Shares in UK water utility Severn Trent LON:SVT traded down 3% in the last five days as the rhetoric rose to fever pitch in national press over the state of the country’s water infrastructure. Seven Trent stock had been relatively steady since October, when investors breathed a sigh of relief, no doubt hoping that the country was putting the water saga behind it.
Much of the problem for Severn Trent is coming from the troubles at adjacent Thames Water. The British public is already hyper-aware that the quality of water in rivers and on sea coasts has deteriorated due to a lack of investment in infrastructure by water companies (NHS hospital admissions lined to water-borne diseases are up by nearly 60% since 2010).
The UK government is currently battling to persuade investors to put more money into Thames Water and its customers that they will need to shoulder a rise in water bills.
Regulators are already zeroed in on Thames Water’s environmental record, and investors do not seem ready to write yet more cheques to back the company. The government is desperate not to have to nationalise Thames Water ahead of a looming general election.
Thames Water is asking for permission to raise bills by 56% in the region it supplies in England, a staggering £262 per household.
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UK water utilities approaching crisis point
The state of British waterways and the lack of investment in the country’s infrastructure is becoming a big stick opposition parties can beat the government with, and is likely to become a discussion point in the upcoming election campaign. The issue was again highlighted when the Oxford-Cambridge boat race on the Thames last weekend was almost cancelled due to dangerous pollution levels in the river water.
Thames Water has asked the government to limit the regulatory fines it could face for sewage pollution, arguing that these will take vital cash out of the business. Two directors, including the company secretary, resigned last month.
Severn Trent and other UK water companies are going to be affected by Thames Water’s issues, as these problems cannot be seen in isolation. Severn Trent is in damage control mode, with £250m earmarked for storm overflows in Worcestershire (a 25 year project, it should be said), plus a further £30m to be spent at sewage treatment works to improve water quality.
Severn Trent said that the aim is to reduce the number of spills into water across Worcestershire, ensuring that by 2040 no overflow will spill more than 10 times in an average year.
Why UK water companies are no longer a safe bet
Investors in UK water companies have been used to the relative security of these companies, with their lack of competition, captive customer bases in the millions, and predictable income streams, regardless of what is happening in the wider UK economy. That may be about to change.
While the water sector was privatised by Margaret Thatcher in the 1980s, it is looking increasingly as if it could be a target for nationalisation. Even communities secretary Michael Gove has criticised Thames Water for prioritising profits over much needed investment in infrastructure. Shadow chancellor Rachel Reeves has so far backed away from talk of nationalising water companies, although Labour has said it would give Ofwat, the water regulator, the power to block management bonuses until the crisis in British water has been resolved.
Water is going to become an election issue before the end of the year, and all UK water companies are going to attract a massive level of scrutiny in 2024. None of this will be good for their bottom lines. For investors being asked to back struggling Thames Water, the sector is starting to look like a busted flush. Shareholders in Severn Trent will be getting nervous too.
