Unpredictable water industry is hindering investment
Investors are being put off by a protracted uncertainty in UK water regulation, according to the asset management company Impax.
The stability and predictability of water company regulation by the Water Services Regulation Authority (Ofwat), has been a major contributor to attracting private investment into the sector, which has attracted over £108bn of investment since privatisation in 1989.
However, according to the Impax, Ofwat’s proposals to modify companies’ wholesale licenses this year, lack detail and are therefore hindering investment.
The proposals, which were clarified in a paper last month, stated that 51% of sector revenue would remain under the current remuneration methodology, and close to 40% of non-network activities would be opened up to wholesale competition from April 1 2015.
Eleven of the 23 regulated water companies challenged Ofwat’s proposals and Impax claims a competition commission referral by the end of the year is the most likely next step.
Impax says that it is still far from certain how utilities and potential new entrants will be remunerated in the next price review – the 2015 to 2020 regulatory period.
The firm’s investment manager Simon Gottelier believes that the industry is losing predictability because the difficulty of calculating the future cost of capital has led to concerns over asset-based valuation methodologies.
Levels of merger and acquisition activity, which has attracted substantial investor interest in recent years, may also be reduced he claimed.
He said: “In line with many other investors, we are concerned by the lack of clarity which could hinder investment if the current situation is protracted. The spotlight does appear to be shifting to other investment opportunities, including the water treatment technology companies and infrastructure businesses.
“However, Ofwat’s clarification paper showed pragmatism and an apparent willingness to listen to both the water companies and to investor concerns.”
He added: “We were encouraged by Ofwat’s reassurances on remuneration of capital expenditure in the next review period and hope that the Regulator will continue to work with all parties to re-establish revenue predictability, and consequently the attractive dividend yield that comprise key attractions of the UK water industry.
“We note the recent narrowing in listed company premia to their Regulatory Asset Value’s (RAV) but believe that there is substantial long term value in the sector.”