Ofwat recognises need for step change in UK water investment but do its plans add up?
The regulator has allowed bills to rise but cut proposed investment plans. Investors are examining whether the combination of price rises, performance targets and allowed investment amount to Ofwat fulfilling its duty to make the sector investable
Global investor sentiment towards the UK has been at an all-time low in recent years, driven significantly by concerns around the regulatory regime. The new Labour government has set out its ambitions to make the UK more attractive to international investors in order to drive its growth agenda. The outcome of Ofwat’s price review for the next five years – known as PR24 - will be one of the first tests of that ambition.
Ofwat’s recognition in its draft determinations - announced on 11 July - of the need for a step change in investment to fix the industry’s historic and future challenges is long overdue. The recognition that bills must rise to fund the reset of the sector is a first step. But by cutting the amount of investment proposed by £16 billion in the period 2025 to 2030, Ofwat risks falling into the trap of setting targets and expectations that can’t be met.
The regulator has a statutory duty to make the sector investable. Investors will be looking very closely at whether the combination of allowed investment, performance targets and required price rises are sufficient to give them confidence. This is a process that will require detailed examination of Ofwat’s proposals for each company.
The next stage in the PR24 process is an Ofwat consultation on the draft determinations, with investors and water companies being given only seven weeks to make submissions on this extremely complex set of issues before the deadline of late August. Ofwat has then provided itself with additional time to issue final determinations by moving this deadline to January 2025.
GIIA calls on Ofwat to ensure that it holds a genuine consultation that fully considers the evidence submitted and that leads to improvements to its proposals, rather than doubling down to defend its initial position. In order to restore confidence in the sector, it is critical that the right balance of allowed investment, returns on equity, performance targets and incentives is found that leads to a final determination that investors and water companies can fully get behind. As GIIA has called for and as the new Government has agreed, the water sector needs a reset, leading to a long-term plan that in due course delivers on the expectations of consumers.
On behalf of more than 25 members who are invested in the UK water sector, GIIA will seek to engage fully with the Government over its forthcoming proposals to reform the water sector. Working together, the ambition is that the industry, regulators and Government can achieve the long-term transformation that will meet consumer expectations and environmental needs.