Sewage Dividend Ban a No-Go After CEOs’ Outcries

Article by Sarisha Harikrishna

Background

In February, Secretary of State for Environment, Food and Rural Affairs, Steve Barclay, informed executives of water companies that large amounts of sewage discharge would result in a ban on dividends and bonuses. This comes after a shocking report in 2023 by Surfers Against Sewage that highlights how raw sewage was discharged an average of 1,090 times a day into bodies of water. The criteria for this proposed ban on dividends would be outlined by Ofwat, the Water Services Regulation Authority, the body responsible for the regulation of the sewage industry in the UK. His proposal to introduce bans on dividends to tackle this issue was criticised by high-ranking officials of water companies in the UK. 

The initial plan proposed by Mr Barclay sought to impose the bans on dividends if there were clear signs that pointed to category one and two breaches. Category one and two breaches cover the actions of giving rise to significant pollution at bathing sites and evident failure in management. A key election issue, the dilemma of sewage spills in the UK has prompted British citizens to reevaluate who they choose to vote for in the next election. 56% of citizens have agreed that this issue is pertinent in influencing the people they will vote for. Liberal Democrats, being the first party to call for the prioritisation of environmental goals over profit in the water industry, have pointed out that their work in combating the sewage scandal since 2021 has been pivotal in helping them secure wins in local election campaigns.

What Are Sewage Dividends And Why Are They Important?

Dividends are generally a fraction of the profit a company gains that is subsequently returned to its shareholders at the discretion of the board of directors. Earning dividends is a lucrative way for shareholders to gain profit without selling the shares. In April 2023, 1.4 billion pounds were paid out in dividends by these water companies, therefore showcasing the water and sewage industry as a profitable area to invest in. By the end of this decade alone, it is estimated that 14.7 billion pounds in dividends will be paid out to shareholders in water companies. The more able a company is to afford dividends to shareholders, the more attractive that company will be in the eyes of prospective investors. 

This main point of a loss in business is behind the concerns raised by water company executives regarding Mr Barclay’s proposed ban. Officials in water companies argue that blocking dividends would result in an increase in the cost of capital and a blow to potential investment by investors. The cost of capital refers to the minimum return that should be achieved after undertaking a project. A ban would result in the water and sewage sector having lesser appeal in terms of investment, thus also affecting the cost of capital. 

Why Was The Ban Blocked?

The UK Treasury blocked the bans that Mr Barclay had sought to impose on water company dividends. However, Ofwat will be able to block dividends in water companies from 2025 onwards only if satisfied that the company’s financial state would take a hit. After significant resistance from executives in the water and sewage industry due to concerns about the future of investment in these companies, the dividend ban did not come to fruition.