Richard Khaldi, formerly the senior director of customers and casework at Ofwat, and now a water sector expert at PA Consulting Group, is warning that what he describes as “the days of easy money” in the UK water sector are over.

Commenting on the publication today by water industry regulator Ofwat of its proposed methodology for the forthcoming 2019 Price Review, Richard Khaldi said:

“The days of easy money in the water sector are over. PR19 will be a tough review for companies with a significantly lower cost of capital and a focus on operational outperformance. Ofwat will expect companies to deliver more for their customers, a more resilient network, and affordable bills. In this climate, companies will need real financial and operational strength to meet the demands of both customers and investors.

Meeting investor expectations

Ofwat is planning on delivering a tough price review and will demand that companies deliver better value for money. Ofwat will only reward those water companies who show significant ambition and innovation in serving customers and whose bills are affordable. The subsequent need to focus on operational outperformance will bring significant challenges for water company management teams in meeting and managing the expectations of investors who are used to high returns.

Uncertain times

Ofwat’s indications that PR19 will be tough for water companies means uncertain times ahead. Investors have seen significant returns over the last decade, but a renewed focus on operational outperformance will threaten those returns.

Ofwat’s call for more value-for-money for customers may also mean companies needing cash from equity as well as debt. In the last two years we’ve seen consolidation (Pennon Group acquiring Bournemouth Water) and changes in ownership (Macquarie exiting Thames) within the sector. A tough review will mean more of the same as underperformers struggle and owners reassess their levels of risk and return. “