Business

Five charts that explain why water bills are about to go up

Published

9 months ago

December 16, 2024

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This is a crucial week for the water industry.

Regulator Ofwat will on Thursday give its “final determination” on how much bills will rise over the next five years.

Before then, Britain’s largest company Thames Water hopes to win court approval for a £3bn bridging loan to stop it running out of cash in the spring.

Together they amount to the greatest test of the water system, the only fully privatised network in the world.

To understand how we got here, and what might happen next, it pays to go back to the beginning.

In 1989, 10 state-owned regional water and sewage companies in England and Wales were sold off by Margaret Thatcher’s government, raising £7bn for the Treasury. The companies were sold debt-free but never intended to stay that way.

The rationale was that the private sector could raise the billions required to upgrade the Victorian sewage network, and fund it from customer bills, so the state didn’t have to.

So borrowing was always part of the plan and, as of this year, the companies have accrued £70bn of net debt, at a ratio to equity (gearing) of around 85%.

In water the problem with debt is not the total, but whether the companies can afford to service it, and what they did with the money.

The answer to the first question varies by operator, but water companies have poured billions into infrastructure and other investments. Adjusted for inflation, investment has run at between £4bn and a record £9bn last year, a total of £210bn in today’s prices, spending that has reduced leakage and improved water quality on some measures.

But it has not been enough to meet public expectation of basic services, of sewage control, or to the challenges of climate change and a growing population. To pick one example, the UK has not built a new reservoir since 1992.

At the same time, the companies’ shareholders have extracted dividends of £83bn (as calculated from Ofwat figures by the University of Greenwich and adjusted for inflation).

But like debt, dividends are a deliberate feature of the privatised system. Investors in any industry need to make a return.

Water UK, the companies’ trade body, says that since 2020, when the regulator began paying closer attention to payouts, dividends have averaged 2.7%.

The level of dividends and executive bonuses have become harder to defend with the emergence of the water industry’s dirty secret; sewage outflows.

These occur when the pipes shared by sewage and rainwater become inundated and, as a failsafe, are deliberately discharged into waterways through storm overflows to prevent sewage backing up into homes and businesses.

For decades the full extent of their use was unknown, with industry, regulators and the public in the dark because of the absence of monitoring. That has changed in the last decade, with full monitoring of almost 15,000 overflows in England revealing more than 460,000 sewage outflows in 2023.

Public outrage has pushed the issue up the political agenda, increasing the pressure on companies.

The water industry can point to some success in improving water quality since privatisation, with a reduction in levels of phosphorus and ammonia and 85% of bathing water classified as “good” or “excellent” by the Environment Agency.

But none of those are in rivers, where wild swimming, and the public activism that comes with it, is a recent phenomenon. And as public expectations for water quality rise, so do costs.

The challenge for the industry is that the cost of addressing the mess – whether physical, financial or of their own making – has just got more expensive.

Water was once a haven for long-term investors who enjoyed reliable returns from monopoly providers of an essential resource. For many years, water enjoyed a “halo effect” with cheaper borrowing costs than other industries.

This chart shows yields for water industry bonds, effectively the interest rate on their debt, compared to an index of other UK corporate bonds. While borrowing costs for everyone increased following the global inflation spike in early 2022, water remained cheaper.

In July 2023, after the full scale of the crisis at Thames Water emerged, the lines crossed over and water debt became more expensive. Water now has a premium attached, growing to almost a full percentage point by the end of this year.

And it is not just Thames. Ratings agencies have downgraded several water companies, damaging confidence in the entire sector. All companies face higher costs for borrowing, from the publicly listed Severn Trent, to distressed Thames, trying to secure terms on a £3bn bridging loan at an eye-watering 9.75%.

To meet these rising costs of capital water companies are now arguing that Ofwat should not only let them raise customer bills, but that investors need a greater return to commit money to the sector.

Luke Hickmore, investment director at abrdn, part of the Thames Water creditors’ group, said: “Water companies are facing a significantly higher cost of funding at the same time as seeing a growing need for infrastructure investment to maintain water and sewage systems.

“Investors have placed a risk premium on the entire industry because of uncertainty over whether the regulatory framework can support this increased investment need, and this drop in confidence has accelerated since Ofwat’s Draft Determination in July.

“Weaker companies with higher debt have suffered more, right at the time when many of them are looking for additional capital to meet the needs of customers and environment for the next five years and beyond.

“This financial strain and deteriorating investor support means higher cost of borrowing, which eventually feeds through to customer bills.”

All of which means your water bill is about to go up, though how much depends on where you live, and unlike other privatised utilities you can’t switch.

In July, Ofwat said bills could rise by an average of 21% to fund £88bn of spending, but the water companies are now asking for 40% to cover an investment of £107bn.

Wherever Ofwat draws its line this will be the most significant bill hike since privatisation. For decades the regulator and politicians were focused on affordability, leaving bills lower in real terms today than they were a decade ago.

