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FOCUS 14


The UK has faced a lot of fl ooding in recent years: what implications does this have for the water sector? Is the right level of funding available for fl ood defences? Is the government doing all that is necessary and, if not, who bears the responsibility?


The prediction is that the future will see more extreme weather, giving rise to events like fl ooding and droughts.


With fl ooding, the responsibility for what to do is split across a number of different agencies; water companies do not hold sole responsibility. The Highways Agency is responsible for draining off the roads and the Environment Agency for managing rivers. Water companies may face capex when it comes to fl ood defences.


What we need to see is better coordination between agencies and greater clarity around responsibility. Flood defences necessitate huge capital at a time when the regulator wants water companies to lower their costs and pass that on to the consumer.


With more extreme weather predicted, fl ood defences – as well as spending on reservoirs to offset droughts – must be given a higher priority. You can’t lay all the responsibility at the door of the water companies though.


Is further M&A activity to be expected in the UK’s water sector in the next few years?


The outcome remains to be seen; it comes down to the assessment of investors at the end of the regulatory review. It will depend upon how happy, or not, they are with the regulatory return they are going to be allowed, compared to the new risk of being obliged to provide better customer service, reduced costs and improved network resilience. If investors are happy, there will be an appetite to invest, and that will show through acquisitions.


At present, there are certain constraints on consolidation in the water sector. The Water Bill currently before Parliament has some merger provisions in it that will loosen the constraints on consolidation. The feeling at government level is that there have to be cost synergies, and consolidation may be the way to go. At the moment, water companies will be assessing whether they want to be the predator or the prey.


How will regulations around excess shareholder profi ts shape up and affect the industry in the coming years?


The regulator is warning that shareholders should expect lower returns compared to the last fi ve years. However, if interest rates start going up, the regulator might have to take a different view. The industry needs investment and nobody – including Ofwat – wants investors to run for the exits. If that happens then regulations have gone too far.


WITH MORE EXTREME WEATHER PREDICTED, FLOOD DEFENCES – AS WELL AS SPENDING ON RESERVOIRS TO OFFSET DROUGHTS – MUST BE GIVEN A HIGHER PRIORITY.


David Gascoigne KPMG’s Head of Power & Utilities T: +44 (0)20 73114314 E: david.gascoigne@kpmg.co.uk


David Gascoigne is KPMG’s Head of Power & Utilities in the UK and leads our relationship with many companies in the sector. He is a Chartered Accountant and has been an auditor and M&A advisor advising many PE and corporate clients on acquisitions and disposals as well as IPOs and public company takeovers.


© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative, a Swiss entity. All rights reserved.


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FUTURE OF H20


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