Ofwat’s chief executive David Black has told investors that water companies may need to raise more equity as well as debt in the next price review period from 2025 to finance necessary investment.
Speaking at Moody’s UK water conference, Black also questioned companies apparent resistance to linking executive pay to performance on issues like pollution and leakage given the potential benefits to their public reputations.
Black said aligning corporate behaviour with public expectations of water companies will be a key objective of the next price review.
He said companies had already been encouraged to link executive pay to performance as part of PR19 but “a significant number are failing to do so.”
Licence changes at PR24 will require dividends to be linked to performance and will tighten the regulatory ring-fending around financing.
Black said: “I find it extraordinary that some companies have been slow to recognise the merits of these proposals given the evidence of widespread public concerns.”
“I question whether any further delay will serve company or investor interests,” he added.
For the next price review period, Black said operational performance will only grow in importance for investors as key to determining the returns they earn. He added that for the financially resilient structures the regulator wants to see in the sector, investors should be committed for the long term.
He said investment requirements may necessitate companies to raise more equity as well as debt to cover the needs of AMP8 and said overseas investors may find opportunities through competitive procurement, which would enable companies to finance major infrastructure schemes without burdening customers with high bills.
Furthermore, Black said issues caused by poor data highlighted in the non-household market are “likely to be present in the residential market too”.
He said the water sector’s progress on driving down leakage as well as its commitments to address the use of combined sewer overflows showed “grounds for optimism”.