But it is clearer than a chalk stream that this approach stored up trouble, and whether you blame poor management, corporate greed, slack regulation, political indifference, or the principle of privatisation itself, the industry faces a critical moment.

Business

Bank shares take fright as budget tax hike is floated

Published

14 hours ago

August 29, 2025

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Bank shares take fright as budget tax hike is floated

Shares in UK banks have fallen sharply on the back of a report which urges the chancellor to place their profits in her sights at the coming budget.

As Rachel Reeves stares down a growing deficit – estimated at between £20bn-£40bn heading into the autumn – the Institute for Public Policy Research (IPPR) said there was an opportunity for a windfall by closing a loophole.

It recommended a new levy on the interest UK lenders receive from the Bank of England, amounting to £22bn a year, on reserves held as a result of the Bank’s historic quantitative easing, or bond-buying, programme.

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It was first introduced at the height of the financial crisis, in 2009.

The left-leaning think-tank said the money received by banks amounted to a subsidy and suggested £8bn could be taken from them annually to pay for public services.

It argued that the loss-making scheme – a consequence of rising interest rates since 2021 – had left taxpayers footing the bill unfairly as the Treasury has to cover any loss.

The Bank recently estimated the total hit would amount to £115bn over the course of its lifetime.

The publication of the report coincided with a story in the Financial Times which spoke of growing fears within the banking sector that it was firmly in the chancellor’s sights.

Her first budget, in late October last year, put businesses on the hook for the bulk of its tax-raising measures.

Ms Reeves is under pressure to find more money from somewhere as she has ruled out breaking her own fiscal rules to help secure the cash she needs through heightened borrowing.

Other measures understood to be under consideration include a wealth tax, new property tax and a shake-up that could lead to a replacement for council tax.

Analysts at Exane told clients in a note: “In the last couple of years, the chancellor has been protective of the banks and has avoided raising taxes.

“However, public finances may require additional cash and pressures for a bank tax from within the Labour party seem to be rising,” it concluded.

The investor flight saw shares in Lloyds and NatWest plunge by more than 5%. Those for Barclays were more than 4% lower at one stage.

A spokesperson for the Treasury said the best way to strengthen public finances was to speed up economic growth.

“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms,” they added.

Business

Controversial P&O Ferries boss Hebblethwaite to quit

Published

16 hours ago

August 29, 2025

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Controversial P&O Ferries boss Hebblethwaite to quit

The man dubbed “Britain’s most hated boss” for his controversial policy of sacking hundreds of seafarers and replacing them with cheaper agency staff is to quit.

Sky News can exclusively reveal that Peter Hebblethwaite, the chief executive of P&O Ferries, is leaving the company.

Sources said he had decided to resign for personal reasons.

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Mr Hebblethwaite joined the ranks of Britain’s most notorious corporate figures in 2022 when P&O Ferries – a subsidiary of the giant Dubai-based ports operator DP World – said it was sacking 800 staff with immediate effect – some of whom learned their fate via a video message.

The policy, which Mr Hebblethwaite defended to MPs during subsequent select committee hearings, erupted into a national scandal, prompting changes in the law to give workers greater protection.

Under the new legislation, the government plans to tighten collective redundancy requirements for operators of foreign vessels.

In a statement issued in response to a request from Sky News, a P&O Ferries spokesperson said: “Peter Hebblethwaite has communicated his intention to resign from his position as chief executive officer to dedicate more time to family matters.

“P&O Ferries extends its gratitude to Peter Hebblethwaite for his contributions as CEO over the past four years.

“During his tenure the company navigated the challenges of the COVID-19 pandemic, initiated a path towards financial stability, and introduced the world’s first large double-ended hybrid ferries on the Dover-Calais route, thereby enhancing sustainability.

“We extend our best wishes to him for his future endeavours.”

A source close to the company said it anticipated making an announcement on Mr Hebblethwaite’s successor in the near term.

A former executive at J Sainsbury, Greene King and Alliance Unichem, Mr Hebblethwaite joined P&O Ferries in 2019, before taking over as chief executive in November 2021.

Insiders claimed on Friday that he had “transformed” the business following the bitter blows dealt to its finances by the COVID-19 pandemic and – to some degree – by the impact of Britain’s exit from the European Union.

P&O Ferries carries 4.5 million passengers annually on routes between the UK and continental European ports including Calais and Rotterdam.

It also operates a route between Northern Ireland and Scotland, and is a major freight carrier.

The company’s losses soared during the pandemic, with DP World – its sole shareholder – supporting it through hundreds of millions of pounds in loans.

Its most recent accounts, which were significantly delayed, showed a significant reduction in losses in 2023 to just over £90m.

The reduction from the previous year’s figure of almost £250m was partly attributed to cost reduction exercises.

The accounts also showed that Mr Hebblethwaite received a pay package of £683,000, including a bonus of £183,000.

“I reflected on accepting that payment, but ultimately I did decide to accept it,” he told MPs.

“I do recognise it is not a decision that everybody would have made.”

