View from City Road: Cleaning up the muddy waters

Months ago BZW Investment Management and the Prudential wrote to Ian Byatt, the water industry regulator, to warn him against imposing a price regime that might unduly harm the interests of water companies and their investors. The idea was to shift the debate away from its normal stamping ground of what a ghastly deal privatisation has been for the consumer into pity-the-poor-investor territory.

Whatever the merits of the argument, it always looked a pretty futile campaign. Investors have done fantastically well out of privatisation, enjoying spectacular growth both in capital and dividends; so have the executives who run the 10 privatised regional water companies. Domestic water users on the whole have not. As the Consumers Association pointed out yesterday, domestic water bills have on average risen by more than 70 per cent over the past five years. Bizarrely, the position is worse for domestic consumers than industrial ones. Bills for industrial use of water have not risen by as much, even though industry is the chief polluter of the water environment.

Those who remember the process of privatisation will know that water companies are allowed these substantial real increases in prices to help them pay for environmental and water quality improvements. Even at the time of privatisation the price caps seemed to err on the generous side, providing few incentives for greater efficiency. As the years passed the suspicion turned into a certainty. Nor is this just because the water companies do not need to spend as much on new investment as they said they did.

In other respects too, the water companies were privatised on outrageously generous terms. Most were sold to investors free of debt; some with substantial 'green dowries'. Average debt gearing for the 10 privatised water and sewage companies is still only about 24 per cent. Mr Byatt believes the companies could comfortably live with twice that. Price controls were set by the Government in a way that assumed the water industry would use its freedom to raise debt in the capital markets; few have felt the compulsion to do so.

Nor has any of them raised new equity for investment in the way most private sector businesses would expect to: these companies can legally force the consumer to carry the can.

Later this month Mr Byatt is due to publish the outcome of his review of price controls. The new ones will be much harsher, but in all probability not as bad as they might have been. Water companies, and their shareholders, should count themselves lucky to escape as lightly as they seem to have done. Few seem likely to use the Monopolies and Mergers Commission as a court of appeal except in circumstances where some companies appear to have been more favourably treated than others.

Mr Byatt has a duty to ensure the companies can finance their legal obligations and that they can fund their core businesses and no doubt he will have honoured this. But the fat cat days are over. Investors can only be grateful that the water industry's licence to print money has lasted as long as it has.