Ofwat chief executive, David Black, told the investment community that shor- term investors focused on cash returns, or those seeking to make gains from risky financing structures, are not welcome in water.
Speaking at the Europe 2022 Infrastructure Investor Forum, he said however that: "As a regulator, we value the contributions that long term responsible investors can make to the sector, we are expecting investors to help drive high performance companies and responsible long stewardship of assets and the environment.”
Black went on to list how water companies could make a good case for investment at PR24. He said Ofwat will be looking for:
companies that are efficient and innovative;
effective use of competitive procurement for major infrastructure projects;
companies to have credible long term adaptive plans with clear understanding of risks to resilience and priorities for their investment between PR24 and future periods;
companies to be financially resilient and financed for the long term; and
companies that demonstrate they are operating in the public interest and that their corporate behaviours are consistent with serving the interests of customers and the public.
Efficient and innovative
Driving the frontier forward on service and cost efficiency. He noted in particular that improving environmental outcomes is an area ripe for innovation and improvement, including through nature-based solutions, sustainable drainage systems, behaviour change initiatives and smart networks. He cautioned: “The question for investors is how far along are companies on the innovation and change curve? Companies that already lag behind on their current performance will face an even bigger challenge at PR24.”
Effective use of competitive procurement
This includes the 18 strategic water resource solutions being considered by RAPID.
Credible, long-term adaptive plans
He commented: “The regulatory regime already provides strong commitment to future cost recovery by the RCV, we will look at how we can better reflect the expected benefit to customers and the environment in future periods from new investment at PR24.”
Financially resilient and financed for the long term
Black said Ofwat remained concerned about the poor financial resilience of several water companies struggling with high gearing and risky structures, and that there would be further consultation on proposals to address this in summer.
Operating in the public interest
Black said: “It is not what the sector says it is doing or even external accreditation of its virtue, but ultimately the way that companies act that matters. This includes company dividend policies and executive pay. Customers need to be confident that water bills are going to be used to fund environmental improvements and better service and not be siphoned off for the benefit of management or investors.”
Black pointed out the investors have enjoyed attractive returns since privatisation, and that companies continue to trade at a premium to regulatory capital value (RCV) despite falling allowed returns at recent price reviews. He also highlighted upcoming challenges for the sector, including on the environment, resilience, net zero, service basics and affordability.
Comments