do not stand the test of public interest” and said the industry should improve its standards or face tougher regulation.
This comes as a warning shot across the bows given that Ofwat’s next regulatory price review – which includes the ability to limit the amount water companies can charge their customers over a five-year period – will take place next year.
Cox said water companies were failing to comply with the UK Corporate Governance Code, saying he was “yet to find a company that fully complies or satisfactorily explains why not”.
The row follows prior stand-offs between regulator and regulated, including when Ofwat last year proposed to move activities accounting for up to 40 percent of water companies’ total revenues outside of the established price control framework.
Although Cox did not identify specific targets, the water sector has a very high proportion of private sector participants, with the industry having attracted a reported £100 billion (€117 billion; $156 billion) in institutional capital over the last 20 years.
In the wake of Cox’s comments, a series of newspaper articles yesterday and today drew attention to the absence of any corporation tax paid by Thames Water in the year to the end of March 2013. Australia’s Macquarie bought Thames Water in 2006, and various other infrastructure investors have acquired a stake in the business since then.
A Thames Water spokesperson reiterated a point previously made when the company was attacked over its tax affairs last year – namely, that it was deferring rather than avoiding tax as it went about investing record amounts of capital in its infrastructure; and that this was entirely legal.
Despite the furore around non-payment/deferral of tax, it is thought that Cox’s main target may have been the use of shareholder loans to reduce tax payments.
The fresh row comes amid Severn Trent’s rejection of a third takeover proposal from a consortium of investors comprising Canada’s Borealis, the Kuwait Investment Office and the UK’s Universities Superannuation Scheme.
Severn Trent’s bullishness in dismissing the consortium’s approaches as under-valuations may indicate that it feels it has little to fear from next year’s pricing review, despite the heated words.