Pension funds group IFM Investors (UK) Ltd, one of the largest infrastructure investors globally, is warning the Competition and Markets Authority of its doubts over the stability and long-term attractiveness of the UK water sector.

IFM was commenting in response to the working papers published by the CMA on the cost of sebt and cost of capital in the ongoing PR19 appeals inquiry. With more than £36 billion of infrastructure equity assets managed worldwide, 98% of its investors are pension funds, including 50 in the UK.

As a shareholder in Anglian Water, IFM said since 2006 it had supported the business in investing over £9 billion into new infrastructure. Writing on behaf of IFM, Christian Seymour, Head of Infrastructure – UK & Europe said:

“The CMA provisional findings ….presented a potential redetermination that fell significantly short of the company’s PR19 business plan that the board had approved and which Anglian Water customers and key stakeholders had endorsed.

“We are therefore very concerned to see in the recently published CMA working papers changes that would further reduce the cost of capital. This would have an adverse impact not only on our pension fund investors, but also our customers and the environment.”

Referring to the CMA’s latest working paper on cost of debt, where reductions in the look-back period to 15 years are being proposed, according to IFM:

“This would fail to cover the overall investment horizon and create a situation where older, efficiently incurred debt is now unfunded - it is unclear why the CMA has shifted position so materially on this point, which introduces an unwelcome retroactive aspect to regulation.

“This, if not redressed, will undermine the transparency and consistency provided by the UK’s long established, incentive-based and independent regulatory framework.

"Regulators should be encouraging the use of longer-term financing to underpin the increased investment in water and wastewater infrastructure necessary for it to meet its duties to customers and to wider society…”

The submission goes on to point out:

“The assumption of there being limited risk of capital exiting (based in part on incorrect assertions made by Ofwat on investor sentiment founded on incomplete evidence) is inconsistent with our view.

“Historically, investors were attracted to the water sector in the UK due to the stability of the regulatory framework. This stability was undermined by the PR19 Price Review and was one of the reasons why Anglian Water has asked the CMA to redetermine.”

"The provisional findings from the CMA helped restore some level of confidence, however the significant change of course signalled in the latest consultation casts doubt on the stability and long-term attractiveness of the sector.”

“Over time, if there continues to be unexpected changes to the way regulators determine the cost of capital, trust will be eroded, and investors will channel capital to more stable environments.

“The proposed 0.25% reduction in the cost of equity alongside all the asymmetric incentives regime being proposed does cause concern for not just AMP7, but signals a worrying trend for future AMPs.”

Commenting on Anglian Water’s customer engagement during the development of its AMP7 Business Plan, IFM says:

“Following an extensive PR19 customer engagement programme - which was acknowledged by Ofwat as industry leading - Anglian Water customers and stakeholders told the company that they wanted to see more investment for the future.”

“Customers consistently placed greater emphasis on ensuring investment to address growing and urgent climate change impacts, rather than having a short-term bigger reduction in bills…..

“To see little evidence of this having been recognised by the CMA, with bill reductions appearing to take precedence over much needed investment, puts into question the purpose of mandating companies to undertake this research in the first place.”

Click here to read the IFM Investors (UK) Ltd submission in full