Ofwat should be given a new and explicit duty to promote investment, forcing it to strike a balance between short-term bill impacts and long-term needs.
This is the plea of the chief executive of the Global Infrastructure Investor Association, which represents some of the biggest shareholders behind the utilities sector.
Jon Phillips told Utility Week the current regulatory system has “systematically restricted investment” across the water sector.
He added: “In approving previous five-year spending proposals, Ofwat has consistently set lower expenditure limits than companies have sought, to deliver a real term reduction in bills over the past decade. This has led to vital projects being deferred. Ofwat has then used the companies which spend least as the efficiency bar for the next price control period, leading to a vicious circle that has stored up mounting problems.”
Phillips’ comments come on the back of the submission of business plans for the 2025-2030 asset management period (AMP). These show water companies asking for £96 billion of total expenditure – almost double the sums expected to be spent between 2020 and 2025.
Several of the plans highlight Ofwat’s current methodology for setting the cost of equity as a significant barrier to secure the finance needed to deliver their plans.
Ofwat’s preliminary cost of equity figure is 6.22%, which is lower than returns in the debt markets.
Phillips said with inflation expected to remain high for the foreseeable future, the financing of the water sector has reached “a tipping point”.
He said: “Investors who will finance this major investment programme upfront need to earn a fair return for those whose pensions savings they manage. With returns in bank accounts higher than those currently available in the sector, and confidence currently low, investors will want to see a competitive return for the risk they are taking so that water companies can continue to attract capital in what is a global marketplace.”
“The government should set out a long-term plan with powerful outcomes-based targets for 2050, which align the objectives of regulators and the industry. And give Ofwat a new and explicit duty to promote investment, striking a new balance between short-term bills and long-term needs.”
He referenced comments by Lord Hollick, chair of the Lords Industry & Regulators Committee, who last month called on Environment Secretary Therese Coffey to tackle “a lack of leadership” in the water industry. Phillips said the “need for that leadership has never been more pressing”.
He added: “A continuation of under-investment for tomorrow to keep down the bills of today will simply mean passing even bigger problems to our children.”