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Investors assess Ofwat’s final determinations and whether UK water is more investable

Investors will need time to fully assess the regulator’s announcement on the amounts of investment and rates of return over the next five years. Ofwat’s decisions are also critical to the UK government’s broader strategy of attracting private investment

Ofwat’s Final Determinations require careful consideration and investors will need to fully assess whether the regulator has moved sufficiently to attract the unprecedented levels of investment the water sector so urgently needs. This is a pivotal moment for the future of the sector.

Ofwat has finally acknowledged the need to raise bills to fund unprecedented levels of investment. However, it also has a duty to ensure the sector remains investable, in order to attract the essential private capital. Investors will be closely scrutinising whether the regulator has taken sufficient steps, which will also be critical to the government’s broader strategy of attracting private investment to drive economic growth 

In its last two price determinations, Ofwat set the water industry on a path to potential failure by prioritising lower bills over critical investment needs while imposing unachievable targets. This approach rendered the sector increasingly unattractive to investors, as the focus on driving bills down has come at the expense of enabling the investment needed to upgrade the UK’s aging water infrastructure.

A historic failure of government leadership, a lack of coordination between regulators and Ofwat’s short-term approach have combined over the last decade to result in the bow wave of investment that is now needed to meet public and political expectations. The new government’s recognition of these shortcomings and its call for a regulatory ‘reset’ are positive steps. However, the sector needs a new approach to regulation now – not in five years’ time.

GIIA’s latest six-monthly Pulse Survey of global investors, out this week, highlights the long shadow Ofwat’s regulatory approach has cast over the UK’s broader investment appeal. Investor confidence in the water sector has been deeply shaken, with broader implications for the UK’s perceived quality of regulation. This has tarnished the country’s investment appeal and left it lagging behind international peers.

A failure to restore investor confidence in the sector could have wider implications for the government’s broader strategy to attract private capital from around the world. If Ofwat is judged by investors to have moved insufficiently from its draft decisions in July, the government may need to take decisive and urgent action to restore investor confidence, unlock capital, and ensure the sector can deliver the improvements that customers, communities and the environment so desperately need.