Leading investor slams UK water review

A senior executive at Invesco Perpetual has predicted that a tough determination by UK water regulator Ofwat towards the end of last year could end up driving equity investors away from the sector. Criticism of the review is not universal, however.

Neil Woodford, head of investment at UK fund management group Invesco Perpetual, has sharply criticised the UK’s water regulator over its most recent review in November last year and predicted that equity investors will flee the sector.

Invesco is one of the largest investors in listed UK infrastructure companies and holds shares in water companies United Utilities, Pennon Group, Severn Trent and Northumbrian Water.

In an interview, Woodford told the Financial Times that Ofwat had “behaved like Robin Hood” [by allegedly favouring consumers too much at the expense of shareholders] and added: “The next time we come up for a water review, don’t expect shareholders to be holding the baby.”

In the 12 months prior to the review, UK water companies under-performed the stock market by 28 percent, partly on concerns that the review – which determines how much water companies can charge consumers over the next five years – would be tough. In the event, it was tougher than many had predicted – setting a permitted weighted average cost of capital of 4.5 percent, compared with 5.1 percent permitted in the previous five-year period.

If Woodford’s prediction of an exodus of equity investors were to materialise, it would mean companies having to rely more on the debt markets and potentially making investment more expensive.

However, some observers have accused the water industry of ‘crying wolf’, and recent financial results issued by UK water companies have generally been reasonably good.

Niall Mills, a senior asset manager in the London office of fund manager First State Investments and member of the board at UK utility Anglian Water, told InfrastructureInvestor.com:    

“It was a tough and demanding determination, that’s a fact. But it was very well structured in terms of challenging the performance of companies. If it was completely unfair, why has none of the WaSCs [water and sewerage companies] challenged it? It rewards the top performers and penalises the underperformers – that’s certainly what the Regulator would maintain.”