“Top investors in the water industry have complained to the Treasury that the regulator Ofwat is being politicised and warned of a flood of appeals against its financial demands.
International investors that control suppliers including Anglian, Yorkshire, Affinity, South East and South Staffs led a delegation this month ahead of a crunch ruling on prices by Ofwat, due in December. They are reeling from the toughest draft settlement from the regulator in years and fearful of Labour’s pledge to renationalise the sector at a big discount to market value.
After years of taking huge dividends from water companies and piling debt onto them, while paying minimal corporation tax and overseeing scandals such as sewage spills and water leaks, utility investors have seen the industry and political environment turn toxic.
Ofwat, chaired by former Anglian Water boss Jonson Cox, stunned the sector in July when it rejected the spending plans of all but three companies and sent the other 14 back to the drawing board, demanding more efficiency, faster paydown of debt and better customer service. It will publish its final ruling on their 2020-25 spending plans in December.
The meeting on October 14 is believed to have included blue-chip investors such as German insurer Allianz, Singapore sovereign wealth fund GIC, Deutsche Bank’s wealth division and Australia’s IFM Investors. Among the issues raised was Ofwat’s independence and the dangers of it reacting to political pressure.
Cox has been on a crusade to clean up the sector. In an interview last year, Cox told The Sunday Times: “This industry still doesn’t accept that customers should be at the heart of this business. We are unwinding one of the last bits of the pre-crash bonanza: buying an asset and gearing it up.”
Investors also asked senior mandarins whether the Competition and Markets Authority had the resources to deal with simultaneous appeals against Ofwat’s financial stipulations. At least five suppliers are believed to considering appeals.
The funds called on the Treasury to assess the financial resilience of the sector, after companies including Thames and Northumbrian complained that Ofwat’s demands were “unfinanceable”.
Global investors have ploughed billions of pounds into former state-owned companies since the privatisation wave of the 1980s and 1990s, yet are increasingly reassessing whether the UK is still an attractive place to park their cash.
Ultra-low interest rates and the need for returns inflated asset values and led to a bidding war for infrastructure companies. However, the appetite for water companies has cooled over the past two years. The Sunday Times revealed in April that Labour planned to renationalise the industry at a big discount to market value, making deductions for “asset-stripping since privatisation”.
That and Ofwat’s clampdown have spooked local authority pension funds, which have belatedly begun pouring cash into infrastructure. GLIL, which invests the pensions of council staff, was among the attendees at the Treasury meeting.
Last month, Alain Carrier, European boss of the CAN$400bn (£239bn) Canada Pension Plan Investment Board, which owns a stake in Anglian, said: “It’s difficult for the regulator under the current political climate not to be seen to be very tough. The independence of the regulator is under some pressure.”
Ofwat said: “Our decision-making is independent from government and based on delivering the very best for customers. Investors have always made clear they value the independence of the regulatory regime.”
Source: Sunday Times (pay wall)