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Kames bond managers scold water firms over tax

The fixed income team at Kames Capital has called for transparency in the water industry, which is facing calls for nationalisation.

Kames bond managers scold water firms over tax

Kames Capital’s fixed income team has written to water companies to demand they stop using tax avoidance schemes, heaping more pressure on an industry that politicians have warned is heading towards renationalisation.

In a letter to bond-issuing water companies, Adrian Hull, co-head of fixed income at Kames Capital, said water infrastructure needed further investment but it should ‘be conducted in a tax framework that in itself gives confidence to the public as consumers’.

He added that while there was ‘no accusation of tax evasion’ the tax efficient schemes being used by water companies were ‘not publicly acceptable in times of straightened public finance’.

‘Perceptions of what is acceptable have undoubtedly changed in recent years’ said the letter, which called for issuers to review their tax structures.

As part of its investment analysis Hull said he considered the management of water companies, their ability to reinvest in assets to deliver future cashflow and returns, and the social, regulatory, and political environment in which they operate.

The last point has become a key concern for investors as ownership of water and sanitation in the UK has become an increasingly political issue.

Despite the 1989 privatisation of the water industry into a series of regional monopolies with guaranteed incomes, at the time the UK government shouldered the sector’s £4.9 billion of debt and also gave the new private companies £1.5 billion of public funds.

Environment secretary Michael Gove last week attacked the water industry over high pay and dividends.

He pointed to the huge salaries being picked up by the bosses of water companies. United Utilities (UU) chief executive is paid £2.8 million a year, Severn Trent’s (SVT) boss takes home a salary of £2.4 million, both chiefs of Anglian Water and Yorkshire Water earn salaries of £1.2 million a year, and the Thames Water boss is on £960,000.

Gove also took aim at the dividends paid by water companies, amounting to £18.1 billion between 2007 and 2016 on profits of £18.8 billion.

Gove (pictured) said Anglian, Southern and Thames paid no corporation tax last year and Thames Water had not done so for a decade.

‘Ten years of shareholders getting millions, the chief executive getting hundreds of thousands, and the public purse getting nothing,’ he said.

He warned that calls for nationalisation of the industry would grow and called on water regulator Ofwat to strengthen governance in the sector, including reining in executive pay.

Gove said ‘in return for operating a monopoly, with the guaranteed income that brings, water companies have to be transparent and accountable’.

Labour leader Jeremy Corbyn has pledged to renationalise water companies to ‘stop the public being ripped off’.

The renationalisation of the water industry is, however, easier said than done. A report by the Social Market Foundation (SMF) estimated it would cost £90 billion – double the cost of the NHS annual wage bill – and add 5% to national debt.

Even if the government forced a lower price it would reduce the up-front cost to taxpayers but could be damaging to the economy in the long-term as investors could demand a risk premium to invest in the UK, or not bother at all, the SMF said. It also pointed out that pension funds, which invest significant sums in the water industry, would also lose out.

Hull said whether the water industry was in public or private hands, the key was to use influence ‘to reduce uncertainty and volatility in the value of our assets’.

‘Transparency builds trust and goodwill with all stakeholders,’ he said. ‘We hope that in some part we can encourage transparency in how our investee companies manage their arrangements and in doing ensure effective delivery of water to all in the UK.’

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