Summary
This note responds to two questions put to the Good Growth Foundation regarding its proposals for the mutualisation of the water sector in England and Wales.
On financing, our analysis suggests that not-for-profit water companies would be able to fund the investment the sector needs. Lenders assess revenue, existing debt and regulation rather than ownership, and large not-for-profits in other sectors already borrow at scale on similar terms to water companies. Most of the sector’s investment is already funded by debt, and the new equity it raises is broadly matched by the dividends it pays out, so a sector without shareholders could largely replace that equity with retained earnings.
On insolvency, the Secretary of State already holds a broad power under section 23(3A-B) of the Water Industry Act 1991 to change how insolvency law applies to water companies in special administration. This could potentially be used to lower the threshold for entering special administration and to require creditors and shareholders to share losses. The Clean Water Bill offers an opportunity to put these powers beyond doubt.
Q1 - Whether not-for-profit cooperatives could finance the levels of investment required in the coming years?
Some have argued that moving English water companies to a not-for-profit or cooperative model would put at risk the investment the sector needs over the coming years. We disagree. Typically, a lender's willingness to provide funds depends on a company's ability to repay, which comes down to the strength and predictability of its revenue, its existing debt and the regulatory environment. Ownership structure is not the deciding factor and water companies in other ownership structures would continue to have predictable revenues that would be unlikely to change significantly in the medium term.
We also found that water companies do not raise significant finance through new equity and instead often opt for debt financing, so the limitations on equity financing that the cooperative model would bring would not restrain water companies from raising the necessary capital for investment. Although Ofwat has suggested over £12bn of equity financing could be required in the current Price Review period, it has also noted that almost all of that could be covered by retained earnings, as it has allowed for almost £11.9bn in dividends. [1]
We set out the evidence on borrowing and on equity in more detail below.
(1a) Challenge: Mutuals and not-for-profit companies cannot borrow at scale
Our research (see diagram below) shows that large not-for-profits or mutuals in other sectors (highlighted in green) with comparable revenues and comparable levels of debt already borrow at similar or better rates to public and privately owned water companies. For example, the three biggest not-for-profit housing associations in England (Clarion, L&Q and Peabody) each have similar levels of revenue and debt as many of the English water companies and therefore also have a similar range of debt-to-revenue ratios (right hand side). Furthermore, they borrow at a similar spread to gilts as the publicly listed water companies, and at a lower spread to gilts compared to the other water companies (left hand side).
Figure 1: Debt to revenue ratio and indicative financing costs of water companies compared to mutuals and not-for-profit companies, Source: GGF calculations
Notably, the only existing not-for-profit mutual water company - Welsh Water - has the highest debt-to-revenue ratio due to its dependency on debt (and inability to raise equity) and yet continues to borrow at a similar spread against gilts as many of its peers. It is notable that Welsh Water has held the highest or joint-highest credit rating of any water company in every year from 2016 to 2025 (see below). In March 2025 it was rated BBB+, level with the best-rated English companies. While Welsh Water’s mutual model is not one that the Good Growth Foundation is advocating replicating - we are advocating for customer-owned cooperatives - and Welsh Water’s performance on sewage has also been unsatisfactory, it has clearly demonstrated that not-for-profit mutuals can raise funds and can do so on the same or better terms than other water companies.
Figure 2: Credit ratings of water companies in England and Wales in 2024 and 2025
(1b) Challenge: Mutuals cannot raise the equity financing required
While some have argued that mutual companies would not be able to raise new equity as an alternative to debt, we have found that debt is already the preferred means of raising capital and funds most of the sector's investment. Indeed, the industry body WaterUK notes that “debt is a sensible and prudent way to finance long term investment” and that “debt is always cheaper than equity” [3]. Ofwat has in the current and previous Price Review periods suggested that debt is used to fund the vast majority of agreed investment requirements.
Between March 2021 and March 2025 the borrowings of the 14 English companies rose by £21.6bn, while Ofwat recorded nearly £5bn of new equity across the whole 2020 to 2025 period. Over the same five years the regulated companies paid £4.8bn in dividends, an amount of a similar size to the new equity. Ofwat has also noted in its financeability assessment for the current price review period that it is expecting new equity of £12.7 billion, with dividends of £11.9 billion. Clearly if the sector were composed of non-profit cooperatives that did not need to pay dividends, the new equity requirement could be largely met from retained earnings [4]. Ofwat itself notes that the £12.7bn of new equity required could be lower if “companies choose to support the required equity financing requirement through retained earnings rather than equity injections”.