The row over his pay was especially acute because of his admission that P&O Ferries’ lowest-paid seafarers received hourly pay of just £4.87.

Mr Hebblethwaite had argued since the mass sackings of 2022 that the company would have gone bust without the drastic cost-cutting that it entailed.

The company insisted at the time that those affected by the redundancies had been offered “enhanced” packages to leave.

Last October, the then transport secretary, Louise Haigh, said: “The mass sacking by P&O Ferries was a national scandal which can never be allowed to happen again,” adding that measures to protect seafarers from “rogue employers” would prevent a repetition.

“This issue has been ignored for over 2 years, but this new government is moving fast and bringing forward measures within 100 days,” Ms Haigh added.

“We are closing the legal loophole that P&O Ferries exploited when they sacked almost 800 dedicated seafarers and replaced them with low-paid agency workers and we are requiring operators to pay the equivalent of National Minimum Wage in UK waters.

“Make no mistake – this is good for workers and good for business.”

The minister’s description of P&O Ferries as “rogue”, and suggestion that consumers should boycott the company, sparked a row which threatened to overshadow the government’s International Investment Summit last October.

Sky News’s business and economics correspondent, Paul Kelso, revealed that DP World had withdrawn from participating in the event, and paused a £1bn investment announcement.

The company relented after Sir Keir Starmer publicly distanced the government from Ms Haigh’s characterisation of DP World.

Business

How the US trade war is now targeting you from today

Published

22 hours ago

August 29, 2025

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How the US trade war is now targeting you from today

Donald Trump has cancelled a loophole from today that had allowed consumers and businesses to be spared duties for sending low-value goods to the United States.

The so-called de minimis exemption had applied across the world before Trump 2.0 but the president has taken action – and the UK may soon follow suit – as part of his trade war.

The relief had allowed goods worth less than $800 (£595) to enter the US duty-free since 2016.

But now, low-cost packages face the same tariff rate as other, more expensive, goods.

The reasons for the latest bout of protectionism are numerous and the ramifications are country and purpose specific.

What is changing?

It was no accident that China was the first destination to be slapped with this rule change.

The duty exemption on low-value Chinese goods was ended in May as US retailers, in fact those across the Western world, complained bitterly that they were being undercut by cheap clothing, accessories and household goods shipped by the likes of Shein and Temu.

From today, Mr Trump is expanding the end of the de minimis rule to the rest of the world.

Why is Trump doing this?

The president is not acting purely to protect US businesses.

More duties mean more money for his tariff treasure chest, bolstering the goodies already pouring in from his base and reciprocal tariffs imposed on trading partners globally this year.

The Trump administration has also called out “deceptive shipping practices, illegal material and duty circumvention”.

It also believes many parcels claiming to contain low-value goods have been used to fuel the country’s supplies of fentanyl, with the importation of the illegal drug being used by the president as a reason for his wider trade war against allies including Canada.

How will it apply?

Under the new rules, only letters and personal gifts worth less than $100 (£74) will still be free of import duties.

Charges will depend on the tariff regime facing the country from where the goods are sent.

Fox example, a parcel containing products worth $600 would raise $180 in extra duties when sent from a country facing a 30% tariff rate.

It has sparked chaos in many countries, with postal services in places including Japan, Germany and Australia refusing to accept many items for delivery to the US until the practicalities of the new regime become clearer.

What about the UK?

All goods not meeting the £74 exemption criteria now face a 10% charge because that is the baseline tariff the US has slapped on imports from the UK.

We were spared, if you remember, higher reciprocal tariffs under the so-called “trade deal”.

How will the process work?

All shipping and delivery companies will be wading through the changes, with the big international operators such as DHL, FedEx and the like all promising to navigate the challenge.

Royal Mail said on Thursday that it would be the first international postal service to have a dedicated operation.

It said consumers could use its new postal delivery duties paid (PDDP) services both online and at Post Offices.

But it explained that business customers faced different restrictions to individuals.

Businesses would be charged a handling fee per parcel to cover additional costs and duties would be calculated based on where items were originally manufactured.

While business account customers could be handed an invoice for the duties, it explained that consumers would have to pay at the point of buying postage.

No customs declaration would be required, it concluded, for personal correspondence.

Is the US alone in doing this?

The answer is no, but it remains a fairly widespread relief globally.

The European Union, for example, removed de minimis breaks back in 2021, making all e-commerce imports to the bloc subject to VAT.

It is also now planning to introduce a fee of €2 on goods worth €150 or less to cover the costs of customs processing.

Should the UK do the same?

The UK has been under pressure for many years to follow suit and drop its own £135 duty-free threshold as retailers battle the cheap e-commerce competition from China we mentioned earlier.

A review was announced by the chancellor in April.

Sky News revealed in July how the total declared trade value of de minimis imports into the UK in the 2024-25 financial year was £5.9bn – a 53% increase on the previous 12-month period.

Any rise in revenue would be welcomed, not only by UK retailers, but by Rachel Reeves too as she looks to fill a renewed black hole in the public finances.