UK Water Funding at Risk Without Higher Returns, Investors Warn

Philip Aldrick
·3-min read

(Bloomberg) -- Top investors warned the UK government that they are unlikely to inject more money into the country’s ailing water system unless returns are made more attractive, according to people with knowledge of a private meeting with ministers.

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Steve Reed, the environment secretary, held a meeting with investors in London on Tuesday. The thorny issue under discussion was the billions of pounds of equity needed to underpin an enormous £88 billion ($115 billion) upgrade of Britain’s water networks over the next five years. Representatives of major pension funds and asset managers warned that shareholders might not be prepared to invest unless the regulator improves returns, according to one of the people.

There could be a broader impact for the government’s growth plans if it can’t count on the support of investors. In particular housebuilding, where water infrastructure is vital to new developments. Bad blood with the regulator could jeopardize other major infrastructure projects in the UK, investors told Reed according to the people.

The water industry is facing a crunch point. Britain desperately needs to fix leaking pipes, upgrade sewer systems and clean up its waterways. This means bills need to rise to pay for the work. Ofwat is under pressure to closely assess company spending plans so that bills don’t increase too sharply. The sector is largely funded by debt but needs to be attractive so that shareholders will stump up the equity needed to stop suppliers becoming too highly leveraged and at risk of financial collapse.

Thames Water Sees Bills Rising 59% Under Revised Plan

The UK water industry and its backers are in fierce negotiations with Ofwat. Analysts estimate that at least £7 billion of new equity is needed to secure the tens of billions of pounds of debt. At least £3.3 billion of that is for crisis-stricken Thames Water alone, which is in the hands of its creditors.

In a meeting with Reed and the Treasury’s growth minister Spencer Livermore that was described as “extremely positive,” investors aired their grievances over Ofwat. Reed and Livermore were told that the gulf has “never been greater” between the returns water companies require to deliver the investment and the regulator’s proposal, according to the person in the room.

Ofwat is due to take a final decision on the next five-year regulatory period in December. In an interview last week, Reed signaled government would be taking a hands-off approach, arguing that political intervention at this stage could undermine the process and delay investments as it would force regulator Ofwat to redo its calculations.

“I don’t think it helps to come in right at the end of a process and change it — it’s frankly mad to change the rules in the last five minutes of the game,” he told Bloomberg on September 5.

A government official said Reed put forward these arguments to investors on Tuesday.

A further stumbling block comes from water companies threatening to challenge Ofwat’s decision at the Consumer Markets Authority, which would delay any water upgrades for months. They won a similar CMA case four years ago.

Reed told investors that water was his number one priority, according to one of the people.

“The round table was an important opportunity for the government to hear directly from private investors in the UK water industry,” said Jon Phillips, chief executive of the Global Infrastructure Investor Association, which represents more than 25 investors in the UK water industry. “By working together we can attract the investment that is necessary. We fully support the government’s ambition to put the sector on a stronger footing.”

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