We also outlined in our original proposal that there is the option to support financing through the National Wealth Fund with guarantees or direct loans that would further support reduced borrowing costs. Support from government guarantees has proven to significantly reduce borrowing costs in the case of the housing sector through the examples outlined above.
Therefore, there is no evidence that a not-for-profit cooperative in the water sector would find it harder to borrow, or that reduced access to equity finance would result in less investment.
Q2 - Whether there are simple legislative options for delivering a new insolvency regime and/or a bail-in mechanism in the forthcoming Clean Water Bill?
In short, yes, potentially without new primary legislation. Section 23(3A-B) of the Water Industry Act 1991 already gives the Secretary of State broad powers to change how insolvency law applies in special administration, and the Clean Water Bill could put its use beyond doubt.
The special administration regime (SAR) for water and energy vary slightly, although for both water and energy the legal requirements for testing insolvency are the same, both considering whether a company is currently or is likely to be unable to pay its debts, following the principles of the Insolvency Act 1986.
Insolvency Test - Water Industry Act 1991
“that the company is or is likely to be unable to pay its debts”
Insolvency Test - Energy Act 2004
The court may make an energy administration order in relation to a company only if it is satisfied—
that the company is unable to pay its debts;
that it is likely to be unable to pay its debts;
While these principles are longstanding, they have been adjusted over time. For both energy and water, the primary objective is to keep customers supplied while the business is rescued or transferred, at the lowest practicable cost. While the interests of creditors still count, but they are subordinate to the continuity-of-supply objective. This is already different to normal insolvency practices.
The most significant departure from insolvency principles was following the financial crisis where a bespoke insolvency regime was set up to ensure that taxpayers never pay the price of failure of banks and that creditors as well as shareholders were fully exposed to losses in the case of bank resolution. The bail-in of creditors could also happen quickly - at the hands of a regulator and in the space of days - rather than taking months or years through a court order. This so-called ‘bail-in’ regime was created by the Financial Services (Banking Reform) Act 2013 and replicated in other jurisdictions. The scope of this Act is limited to the banking sector and many of its provisions are specific to banks, which means it cannot be easily linked to the water sector. However, if the Government wished to depart from insolvency rules in a similar way to ensure creditors can be bailed-in up front, the Government does have an option to amend the insolvency rules applying to the water sector.
In both the Water Industry Act 1991 and the Energy Act 2004, there is a provision enabling the Secretary of State to make provisions to amend the effect of existing insolvency laws and principles. The Section 23(3A-B) power defined in the Water Industry Act 1991, as amended by the Flood and Water Management Act 2010, is broad and allows the Secretary of State to disapply, modify, or replace an insolvency provision which could include provisions about “the consequences of insolvency”.
Adjusting insolvency rules - Section 23(3B), Water Industry Act 1991
(3A) The Secretary of State may make regulations about special administration which—
apply (with or without modification) an insolvency provision;
disapply an insolvency provision;
modify the effect of an insolvency provision;
make provision similar to, and in place of, an insolvency provision.
(3B) In subsection (3A) “insolvency provision” means a provision of the Insolvency Act 1986 or another enactment about insolvency (including (i) a provision about administration, (ii) a provision about consequences of insolvency, and (iii) a provision conferring power to make rules).
The Government should further explore whether this power can be used to (i) adjust the entry point into SAR (i.e. whether it can change the definition of whether a company is likely to be unable to pay its debts) but also (ii) the process after SAR has been activated and the extent to which creditors and shareholders must face a haircut. If there is remaining uncertainty about the use of this power, this could be put beyond doubt through the Clean Water Bill.
Sources:
[1] PR24 final determinations: Aligning risk and return | Ofwat
[2] Ofwat Financial Monitoring Report 2024-25
[3] UK Water Industry: Myths vs. Facts
[4] PR24 final determinations: Aligning risk and return | Ofwat
