Utility Week

UTILITY WEEK | 16TH - 22ND MARCH 2018 | 17 Policy & Regulation investors. The clock was now ticking for sec- tor change, he warned, to come ideally from water companies working with the regulator. His contribution was never going to be a mere warm-up act – no-one expected it to be – rather regulatory grist to the mill for Gove's political blast that followed. As temperatures in the frosty capital con- tinued to plummet outside, it felt almost as chilly indoors. Things seemed set to warm up when Gove began itemising some executives' salaries – one of which he said was five- times that of the prime minister's. "You must realise that in the public eye you are very handsomely remunerated," he said. "At least, one might hope, companies making such massive profits, paying such big dividends and supporting such generous executive salaries would be big contributors to the Exchequer through their tax bill. Well some are, and others not. Very much not." But the crackle of electricity this had sparked around the room was quickly gone – like Gove himself, who didn't stop for lunch. Next moves What happens next will be key if the sector is to prove it has listened to both Gove and the regulator. No-one Utility Week spoke to aer- wards seemed to have taken the governmen- tal shot across their bows lightly. Many agreed, just as with privatisation in the 1980s, that another key moment in the history of their industry had arrived, not least with the prospect of renationalisation, as Gove pointed out, gaining "significant public support". Raising some of the challenging realities for water companies in achieving consumer buy-in on certain projects, such as inter- generational expenditure, conference chair and chief executive of Southern Water Ian McAulay said gaining absolute support could be difficult – something perhaps for water companies to discuss with the regulator. He also wondered if there was a role for government to play in helping the sector, during this new water age, to champion its value to the public in terms of environmental and economic benefits. Yorkshire Water chief executive Richard Flint called for a proactive takeaway from the conference to restore consumer confidence. "Meeting and not beating targets is not the place to be, so we shouldn't be led by regu- lation we should be led by minimum stand- ards. We should talk openly about seeking to outperform." As we move towards a third decade of a privatised sector, it seems companies' PR messages will need to hold far more water than ever before. Yorkshire plans to jettison offshore activities Negative publicity surrounding offshore finance is nothing new. And those water companies with financial arrangements in such jurisdictions have faced criticism for years. Yet in recent months, a stream of revelations about the mysterious, private world of so-called tax havens has seen public mistrust rise to new levels. Water companies that, despite protesting their arrangements have nothing to do with tax avoidance, have realised the time really has arrived to ship out on offshore. Pressure rose further at Water UK's conference, with Michael Gove's barbed message to companies with interests in the Cayman Islands. Rounding on those with complex offshore multiple subsidiaries and their slow progress at scrapping them, he said: "The stated reason was to enable smoother access to global bond markets. But the rules were changed and yet the offshore firms continue to exist. The companies concerned have maintained the structures that enable them, among other things, to avoid proper scrutiny." In recent months, he noted, some water companies with offshore structures had agreed to close them "to rebuild public trust". But he said: "The companies, people in this room, have said it will take up to two years to wind up the Cayman operations, as it's claimed it will take that long to con- tact international bond-holders who may have made their investment a decade ago. "Well that sort of excuse-mongering just will not wash with the public I'm afraid." One company he referenced was Yorkshire Water. The issue is something its director of finance, regulation and markets, Liz Barber, has long had to field. At Moody's 2017 UK Water Sector Conference in October, she announced the com- pany's plans to remove its "no longer necessary or appropriate" offshore banking arrangements, used to manage high levels of borrowing, as soon as possible. In an interview with Utility Week a few days before the City conference, when asked if sorting out the Cayman issue was something it was still taking seriously, she responded: "Absolutely, completely seriously. It would be ideal if we could do this immediately, but it's complicated." However, the company was now at the stage of "getting very strict regulatory clearances". "We may have gone quiet, but we are very much working on this." Yorkshire's Cayman holding company, she explained, had been made up of two subsidiaries. One, a "legacy" bond structure, is now ready to be paid off. The other issues bonds. The plan is to close the Cayman operations and set up a new UK issu- ing company. Any new bonds from now on will go through the UK process. Existing bonds will be moved into this for the meantime but, as soon as it can, the company aims to strike them off. "The reason for the Cayman Islands was not for tax avoidance, it was never anything to do with tax, and despite us saying very regularly it was nothing to do with tax, people would say 'well, we just don't like it'." In fact, the activities of Yorkshire Water, she pointed out, contribute about £100 million of revenue to local authorities or the HMRC. But why go offshore in the first place? In 2008, it was a way to temporarily under- write external debt – with cross-guarantees plus securitisation – all in one place, although this can now be offered elsewhere. "It was commonplace at the time to go to a jurisdiction where you could do both of those things." Why then not change the historic offshore arrangements, involving about £4.5 billion in bonds, sooner? Because it was, she explained, "a daunting task". And expensive, requiring "lots of experts and advisers". "We felt why go into it and spend a lot of money on it? At one level that's under- standable. But it goes back really to being about company legitimacy." Resisting sharing a timescale, she revealed Yorkshire Water had summer in its sights. "We can't push third parties quicker than they can go." But, although "quite a stretch", she said it hoped to get its Cayman business removed and into a UK company by the time of this year's results, possibly mid-July. "We can't guarantee it, but that's our desire." It is also responding in other ways and considering ethical, social bonds. "We are actively exploring that proposal later in the year. It needs working at, it's not a slam dunk. But we really want to seriously explore social bonds. I think it would also be good for the industry."

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