The Labour government’s first international investment summit arrives next week, a chance for ministers to advertise the splendid opportunities available to global funds under the UK’s new pro-growth, mission-led, market-friendly administration. It is also a moment for those global investors to belly-ache about Ofwat, the water regulator.
In fact, they’ve started already. Here comes the Abu Dhabi’s sovereign wealth fund with a write-off of its entire 9.9% stake in Thames Water, the over-indebted big beast of the sector. Aside from Thames’s “operational performance” (well, quite), Abu Dhabi blamed “the challenging regulatory environment”, a nod to the familiar grumble that Ofwat has somehow made English water companies “uninvestable” by refusing to allow customers’ bills to be hiked to the moon, just halfway to it.
And here is Jon Phillips, chief executive of the Global Infrastructure Investor Association, telling the FT about the supposedly dreadful spillover effects: “Some 30 international investors in UK water are also potential investors in energy, transport and digital infrastructure. But perceptions continue to be coloured by their experience in water, where the regulatory environment remains a red flag.”
What are poor Keir Starmer and Rachel Reeves supposed to say in response?
Well, first, they could start by reminding Abu Dhabi and others who have lost their shirts at Thames – including our own Universities Superannuation Scheme – that they made a spectacularly stupid bet in buying the company in stages from Macquarie, the Australian outfit not noted for leaving much on the table for the next guy.
If we’re talking red flags, there were plenty fluttering over Thames in that 2011-17 era – extreme financial gearing, Macquarie’s dividend extraction at purchase, run-ins with the regulator over price rises, misreported data, burst water mains, leakage rates and more. If you still chose to give Macquarie an exit at a premium to the company’s regulated asset value, sorry, but caveat emptor applied.
Second, the PM and chancellor could show their foreign guests the total shareholder return charts for Severn Trent and United Utilities, the next two biggest companies in the sector and two of the three that didn’t disappear off the stock market.
United Utilities’s most recent annual report records that £100 invested in the company’s shares in 2014 was worth £204 ten years later. That’s a compound annual rate of roughly 7% – more or less what a long-term investor would expect to earn from a regulated utility. Severn Trent’s statistics are almost identical. And neither company’s share price has gone into meltdown over Ofwat’s recent price proposals. No question marks over investability there. Ofwat probably hasn’t lost its marbles.
Third, Starmer and Reeves could make the reasonable argument that investors, foreign or domestic, are expected to act like owners when they’re backing companies as important as Thames. You are not buying a government gilt with a sovereign guarantee. You are expected to understand the nature of the assets you own. It is, for example, no use complaining after the event about Thames’s “Victorian” pipes when they were Victorian when you invested – and, indeed, were Victorian when Queen Victoria was on the throne.
You get the picture. There are entire expanses of UK infrastructure – electricity networks, gas networks and so on – that should be entirely unaffected by the Thames debacle and the losses for its shareholders (and some of its bondholders, probably). And, even within water, the number two and three players are untroubled.
So, yes, roll out the canapés and excruciating soundbites next week in search of foreign capital. But do not indulge the lobbyists who think investors are entitled to a bail-out when they make bad bets or fail to improve assets. Once the huffing and puffing over Thames dies down, the money should still come.