How to attract investment
The UK water and wastewater industry is struggling to attract private investors because of concerns over security of supply and the need for increasingly efficient wastewater treatment. Phil Bolton of Watson-Marlow reports.
As a result of the large amount of capital investment in each year compared with annual turnover since privatisation, the water industry in England and Wales has had, and continues to have, a negative cash flow before financing.
The UK water and wastewater industry faces particular challenges in financing its long-term investment programmes. Massive investment levels (some £50B between 1990 and 2005) show no sign of slowing down and are indeed likely to increase once the requirements of the Water Framework Directive start to come on-stream. Water companies remain cash hungry due to the continued need to fund water quality and other environmental capital expenditure programmes. Concerns over security of supply and the need for increasingly efficient wastewater treatment to counteract this problem may be preventing private investors from choosing to spend within the water sector.
On the flipside, fears over water shortages appear to be pushing up water prices worldwide. From that point of view, investing in this infrastructure could be a smart move - but only if supplies are able to meet demands in order to reap the revenue.
Those who are willing to invest in the water sector all agree that more efficient wastewater treatment is vital to the success of the industry. If fresh supplies can no longer be relied upon, recycling will become ever more necessary.
Australia, which is in the mist of a prolonged drought, appears to be attracting investors without problem, probably due to the measures being taken to ensure water supplies are still available. This includes installing extra desalination plants and also recycling water.
There are a number of key factors that underpin the growing interest in the water sector. One of these is a significant demand over supply for water, combined with a high demand for investment in infrastructure.
While the price of water is going up universally, the result of this is that there is a lot of money in the sector being invested in infrastructure and new technology. Also, it seems that water stocks are being re-valued as the sector is discovered.
Lastly, there is a lot of mergers and acquisition activity due to the globalisation of the industry, which creates valuable opportunities for investors to sell out of financially successful companies.
In the UK, the need to modernise Victorian networks of water supply and sewage disposal, environmental and public health legislation, potential and growing climate change impacts and growing pressure on water resources, particularly in the South-east, all mean investment is expected to continue apace.
In recent years, the financial structure of the water and wastewater industries has changed significantly. And gearing (debt as a proportion of total debt and equity) has risen from 49% in 2001 to 61% in 2005 in part related to companies taking advantage of low interest rates. This trend in gearing since privatisation has been a steady increase from nearly zero at privatisation - the European Investment Bank is a significant provider of loans to the water industry in England and Wales.
Continued high levels of investment will undoubtedly increase borrowing and pressure on balance sheets that could become costly to address - which ultimately will feed through into customers' bills.
Those in the industry need to think more long term about efficient wastewater treatment and maintaining resources. Flexibility is paramount in this changing industry, and equipment that is able to cope with constantly altering requirements is vital.
Watson-Marlow says its Bredel pumps are well placed to keep on top of these alterations with a variety of dosing applications achievable through the changing of a tube. These pumps also promote long-term cost efficiency, the company says, as one pump is able to meet the requirements that often necessitate the installation of multiple appliances. This future proofing of equipment must become an integral consideration if private investment is to continue to the maximum benefit of the industry and consumers alike.
Phil Bolton is a water industry specialist from Watson-Marlow.
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