By Peter Spring
I am sitting in the front room of my house on South Road on a warm mid- summer morning. Normally I would hear the zoom, zoom of boy racers using the straight stretch outside the almshouses as Faversham’s version of the Le Mans racetrack’s Mulsanne Straight. (20mph speed limit anyone?)
Instead, I hear the joyful twittering of birds and the gentle burble of a waterfall. Have I passed on to a better place?
No, the restoration of the sounds of nature is due to the combined efforts of South East Water which supplies the road’s drinking water and Southern Water which has a sewer close to my house. The necessity for deep excavation has resulted in the road being blocked, eliminating the roar of motor vehicles, while drinking water flows from a broken freshwater pipe near the surface into the abyss of a holed sewer pipe five meters below.
HOW DID THESE SYLVAN SOUNDS COME ABOUT?
On a Monday morning, without warning, South Road was blocked off between Stone Street and Plantation [Street]. Also, a digger was pulling up the road surface directly in front of my house. As no one had given any warning at all I asked the man, tasked with standing beside the hole duty, what was up. Apparently, a camera had been placed in the sewer at the South Road/Stone Street junction and pushed several hundred meters up to my house, which had found the Victorian brick-lined sewer had collapsed directly outside. As the sewer is five meters down it would take a couple of weeks to excavate, place revetting around the hole, and repair the brickwork.
Many weeks later the digger started to remove the road surface to the south of the existing hole (not dug in the right place?), and contiguous to it. Again, no warning.
And now our troubles began in earnest. At about 4pm I turned on the kitchen tap and no water flowed. Southern Water, in excavating its new hole, had sheared through the South East Water pipeline, resulting in water merrily flowing directly from the freshwater pipe into the sewer five meters below.
Southern Water could not do anything as, although it had broken the pipeline, only South East Water could repair it.
Next day in the morning nothing had happened. The “ticket” passed from Southern to South East had gone AWOL.
After increasingly agitated calls, as my 96 year old mother lived with us, I was told that another “ticket” had been issued and South East Water would come soon. I was also told a “liaison officer” would visit but none ever came (and no one throughout the whole month plus time ever proactively explained what was happening). A young contractor took pity and brought us some bottled water.
Twenty four hours after being cut off freshwater was restored. The excavation and repair of the sewer took weeks further.
The house was duly billed £900 by South East Water instead of the usual £300. My wife phoned up and explained the situation and was told the money would not be direct
debited out of our account. But it was. More phone calls and it was at least refunded.
The takeaway from all this is that Southern Water and South East Water don’t efficiently talk to each other and don’t talk to customers at all. Also, repairs will take much longer than expected and carry considerable risk.
Is this a one-off in Faversham? The answer is almost certainly no. My house was probably built about 1890 and has rusted cast iron freshwater pipes and cracking brick sewers.
Several holes have since been dug in South Road and more seem likely across Victorian and older Faversham.
SO WHO OWNS SOUTHERN WATER AND SOUTH EAST WATER?
Southern Water is owned by a group of investors through Greensands Holdings Limited (GSH)
Macquarie Asset Management 62%
JP Morgan Asset Management 15%
UBS Asset Management 8% Hermes Infrastructure Funds 8%
Whitehelm Capital 8%
South East Water is owned by a group of investors through HDF (UK) Holdings Ltd
Utilities of Australia 50%
NatWest Pension Trustee 25%
three entities of the Desjardins cooperative financial group
- Régime de rentes du Mouvement Desjardins 12.5%
- Desjardins Financial Security Life Assurance Company 6.25%
- Certas Home and Auto Insurance Company 6.25%
Clearly, both companies are majority owned by foreign entities. Also, the name Macquarie should strike fear into any utility user.
WATER—AN ABJECT LESSON OF PRIVATISATION AND REGULATORY FAILURE?
In July Thames Water became the first water company put in a “turnaround oversight regime” by water regulator Ofwat which could result in restructuring or renationalisation.
