Neil Collins’ Notebook – Ofwat is holed below the waterline
A nasty crack appeared this week in the magnificent edifice of regulation, erected to contain the industries which used to be owned by the British state. At first sight, it looks rather a small crack, soon to be papered over, and posing no big threat to the structure. In reality, the power and position of the regulators has been seriously, perhaps irreparably damaged.
Look carefully, and you can already see the water seeping through the crack, since it is water regulation that has taken the hit. When Ofwat, the industry’s regulator, imposed its final rulings for water pricing over the next five year period, four companies – Northumbrian, Anglian, Yorkshire and Bristol – scuttled off to the Competition and Markets Authority to argue that the permitted rate of return on their capital (which is how these things are stated) was too low. Ofwat had imposed 2.9 per cent, while the companies wanted 3.6 per cent.
Now the CMA has ruled. Looking through its rather dry (sorry) prose, it seems to have split the difference, imposing a rate of 3.2 per cent. This looks suspiciously like a “don’t know” reply to the question, but the implication, that Ofwat didn’t know what it was doing, is clear enough. Other companies which reluctantly swallowed a low rate will be feeling foolish – 0.3 per cent of the very large numbers in this industry is still a very large number. Ofwat says its own proposal was worth an extra £13.3bn over five years to the four companies.
However, the others will not be feeling half as cross as Ofwat itself. You can almost hear Rachel Fletcher, the CEO, grinding her teeth as she said: “I am grateful to the CMA for its engagement with us and the considerable analysis it has conducted.” In practice, the CMA has opened Pandora’s water-carrier; next time Ofwat’s negotiating position will be fatally weakened even before the talks start.
Ofwat had been trying to claw back some of the grotesque rewards many water company owners have made. The extreme example remains Thames, where systematic replacement of initial equity with debt by Macquarie left the balance sheet too weak to finance the Thames super-sewer. Public anger at the shocking state of the nation’s rivers after 30 years of privatised ownership reflects the result of an industry which was out of control of the regulator. Ofwat has tried to impose financial discipline and better behaviour. It will find doing so much harder in future.
Getting Hammered
We must wait a little longer to find out how much the pair of Daves who wrecked Britain’s third-largest quoted property company have been paid to go away. The innumerable pages of Hammerson’s results announcement last week couldn’t find space for this. When the accounts are published, their final rewards will be about the only numbers that we don’t already know.
The ones we do paint a truly depressing picture, the culmination of years of mismanagement which needed a capital reconstruction and a share consolidation to avoid the embarrassment of becoming a penny stock. Perhaps the darkest hour for chairman David Tyler and his CEO David Atkins was in 2018, when the pair attempted to believe two impossible things before breakfast. They wanted to issue shares at a discount to pay £3.4bn for the (now bust) rival Intu while simultaneously rejecting a takeover approach at a premium which valued Hammerson at £5bn. Sell low, buy high, is not generally a successful investment strategy.
No number of Daves could have foreseen the impact of the virus last year on the shopping centres at Brent Cross in London and the Bullring in Birmingham, but the 2019 accounts, issued as it struck, were a picture of complacancy, mostly full of drivel about how wonderful everyone was. The endless pages devoted to board pay under head of rem. com. Gwyn Burr were a model of how these things are done today – impenetrable to outsiders, yet producing a healthy result for the executives.
By May both men had signalled their departure, and in August came the £550m rescue; at the low point in September, that new money just about equalled the market value of the entire business. The tenants in the shopping centres are revolting, paying only 54 per cent of rent due in the first quarter of the year.
Since then, things have looked up. Robert Noel, recently retired from running Land Securities, accepted the hospital pass to become chairman, and the splendidly-named Rita-Rose Gagne is CEO. Perhaps all is not lost after all. Perhaps we will flock back to the biggest and brashest shopping centres when this lousy war is over, while finding imaginative uses for those properties which will never recover. Perhaps Hammerson, shorn of its Daves, is the way to play this future. Perhaps that is why the shares have perked up in the week since the results.
Inflation, but not as we know it
Such a comfort to know that the boys and girls at the Office for National Statistics are keeping up with our changing spending habits. They have chucked out those sickly white chocolate bars and the accompanying ground coffee from the basket they use to calculate the Consumer Prices Index, the official measure of inflation. In come training weights and smart watches, perhaps because that’s what shows on Zoom. In come electric cars, even though they remain unpopular and far too expensive except for Uber drivers and show-offs. No pressure from the government here, of course.
The CPI is currently rising at an imperceptible 0.7 per cent a year, according to the ONS. The elephant in the inflation room, or rather in the room you’d like to own, is the soaring cost of houses, up by 5.2 per cent in the last year on the Halifax index. The statisticians don’t view this as inflation, and it’s generally reported as a cause for cheer, vindicating all previous purchases. It also means that homes are not only unaffordable without lender and borrower taking on increasing risk, but prices become ever more vulnerable to setbacks, as government measures to keep them up become ever more desperate.