Has Thames Water crisis made investors wash their hands of the UK?

Thames Water’s travails have caused a crisis of confidence for some in the City who have warned that “unpredictable” regulators pose a threat to UK investment.
Investors were voicing concerns about Ofwat, the regulator, over the summer as the debacle at Britain’s largest water company dragged on, arguing that regulatory interventions suggested the UK was unreliable and would pose a funding risk not just for the water sector, but for other utilities as well.
Yet in more recent weeks, one of the largest investors in the water industry has doubled down on the UK with billions in funding for new infrastructure, while the government has announced a record-breaking funding round for green energy projects, indicating that interest in UK regulated assets remains strong. So has Thames Water made the whole of the UK uninvestable or is it regarded as an isolated case?
Ofwat has made its attitudes to operators clear in public statements. The watchdog has admonished companies for delivering “disappointing” results on performance targets for several years and has said customers should only be charged to “pay for new investment and not to put right past failings”.
Its stance has led to a protracted dispute over how much companies will be allowed to bill households, with Thames Water’s investors declaring its rules have made the company “uninvestable”.
The debacle appears to have overflowed into a broader resentment among the investment community. City sources have been warning behind closed doors that the outcome of Thames Water’s current crisis will determine how much money is available for UK infrastructure more generally.
Meanwhile the Universities Superannuation Scheme (USS), the country’s largest private pension fund, has written down the value of its investment in Thames Water, and Simon Pilcher, the fund’s chief executive, has said the crisis could deter the fund from investing in other parts of the economy. In July he warned that the fund’s disappointment would influence its “future approach” to regulated industries.
He said: “Economically regulated assets should be a good fit for long-term patient investors like USS, particularly where, as with infrastructure, they require long-term investment to address historical challenges.
“That is, though, dependent on similarly long-term, consistent regulation that recognises the need for that investment and that strikes a fair balance between risk and returns over the long term.”
Meanwhile, Water UK, a trade body representing the sector, commissioned Oxera to canvas investor views on the sector. The consultancy firm interviewed more than 30 investors. It found they had all “expressed severe concerns with Ofwat’s approach to investability” and that its regulatory proposals posed a “material risk” to the sector.
The report did not name the investors interviewed but it has since emerged that Singapore’s sovereign wealth fund told the government it will not invest in the UK’s water, electricity or gas networks owing to the upheaval at Thames Water. At a meeting attended by other investors, GIC told Steve Reed, the environment secretary, that it would steer clear of investing in British utilities. The Sunday Times reported that one person at the meeting complained UK regulators had become “too unpredictable”.
However, Sadek Wahba, managing partner of I Squared Capital, a private equity firm with assets of around $40 billion, said the suggestion that regulators had been behaving out of character in the UK was “misplaced”. I Squared Capital is looking to expand its investments in the UK after buying Arriva, the London bus operator, with a commitment to invest more than €2 billion electrifying its fleet of vehicles.
Wahba said the notion of having a regulatory framework “where the government can intervene” had been a key tenet of the privatisations undertaken by Margaret Thatcher’s government.
“And in the case of the water sector, and other sectors, that has in my experience been absolutely the case,” he said. “I think where people have commented [on this], they have commented because some of these companies have lost money. They haven’t lost money because of the regulatory framework, they’ve lost money because of their own doing, either mismanagement, or too much leverage.
“It’s easy to blame the regulators, but I don’t think the regulators fundamentally deviated from what they said they were going to do, which is to balance the interests of private investors, as well as consumers. So I don’t share that view at all.”
Macquarie, the Australian infrastructure bank, has been at the centre of the Thames Water scandal, both as the investor criticised for loading the company with debt and extracting billions in dividends, and as the current owner of Southern Water, which was fined £90 million for illegally dumping raw sewage into the sea across the south coast.
Yet Macquarie has been expanding on its investments in the UK, despite its difficulties with Ofwat. In July the firm announced it was taking full ownership of Britain’s gas transmission network, National Gas, which will add to its stake in Cadent, a gas distribution network serving 11 million homes and businesses.
Macquarie has more recently announced investment of £1.3 billion into green infrastructure including a new solar farm in Stow, and fast charging points for electric vehicles at its Roadchef restaurants on motorways. It has announced that its total funding allocation for the UK over the next five years is £20 billion.
Julia Prescot, co-founder of Meridiam Infrastructure and deputy chair of the National Infrastructure Commission, said that when she speaks to investors she finds the sentiment towards investing in UK infrastructure is “broadly positive”.
She points to the recent record-breaking funding round for renewable energy projects delivered this year, which raised £1.5 billion, a significant increase on the £227 million delivered in September 2023. Investors participating in the auction have committed to building 131 projects combining an overall total capacity of 9.6 gigawatts.
Prescot said: “The UK has always been seen as a very good international destination, due to the regulatory background, and the feeling is that if the UK says it is going to do something it generally does, whereas there are other places that don’t. When I have been talking across the board to investors there is a generally positive perspective.”
Wahba said: “When I talk to pension funds and insurance funds looking to deploy capital outside of the US, the UK is the number one destination without a doubt.”
The investment community is also looking to new regulatory structures and delivery models to increase their exposure to water sector assets and other utilities. The Thames Tideway, a new super-sewer for London, has been funded using the specified infrastructure projects regulations. The SIPRs have been set up as a structure for funding large-scale investments which would be impractical to arrange through five-year company business plans.
The Tideway is owned by a consortium of investors comprising Allianz, Amber Infrastructure, and Dalmore Capital. Yet Thames Water will operate the tunnel once it has been constructed and it is being funded through customer bills. The project is the first to use the SIPR model for funding. Tideway’s annual report showed infrastructure commissioning ahead of schedule and, unusually for a project of its size, the costs remained steady at £4.5 billion.
Prescot said the projects planned under SIPRs were attracting interest from firms “looking to new and anticipatory investments, rather than the more standard buying and selling of the utility shares”.
She added: “These are new future investments which are critical for our resilience and making sure our water systems are fit for the future. And investors are looking at those and saying: that’s an interesting structure.
“When you are looking at other markets, there is a renewed interest in the UK as a stable destination from a policing perspective. The business models we are looking at now are longer-term than the standard five-year price controls. And I think that is very positive.”