Water, water everywhere
Robin’s Question: Robin Lawler tweeted us the good question whether the analysis in A Better Deal for Nation Rent could be applied to electricity companies.
We agreed that utilities offered an interesting comparison.
As the Water Regulator, OFWAT, recently has announced a new proposal for pricing for the period to 2020 (the period we have looked at in A Better Deal for Nation Rent, we thought that a comparison between top 25 housing associations compared to the regulated water companies might be good to compare.
How does the performance of housing and water sectors compare?
Social housing rents have risen faster than water bills:
To date, over the last five years average social rents have risen much faster than water, by 20.3% as against water bills by 15.5%. Both water and social rents have imposed rises above general inflation levels on their customers.
Operating Margins are comparable:
There are greater similarities in the operating margins between the two sectors than might be expected. The chart shows the indicative operating margins from social housing lettings for 25 large housing associations (columns starting HA) compared with indicative operating margins of 16 large water companies (columns starting W). In order to assist in making a useful indicative comparison, where possible figures have been adjusted for exceptional items such as acquisitions/mergers and also IFRS adjustments. Clearly smaller housing associations will have a wide range of profit levels.
Overall operating margins for the leading group of 25 housing associations average around 25.7%. Profits from their social housing lettings, their largest and core activity, deliver higher margins at around 30.6%. The overall profit margin is 13.3%. By comparison water companies achieved an average operating profit of 34.9% and an overall profit of 16.9%.
Social Responsibility in price setting?
OFWAT expressly considers the interests of consumers and social responsibility within their approach to regulatory profit controls. They express themselves as balancing “the interests of consumers with the need to make sure the sectors can finance the delivery of water and sewerage services. We also need to make sure they are able to meet their other legal obligations,including their environmental and social duties.”
In consideration of those social duties, OFWAT had set out a new proposal pricing settlement which would result in an aggregate sector real terms price cut to 2020, likely to put pressure and reduce water company margins.
By contrast, the HCA had agreed an inflation busting price rise placed on social tenants over the same period, with margins expected to continue to increase, according to the Global Accounts published by the HCA.
Does being ‘not for profit’ impact on what regulated consumers pay?
Only one of the 16 large water companies is a ‘not for profit’ organisation – the rest are more traditional corporates. All of the top 25 housing associations are ‘not for profit’ organisations, and most are also charitable.
In summary, “Not-for-Profit for a purpose” should not mean maximising rents and profits from existing social tenants in order to further corporate ambitions. The focus should be on how we can deliver more social value to existing customers and attract new investment into delivering more homes for people.
The comparison with water companies provides further support for the case for the new investment approach we set out in Nation Rent. It also reinforces the need to use tools such as the Million Lives Three Pillars of Social Value to make sure the right profit is made for the right purpose, and that the social impact of charging rent increases to customers in need is properly assessed.