Thames had over £15bn debt and only sufficient funds to trade until June 2025. It was majority owned by Macquarie from 2006 (Labour government) to 2017 when it doubled debt to £11bn. Macquarie bought a majority stake in Southern Water in 2021. Southern Water, also on Ofwat’s watch list of financially at- risk companies, is seen as the water company most likely to follow Thames into special measures. In October it said it needed to raise
£4.5bn over the next five years. Late in October Ofwat revealed that Southern wants to raise annual bills from £420 to £772 by 2029. (Southern has also asked customers to apply water-saving measures and proposes importing bottled Norwegian water.)
South East Water is also on Ofwat’s watch list. In July South East Water said it needed a cash injection from investors. “If it is not possible to raise the additional liquidity, the group and therefore company would not have sufficient liquidity for the going concern period.” South East Water has been apologising profusely to the disgusted of Tunbridge Wells where the mains have burst three times. (if mains have to be burst Tunbridge Wells is probably not the best place. This bluest of seats is now yellow.)
How did we get into this position? When the water companies were privatised in 1991 it was recognised that significant investment was required. They were listed without any debt on the (naïve) assumption that the much-needed investment would be funded by a combination of revenue, new equity and modest debt. Instead, the regulator OFWAT and the government of the day (Conservative and Labour) have sat on their hands while the inherent justification of privatisation, such as it was, has been ignored and supposedly safe cash generators have been turned into debt- ridden nightmares.
Water companies have proved singularly vulnerable to financial engineering greatly facilitated by two factors:
Firstly, debt financing is cheaper (but riskier) than equity as the former is paid out of taxed but the latter out of untaxed income. Thus, replacing equity with debt is justified on the grounds of balance sheet “efficiency” as lowering the overall cost of capital. (Very convenient when replaced equity is paid out as dividends (that is not used to fund investment) and fat bonuses are paid to the financial engineers.)
Secondly, if all the quoted shareholder equity is bought out and the company falls under control of private equity then advantage can be taken by the new owners of “carried interest” (profits paid to the private equity groups’ managers as performance fees) which mean that private equity owners are taxed on carried forward profits at lower capital gains rates (24%) rather than higher income tax rates (45%). (Again, very convenient for the private equity purchasers of company but resulting in opaqueness as there are no inconvenient shareholders asking questions and the interests of consumers, employees and the environment can be passed over.)
The problem is that this is all in the past, the useless regulator OFWAT and governments having allowed it to happen. Water companies are borrowed up to the gills, have little or no money to invest and cannot borrow much more (several are either already effectively bust or close to it). Their assets have been “sweated” to exhaustion.) The investment that is manifestly necessary, see Faversham, in both replacing existing Victorian infrastructure and building new, as the town expands, can only come from raising prices or owner cash injections.
It is, however, all very well OFWAT and ministers bleating that water price increases must be restricted in the next 2025-30 regulatory period following the 2024 price review.
The fact is, however, that the largely foreign owners of English water companies are unlikely to provide more money as the risk is so high and the effective return so low.
Financial engineers and private equity groups only do what they can get away with. It is the regulator and governments who should really be held to account and they have to be honest with the public—they cannot recover the moneys that have already been paid out to investors by water companies, rather than be used to fund investment, as lacking either the means or the will to do so.
Sadly, OFWAT and ministers need to come clean explain that we will face higher water prices (largely due to their incompetence) or places like Faversham will see many more incidents like the one which resulted in weeks of disruption outside my house as decrepit systems are patched up rather than rebuilt.
Or they can let many of the water companies go bust, wipe out investors, and renationalise them (which might be good as private investors would get the message that the point of privatisation was that financial risk would be transferred to those who chose to invest and not remain with taxpayers). The result, however, will still be that, as the result of regulatory and ministerial failure, consumers still eventually paid higher prices.
Editor’s note: Since writing this, Southern Water is being refinanced by hedge (vulture) funds who will inevitably hold consumers to ransom.
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