The privatised British water and sewerage companies paid out £1.4bn as dividends in 2022. This is up from £540mn in the previous year.
Based on an analysis of 10 major water and sewerage companies, the figures are higher than the headline dividends for the year ending March 2022. The reason is that several companies have complex corporate structures, with many subsidiaries. Ofwat regulates only the operating company.
If dividends are maintained, there is less money available from the customer’s bill for investments in critical infrastructure like sewage treatment or water mains.
The complex arrangements allow providers to differentiate between internal dividends – payments made between holding companies within the group – and external dividends paid to pension, sovereign wealth, and private equity funds that own the entire water business, including the holding company.
Ofwat’s concern over transparency is partly due to the byzantine structure of the sector. Ofwat is updating license conditions to be able to block dividends as early as April 2025, if a company appears financially vulnerable. The board will be required to consider customer and environmental targets when deciding on payments.Ofwat, which regulates water companies, says that it does not distinguish between internal dividends and dividends paid to shareholders.
David Hall, a visiting professor at Greenwich University said that monopolies are “called dividends because it is dividends”.
Dividends are paid by businesses and households through their bills. . . ] Benefit group companies owned entirely by ultimate shareholders.”
Thames Water, the world’s largest water monopoly paid £37mn in “internal” dividends to its parent corporation during the year ending March 31, 2022. The increase was from £33mn the previous year, despite announcing “external shareholder” dividends had not been paid for five years.
The company’s owners, including China Investment Corporation, stated that all dividends will be used to service debt obligations and group-related costs of other Kemble Water companies [which include Thames Water].
Ofwat reports that the companies were sold in 1980 with zero debt.
The 10 largest companies, excluding Thames Tideway, have not increased their total expenditure on waste water infrastructure. The average annual investment in wastewater was £295mn during the 1990s. It increased to £297mn between 2010 and 2020.
Costs — including interest payments– are on the rise, increasing pressure on companies’ finances just as they are being asked to increase investment in infrastructure.
Professor of economic policy Sir Dieter Helm at Oxford University says it is difficult to track where money from water bills goes.
He says that “these complex financial structures have not been transparent or clear, and they haven’t brought any obvious benefits to the customers.” “Water companies have run rings around Ofwat since years.”
Ofwat stated that its new powers will allow it to take action against companies that pay dividends which do not reflect their performance. Anglian Water, however, said that it “fundamentally disagrees” with the notion that transactions are opaque. Thames Water stated that it has a “strict, performance-linked policy” which is monitored by Ofwat.
Anglian said that the “idea money is diverted away from frontline infrastructure is simply false”. The regulator monitors and specifies what level of infrastructure is developed.
Dividends are high by any definition. Anglian Water’s accounts show that it proposed a PS169mn to its immediate parent last year. However, it states only PS91.8mn to go to ultimate shareholders.
Anglian stated that this was the first dividend payment since 2017. The accounts, however, show that £2.5bn in “internal dividends” were paid over the last five years.
Anglian Water is owned by Abu Dhabi Investment Authority and a number of pension funds. The company said that the term “dividend” in relation to inter-company payments was misleading, as the money “reported between 2017 and 2020 as dividends was used to repay debt and interest on debt, head office expenses and group pension deficit cost”.
It said: “We would like to make it clear that the only dividend payment shareholders received from 2017 to 2022 was the payment £91.8mn (2022).” “Our corporate structure allows us to finance significant levels of investment with the lowest rates possible, resulting in lower bills for our customers.”
Dividends can be delayed until financial results have been released. This allows companies to publish zero dividends in their annual reports and accounting. Dividend payments can also be described as being “cash-neutral” because the funds are returned immediately to the company by the group as payment of debts.
Northumbrian Water (majority owned by CK Infrastructure Holdings) declared £272.6mn as dividends for the year ending March 2022. This included an interim dividend worth £58.2mn and a final payout of £55.4mn. The final dividend has been approved after the balance-sheet date, and will appear as a dividend only in the 2023 financial statement.
According to the accounts, the £272.6mn includes £159mn in a special dividend. The company stated that this allowed a group company pay off a debt.
Northumbrian stated that the non-appointed dividend had nothing to do with the regulated water business and sewage treatment. It came from an entity which provides industrial and fishing water treatment.
Nick Hood, senior advisor at Opus Restructuring said that it was “difficult” to see the purpose of such opaque corporate structures, except perhaps to create a lack in transparency, to facilitate tax minimisation, and to make it unreasonably difficult to track where money diverted away from front-line water infrastructure investments is going.
Thames Water, however, said that it “complies with all tax laws at all times in both the letter and the spirit of the law”. Thames also has a strict, performance-linked, dividend policy, which is monitored by Ofwat.
Anglian Water stated that “Anglian Water Services Ltd is the regulated company and is registered to pay tax in the UK. We pay all our taxes in full”. The company added that “our annual accounts detail our financial structure, payment policies and payments”. Northumbrian has declined to comment on Hall and Helm’s comments and the tax allegations.
Water UK, a trade association, stated: “All water firms report financial information including dividend payments in accordance with international accounting standards.”
When dividend payments are retained by a regulated company, the money is used to cover a variety of corporate overheads. External investors receive a smaller or no dividend.