Yorkshire Water's privatisation let debt spiral to pay shareholders, report claims

It said: “There never was any (net) equity investment in Yorkshire Water after the first £75 million in 1990. Only cash extracted which now totals £4.4 bn.”

But Yorkshire Water strongly refutes claims made in the report, calling it ‘misleading’, with ‘false statements’, and showing a ‘fundamental misunderstanding of the way the water industry is regulated’.

The privatisation of the sector is the primary focus of the report, which found that for every £100 of Yorkshire Water’s capital expenditure there has been a financial overhead of £85, due to privatisation.

By comparison, Scottish Water (which is publicly owned) has a financial overhead of £12 per £100 spent, it claims.

As a result, it calculated that as of last year, with rates as they are, Yorkshire Water would have had £3.5 billion to spare, after covering all operational costs, capital expenditure and taxes, had it not been for costs arising from the complex financial structure.

The report has been published by retired auditor Stanley Root, who has previously exposed an accounting ‘trick’ he said was used to artificially inflate the balance sheet of Severn Trent Water by more than £1 billion – a claim denied by the company.

He is examining the finances of each of England’s 10 largest water companies, and the Yorkshire Water report has been promoted by Ilkley Clean River Group, which campaigns for water quality improvements.

With Yorkshire Water, it found a principle reason for the current level of debt was the financial structure of its parent companies.

It said: “As with all the other privatised water utilities, Yorkshire Water’s regulated business achieved a healthy profit of £2.3bn before paying dividends to its various parent companies.

“By stark contrast, the non-regulated business of Yorkshire’s various parent companies has incurred a loss of £4bn, much of which relates to additional interest on debt taken out to buy Yorkshire Water.

“The consolidated accounts, which combine the two numbers, show the resulting loss for the whole business of £1.7bn.

“The group established above the regulated entity on privatisation has been nothing but a financial burden to the regulated business.”

It goes on to say: “Financial incentives drove dysfunctional management behaviour.

“Since there was never any question that water companies had to borrow to fund their day-to-day operations, this £9bn total finance cost is to be compared to total investment in water and wastewater infrastructure since privatisation.

“It turns out that for every £100 Yorkshire Water has spent on infrastructure, another £85 has gone to pay interest and dividends.

“Privatisation and the profit motive were supposed to bring financial efficiency to funding infrastructure investment.

“Their principal role instead appears to have been to drive dividends and debt.”

The report concludes: “The last time Yorkshire Water disclosed a current cost valuation of its property, plant and equipment was ten years ago, in 2015, when the valuation was £51 billion.

“Thereafter the disclosure appears to have been quietly dropped, perhaps out of embarrassment.

“Because although everything bought before 1990 had been paid for by UK taxpayers and everything since, by Yorkshire Water customers, this £ 51 billion asset was now firmly under the control of four Hong Kong, Singaporean and Australian investment funds.

“And neither the UK taxpayer nor Yorkshire Water customers got a single penny for them in return. All they got were sweet words and bold promises.

“And in Yorkshire Water’s case, each of these bold promises never actually materialised.”

A Yorkshire Water spokesman said the £51 billion figure was inaccurate, and instead is an historical replacement cost, rather than a valuation.

The report has been submitted to Defra’s Independent Water Commission.

A Yorkshire Water spokeswoman said: “There are considerable factual inaccuracies and false statements within this report which show a fundamental misunderstanding of the way the water industry is regulated. As a result, it paints a misleading picture of Yorkshire Water.

“Our senior team has spent time with the Ilkley Clean River Group to go through and explain these issues, but this has not been reflected in the report.

“Yorkshire Water is financed in a similar way to most other highly regulated infrastructure businesses in the UK, using a mix of borrowing and money invested by shareholders.

“We have an extensive investment programme over the next five years to improve Yorkshire’s infrastructure. This includes £60m being invested in Ilkley, which is in addition to the £15m we’ve already invested over the past few years.”