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Ofwat’s moves to make water companies take more risk is putting off investors, a survey commissioned by industry body Water UK has found.
The regulator expects investors to accept lower baseline rewards in the 2015-20 investment cycle, with penalties for underperformance and greater opportunities to benefit from outperformance.
This “risk and reward guidance” has made the sector less attractive to 94 per cent of unlisted equity holders, 86 per cent of bondholders and 85 per cent of advisers canvassed. Equity holders in listed companies (Severn Trent, United Utilities and South West Water) were more likely to see the upside, with 43 per cent saying it made the sector more attractive.
The survey, carried out by consultancy Indepen, showed that Ofwat’s investor engagement has improved since the last price review in 2009. The 67 investors who responded were also mainly positive or neutral about changes in the regulatory approach.
However, more than half of respondents said Ofwat had got the balance wrong between customers’ and investors’ interests, up from four out of 10 last year.
Investor concerns about financeability contributed to a perception of the UK water sector as less attractive than last year in comparison to other countries. Australia, the US and Canada are seen as better bets for water investment.
Set against other UK sectors, water was viewed as less risky than electricity generation, energy supply and rail operations but riskier than rail infrastructure, airports, telecoms and energy networks.
South West Water and Affinity Water are being fast-tracked through the current price review. Ofwat is due to publish draft determinations for the remaining water companies in August.
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