UK Tries to Fix Water Sector With Longer Investment Cycles
(Bloomberg) -- The UK is seeking to end the “boom and bust” investment cycle in its embattled water and sewerage industry by requiring companies to plan their funding needs for the next 25 years.
The announcement on Tuesday is part of a package of measures by the Department for Environment, Food and Rural Affairs aimed at reversing decades of underinvestment in the regulated sector, which has fueled public anger over chronic leaks, sewage spills and service outages.
The current five-year price review cycle discourages investment in large-scale projects, such as upgrades to treatment works and sewers, the government said. It also means companies make little progress on environmental goals until the end of each cycle, when they rush to invest, putting pressure on supply chains and still missing targets.
Under the proposals, the new regulator will instead use a “5/10/25-year planning approach,” according to the white paper. While prices will still be set every five years, companies will also need to set out investment for the next 10 and 25 years. The five-year price reviews will become “checkpoints,” rather than “delivery sprints,” it said.
A spokesperson for Defra said the new approach is designed to attract investors seeking long, steady returns rather than short-term capital. A review into the sector by Jon Cunliffe called for greater scrutiny to ensure the industry attracts investors willing to accept steady returns, as opposed to those wanting to make a quick profit before exiting.
Finding the right investors has been a challenge facing the biggest supplier, Thames Water. The company has endured a calamitous few years, weighed down by debt and facing widespread criticism for its poor environmental record, which has landed it with hefty fines. Thames is now effectively in the hands of its creditors, who are trying to agree the terms of a rescue deal with Ofwat.
Long-term transparency will also avoid investors being “caught off guard” by new regulations, a spokesperson for Defra said. Toward the end of the last price review period, investors were suddenly asked to provide money for new targets on storm overflows and phosphorous.
Defra confirmed plans to abolish the current main water regulator Ofwat and create a single unified water watchdog, which would also cover drinking water quality and environmental regulation. Details on how that will be achieved will be published in a separate “transition plan,” later this year.
As part of the changes, companies will also be required to publish contingency plans that would ensure critical services continue should a company be brought into special administration. The question of special administration has been hanging over Thames Water since its shareholders walked away from the business in 2024. It remains a possible outcome if an agreement can’t be found with creditors and the company runs out of money later this year.
(Updates with more details from white paper in ninth paragraph.)
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