'Water poverty' loans to utilities set to hit €4bn

The EU plans to raise loans to the UK's 10 biggest water utilities by 60 per cent to €4bn (£3.4bn) as they try to reduce the number of customers who cannot pay their bills.

The companies, which include FTSE 100 stalwarts United Utilities and Severn Trent, take advantage of cheap EU loans to reduce "water poverty"– where a bill accounts for more than 3 per cent of household spending. Last year, the value of bills left unpaid for more than 12 months was £804m, up 16 per cent on 2008.

Under legislation introduced in 1999, utilities cannot cut off non-payers. This, coupled with necessary infrastructure maintenance and development, has led to inflated bills and, in turn, more bad debts.

The European Investment Bank (EIB), which is the EU's infrastructure lending arm, has helped the utilities by lending on specific projects over their five year investment programmes. During the last review period, the utilities received €2.5bn.

Water industry sources said that the EIB is planning to lend €4bn in the 2010-15 period, known as Amp 5. Since the turn of the year, the EIB's water team has met the utilities over several visits to draw up draft funding proposals and are particularly keen to support water treatment projects that help tackle climate change.

Senior EIB executives are expected to sign off the plans by the end of the year. Already Northumbrian, Yorkshire and Welsh Water have proposals that are deemed "under appraisal" at the EIB, meaning that they should be close to approval. The trio are looking for up to £150m each in loans.

A sector specialist said: "The EIB's water team was last here a couple of weeks ago and agreed to offer new facilities to one of the major utilities."

The EIB has been encouraged by EU finance ministers to provide a stronger lead in the European lending market since the start of the credit crunch three years ago. In 2009 it lent a record €79bn.

Simon Brooks, EIB's vice-president for the UK, said: "The EIB is a long-term supporter of the UK water industry and the largest single lender in the sector. Across Europe, the EIB seeks to focus lending to the sector where it can bring clear environmental benefits and contribute to broader climate action activities."

The EIB was formed in 1958 and since then has lent more than €30bn to water and sanitation projects. In the past five years, this has intensified with an average €2.1bn loaned to members.

Water utilities are among the biggest companies in the UK, with United Utilities and Severn Trent having a market value of nearly £3.8bn and more than £3bn respectively. Other major utilities include South West Water and Bournemouth & West Hampshire Water.