Ofwat chief defends debt finance declaring over-borrowing is on shareholders to sort out

Ofwat chief executive, David Black, has defended debt finance in water, and highlighted the need for more borrowing to pay for further investment in the sector.

In a blog, Black argued debt was expected at privatisation to fund investment and that the industry has indeed invested £190m of capex since then – “about double that of the period before”. The investment is evident in the increase in industry asset value from £9bn to £85bn, “while the debt raised over the same period is about £57bn, and the equity is a touch under £20bn”.

Black wrote: “Put simply, the sector has borrowed to fund new investment. For most companies, debt has been a prudent low-cost source of finance with low interest rates fixed for the long-term. However, some companies borrowed too much, most obviously Thames Water. The risk for this – and for correcting this – belongs to the company and its shareholders.”

He hammered home this message: “The company’s owners and executive are responsible for sorting out the business’ problems and they need to do so with urgency. Thames has reserves of around £4.4bn, so it is a liquid business (excuse the pun), but it needs to develop and execute a turnaround plan.”

Looking ahead, Black said water resources and pollution reduction would require significant investment which would necessitate more borrowing. He urged firms to “learn the lessons of the past and consider the role of equity as well as debt, to make sure they are resilient financially. And companies might do well to consider different routes, beyond private investment, including whether funding might be raised publicly through the listed route, or by championing other models, as happened with the Thames Tideway”.

• Moody’s downgraded to B2 from B1 the backed senior secured rating of the £400m medium term notes due 2026, issued by Thames Water (Kemble) Finance. It said the action followed Ofwat’s March modification of the regulatory ring-fencing conditions in water company licences, and increased scrutiny of Thames following the resignation of former chief, Sarah Bentley. The outlook remained negative.