Jeremy Warner's Outlook: For investors in UK water, the cash leaks just keep on gushing

BT: an understated success story; What now for pensions reform?

Hard to credit all these years later, but when the water industry was privatised in the late 1980s, it had to be endowed with large quantities of government cash to persuade investors to buy. These so-called "green dowries", distributed among the 10 water authorities of England and Wales according to their perceived need to invest in improvements in water quality and supply, virtually cancelled out all the money raised in the flotations, leaving the net gain to the Exchequer from flogging off one of the biggest captive monopolies in the land at little more than a couple of billion pounds.

The return made on these companies since then lies somewhere between extraordinarily good at the lower end of the scale to absolutely phenomenal at the top. And still the cash keeps flowing, to judge by yesterday's takeover approach for AWG, the owner of Anglian Water, and the ongoing private equity auction for Thames Water.

The approach for AWG, pitched at around the 1,515p which the shares rose to yesterday, comes from a 3i-led consortium of overseas pension funds. The equivalent price at the time of privatisation was little more than a pound.

Factor in the torrent of dividends and capital repayments shareholders have enjoyed across the years, and it's easy to see why the City regards the water industry as the investment equivalent of winning the National Lottery jackpot. Nor does it stop there. The private equity bidders for AWG and Thames confidently expect to extract a lot more cash yet.

With the benefit of hindsight, the price at privatisation was a giveaway of scandalous proportions. Even the excuse sometimes advanced - that the public finances needed to get shot of liability for hundreds of billions of pounds of investment in environmental improvement - scarcely justifies the gross undervalue these companies were sold at.

There may be no excuse, but there are any number of explanations. Few even remotely anticipated the size of the efficiency savings that could be wrung out of the UK water industry. Nor was the scope for reducing the cost of capital by gearing up these companies with debt properly understood at that time.

Yet some of these failings seem to have persisted into more recent times too. For instance, it was only three or four years back that the board of Anglian turned down a private equity bid from Robin Saunders and her City backers. At the time, this was thought a quite plucky thing to do, even though it has been subsequently justified three times over: the Saunders bid was just £5 a share.

What's happened since then to change perceptions of value is an extraordinarily generous regulatory review of charges, where in some cases substantial increases in water rates have been allowed to fund future investment needs. The regulator justified these increases on the grounds that virtually all the low-hanging fruit in terms of efficiency gains had already been plucked. Yet somehow or other, UK water has managed to clamber up to the higher branches. It seems that every time the rules are set, the City again succeeds in pulling the wool over the regulator's eyes.

It's a funny old world that allows the persistence of extraordinary investment gain at a time when companies routinely fail their customers with drought orders necessitated by an inability to get to grips with water leakage.

BT: an understated success story

British Telecom is one of those quiet business transformations that scarcely anyone outside those paid to take an interest in such matters would have noticed. Most of us still think of the company as a traditional, national telecoms incumbent, serving up bog standard landline and broadband telephony to tens of millions of UK households and businesses.

That remains the larger part of what BT does, of course, but running alongside this commodity activity, where growing competition means that prices are falling faster than volumes can rise, is one of the biggest success stories in corporate Britain today. This is the company's world-leading position in communications and IT support for global corporations and organisations. After the telecoms shake-out of four to five years back, there are only three serious players left in this fast growing market. One of them is BT. Clients include Reuters, Unilever and the National Health Service.

So what does this jewel in the BT crown - new targets for which were outlined by the chief executive, Ben Verwaayen, yesterday - actually do. Broadly, it is in the provision of IT network services, allowing, for instance, Microsoft to connect up all its call centres worldwide, or Reuters to ensure that all its realtime data is communicated to every terminal across the world simultaneously. BT likes to describe it rather grandly as "providing the infrastructure for globalisation". Whatever you call it, it's apparent that BT has tapped into a rich seam of future growth.

BT Global Services already accounts for more than 40 per cent of the group's total revenues, and with new contracts being added at the rate of £2bn of value a quarter, it will soon eclipse the traditional business of British retail and wholesale telephony.

Stranger still, the City is even beginning to buy the story. The shares have risen strongly this year as the price finally starts to break free from a rating which reflected the perception of BT as a dying British utility. There's a way to go before the company finds itself rated like IBM, with which it often now competes for contracts, but the process has at least begun.

It has taken four years of hard grind for investors to start believing the story. Yet not only do Global Services now show a consistency of big contract wins, it even appears BT can make money out of them too. Some £400m of annualised cost cuts were announced yesterday in pursuit of the division's 15 per cent Ebitda target. The contrast with the value destruction of BT's previous attempts to go global - where high cash prices were paid for assets of questionable quality - could hardly be greater. By following clients into markets where they need service, BT is creating a global presence of impressive proportions.

There are lots of things that could still go wrong, but on the international front, at least, this once bombed-out old telecoms company seems finally to have seen the future and to be getting it largely right.

What now for pensions reform?

All the fevered speculation about what Gordon Brown may or may not do with foreign and domestic policy when he becomes Prime Minister is getting to be a bit of a bore, but, just to compound the tedium, let me add my penny's worth in the arcane but vitally important area of pensions.

Conventional wisdom would have you believe that he'll junk all Lord Turner's proposed reforms the moment he gets through the door, if only to ensure they don't become part of Tony Blair's "legacy".

There was always an element of "not invented here" about Mr Brown's opposition to the proposals, and it may be that out of spite alone he'll return to the drawing board. Both at a practical and an ideological level, the Chancellor worries about the higher, basic state pension recommended by Lord Turner - the one because of its implications for the public finances, the other because he favours means-testing.

Less controversial from his perspective is the proposed National Pensions Savings Scheme, where employers and employees are obliged to contribute unless they specifically opt out. He won't care a fig about the dumbing down effect this might have on more favourable private pension provision. The middle classes can on the whole take care of themselves.

Yet the NPSS only really works lower down the employment chain in conjunction with a non means-tested higher state pension. The betting therefore has to be that pension reform broadly in line with the eminently sensible set of proposals put forward by Lord Turner will be part of the new "inclusive" Gordon Brown.

j.warner@independent.co.uk