For investors in the UK, there was barely time to uncork the champagne before having to deal with the latest threat to their assets. Having seen down the threat of Jeremy Corbyn’s nationalisation agenda on 12 December, political fears were – pardon the pun – trumped by regulatory ones as the final determination by Ofwat, the country’s water regulator, came through, setting an allowed return for the next five years at 2.96 percent.
Though not unexpected, it is the lowest allowed return since privatisation in the 1990s. While collective punishment is not the job of a regulator, the decision drew a line over an 18-24 month period in which Ofwat dished out multi-million pound fines to the likes of Southern Water, Thames Water, Severn Trent and South West Water, as the companies were found guilty of a number of misdemeanours, including multiple pollution and sewage leakage offences.
The regulator was finally striking back. It was following on the coattails of energy regulator Ofgem, which in its own regulatory review cut the allowed return to 4.3 percent for gas and electricity distribution and transmission networks. With excessive profiteering one of the main concerns of this industry, Ofgem admitted in October that it had erred when setting the previous rate in thinking the cut would deter investment. Instead, half the companies under its watch were making double-digit returns, despite the allowed return being between 6 and 7 percent.
After years of profitability, the situation was probably best summed up at our Hong Kong summit in November by Ang Eng Seng, the head of infrastructure investment at Singapore’s sovereign wealth fund GIC. “We kicked off in London thinking it was the best and safest place [to invest]. My gosh, we were wrong,” he said, with a notable reference to GIC’s attempts to expand London’s Heathrow Airport.
Yet, regulatory issues haven’t just been limited to the UK. In Spain, the shift to a UK-style of regulation saw an allowed return set for the first time for gas distribution and transmission of 5.8 percent, which reportedly sparked ire from the likes of Global Infrastructure Partners and CVC Capital Partners, which were said to have written to the government expressing their displeasure.
Spain’s shift, according to the National Commission on Markets and Competition, was an attempt to balance “the interests of consumers, both individuals and companies”. Similar motivations were behind a potential shift in Australian regulation of its major airports, as airlines and consumers complained of high prices, although the Australian government’s decision for “light touch regulation” went against the grain of the year. Australia has also struggled on energy regulation, causing great uncertainty among renewable energy investors on marginal loss factors.
Our 2020 LP Perspectives Survey has identified regulation as the greatest worry among investors, with 36 percent highlighting it as their greatest concern. Perhaps some advice from GIC would help going forward.
“Investing in regulated assets has risks, and a key risk is regulatory surprises,” Ang said. “We need to price that [in when making investments] – it’s almost like an insurance premium we need to build in.”