Water companies ordered to stop dividends if services don’t improve

Water and sewerage regulator Ofwat will stop water companies from paying dividends if the watchdog believes they are not delivering results for customers and the environment.

The new rules come after water companies faced criticism for paying high dividends to shareholders rather than reinvesting profits into infrastructure improvements.

Since being privatised in 1989, English water firms have paid dividends of more than £65 billion to shareholders. London utility Thames Water - which has been criticised for dumping sewage into the River Thames - pledged not to pay external dividends in 2017, but has continued to pay dividends to service its debts, including a £37.1 million payment to its parent company last year.

Under the new rules, water companies must “take account of service delivery for customers and the environment over time, current and future investment needs”. Ofwat CEO David Black said many water companies were not taking customers into account in their dividend policies.

“When deciding on dividend payments to investors, water companies need to take stock of their performance for customers, the environment, and the company’s overall financial health,” he said.

“Too often, this has not been the case. That is why we’re implementing changes that will allow us to better hold companies to account and take enforcement action when they get it wrong.

“We hope the introduction of these new powers will focus minds around company board tables on the importance of responsible decision making and openness with customers and other stakeholders. And if that isn’t the case, we will act.”

The rules will also prevent businesses from paying dividends if they would put the company’s financial health at risk. Under the new rules, water companies would also not be permitted to pay dividends if a credit rating agency is considering downgrading the business to their lowest investment grade.

The regulator highlighted Thames Water as  an example of a company where “weak levels of financial resilience have been combined with poor levels of operational performance”.