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(a) The Cleevemoor Water Authority was privatised in 2000, to become Northern Water plc (NW). Apart from political considerations, a major motive for the privatisation was to allow access for NW to private sector supplies of finance. During the 1990s, central government controls on capital expenditure had resulted in relatively low levels of investment, so that considerable investment was required to enable the company to meet more stringent water quality regulations. When privatised, it was valued by the merchant bankers advising on the issue at £100 million and was floated in the form of 100 million ordinary shares (par value 50p), sold fully paid for £1 each. The shares reached a premium of 60 per cent on the first day of stock market trading.

Required In what ways might you expect the objectives of an organisation like Cleevemoor/NW to alter following transfer from public to private ownership?

(b) Selected biannual data from NW’s accounts are provided below relating to its first six years of operation as a private sector concern. Also shown, for comparison, are the pro forma data as included in the privatisation documents. The pro forma accounts are notional accounts prepared to show the operating and financial performance of the company in its last year under public ownership as if it had applied private sector accounting conventions. They also incorporate a dividend payment based on the dividend policy declared in the prospectus.

The activities of privatised utilities are scrutinised by a regulatory body which restricts the extent to which prices can be increased. The demand for water in the area served by NW has risen over time at a steady 2 per cent per annum, largely reflecting demographic trends.

Required Using the data provided, assess the extent to which NW has met the interests of the following groups of stakeholders in its first six years as a privatised enterprise.

If relevant, suggest what other data would be helpful in forming a more balanced view.
(i) shareholders (ii) consumers (iii) the workforce (iv) the government, through NW’s contribution to the achievement of macroeconomic policies of price stability and economic growth.

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Key financial and operating data for year ending 31 December (m) 2000 2002 (pro forma) (actual) 2004 (actual) 2006 (actual) Turnover 450 480 540 620 Operating profit 26 35 55 75 Taxation 5 6 8 10 Profit after tax 21 29 47 65 Dividends 7 10 15 20 Total assets 100 119 151 191 Capital expenditure 20 30 60 75 Wage bill 100 98 90 86 Directors' emoluments 0.8 2.0 2.3 3.0 Employees (number) 12,000 11,800 10,500 10,000 P:E ratio (average) 7.0 8.0 7.5 Retail Price Index 100 102 105 109