Come winter, a looming energy crisis is set to add to an already hostile cost-of-living environment, generating widespread discontent, particularly in Europe. Within this region, investors should keep their eyes trained on the UK, one of the world’s most privatised infrastructure markets.
Depending on how the coming events are handled, winter may end with changed attitudes towards private infrastructure ownership and a rethinking of traditional core assets.
Let’s start with the latter. Before the coming winter of discontent, we have a summer of discontent.
Blighted by drought – and the prospect of another dry winter – the UK media has unanimously trained its guns on the water companies, with predictably unflattering results. Cue headlines about the three billion litres of water leaked daily by English water companies. Or the projected need to build 30 new reservoirs, at a cost of £8 billion ($9.4 billion; €9.5 billion), against the charge that not a single one has been built since privatisation.
Then there is the “summer of sewage”, with water companies’ discharges into the UK’s rivers and seas leading to pollution warnings for more than 50 beaches, locals asking themselves if this kind of thing should be happening in Western Europe, and Environment Agency data painting a distressing picture of water companies spending six million hours on 775,704 separate occasions dumping sewage over the past couple of years.
All of this is topped up by quasi-daily reminders of the dividends extracted by these firms since privatisation (£72 billion), the debt added to their balance sheets (£56 billion) and the increase in customer bills (40 percent). Even business friendly publications such as The Times are dismissing regulator Ofwat as “a lobbying organisation for the water industry”, with the Financial Times calling it “supine” and suggesting it should be chaired by Feargal Sharkey. Sharkey is the industry’s bête noire, the former singer of The Undertones who went from writing Teenage Kicks to kicking water firms daily on Twitter and in print.
The UK’s privatised water companies are no strangers to controversy, but this summer feels like an inflection point. A staple of core and super-core strategies, it seems right to ask if these assets – nowadays – have the right risk profile to fit into these low-returns, low-risk vehicles, given how shaky their licence to operate appears.
Alas, things can get worse for UK infrastructure investors on the risk front. Tomorrow, UK regulator Ofgem will officially announce what prices consumers are set to pay for their energy over winter, and the expected changes are nothing less than seismic. According to widely reported analysis from Cornwall Insight, energy bills for the average household are expected to surpass £4,000 a year by Q1 2023 – up from circa £1,300 last October. Such a staggering increase is forecasted to plunge two-thirds of UK households – about 18 million families or 45 million people – into fuel poverty by January.
It’s not hyperbole to say these predictions are generating panic across the UK. It’s also hard to see a scenario in which the government isn’t forced to intervene through some kind of bailout. How far a potentially explosive situation can be diffused will depend on the shape and timing of that intervention. Until that happens, poorly conceived blanket calls for nationalisation or more widespread energy windfall taxes are likely to continue to proliferate.
“The social contract [in the UK] is broken,” Christopher Dembik, Saxo Bank’s head of macroeconomic research, wrote in a note earlier this month, warning “the UK is more and more looking like an emerging market country”.
Speaking more generally, Nigel Green, chief executive of financial advisory deVere Group, said recently: “Investment headwinds are many in the coming months. One of the biggest – and most overlooked – is the rising risk of large-scale social unrest.”
With a brutal winter in store, are we about to see a long-lit fuse finally detonate?