Unloved but worth holding

Alex Brummer

Consumers may be irritated by the performance of water utilities, says Alex Brummer, but their solidity and growth potential make them sound investments

Under the draft business plans submitted by the industry, aggregate bills for consumers would likely rise by 1.6 per cent, after inflation, for most of the companies. Thames and Southern, with their need to cure leakages, are asking for more. The quoted water companies are projecting more modest rises.

Ofwat is certain to tighten up the plans. But it will be anxious not to decrease the scope for more capital investment. So there will be a focus on lower unit costs, more efficiency and reducing the cost of capital. It is even possible for those companies with lesser capital expenditure needs that there could even be real price cuts ahead. The review will also have to take note of the green agenda demanded in Whitehall and by the consumer too.

Ofwat has been told by Government that it must reduce its greenhouse emissions, which are estimated at around one per cent of the national total. In particular, this will have to be taken into account when setting leakage targets.

The industry is also under pressure to encourage greater water conservation. This is particularly true in the south east of England, which despite two drenching summers, is still classified by the OECD as being in the same bracket as the Sahara. As far as the companies are concerned, metering is not necessarily to the advantage of their bottom line. Evidence suggests that when people control their own water consumption through metering, they are much more cautious about wasting a valuable commodity.

Clearly, direct investment in UK water companies faces a variety of regulatory risks. But as unpopular as price increases are, Ofwat does recognise the need for balance between the green and leakage agenda and the requirement that companies make reasonable returns.

Water investment has been deeply unfashionable in Britain because of the consumer backlash from the drought years. Yet a time when banks and consumer companies are being rocked by the crunch and economic recession, water – an essential not easily cut back on – looks like a relatively safe and reliable investment at home. Internationally, it could even become a growth industry. As a saver, the best way to access the upside could be through infrastructure funds with a decent water weighting. But it may be a long haul.

Alex Brummer is City editor of the Daily Mail