UK pension funds investors GLIL Infrastructure LP (GLIL) has warned the Competition and Markets Authority that investment in UK regulated utilities is “perilously close to the edge …leading to a negative cycle of low investment, poor returns, inability to attract and motivate strong management teams.”

The warning comes in a submission on behalf of GLIL by Chris Rule, Chief Executive, Local Pensions Partnership and GLIL Executive Committee Member, on the latest working papers published by the CMA as part of its ongoing inquiry in the PR19 appeals process.

With more than £2.3 billion in committed capital, the alternative investment fund is supported by a number of UK local government pension funds. These include Greater Manchester, Merseyside and West Yorkshire Pension Funds, which are known collectively as Northern LGPS, and Lancashire County Pension Fund, Royal County of Berkshire Pension Fund and London Pensions Fund Authority, which form Local Pensions Partnership Investments.

In February 2018 GLIL became an investor in Anglian Water Group via its joint investment vehicle Camulodunum Investments Ltd. Since then GLIL has made no further investments in UK regulated assets - the submission letter points out that although it has reviewed opportunities to invest “none have proven to be sufficiently attractive compared to other opportunities.”

“We are not ‘faceless’ institutional capital. We represent over one million UK pensioners"

Chris Rule told the CMA:

“It is important context for our response to this consultation that the Competition and Markets Authority appreciates that GLIL considers itself to be an investor that is well aligned with the aspirations of Anglian Water over a long horizon, including the needs of the customer base and the local environment. ….

“We are not ‘faceless’ institutional capital. We represent over one million UK pensioners, and we are accountable to them to act as responsible stewards for our investments over the long-term while generating a fair return on capital to pay the pensions.”

GLIL says it welcomes the approach taken by the CMA during the water redeterminations process, which it believes has run a robust process. However, the submission emphasises that as evidenced by its recent investments, there are many potential investments in the UK which represent a “compelling risk versus reward for investors when compared to an investment in regulated UK water assets.”

GLIL goes on to warn that the proposed reduction in cost of capital from the CMA’s initial Provisional Findings approach “introduces substantial risk to future investment in our view, both in AMP7 and beyond.”

The submission states:

“We would argue that we are perilously close to the edge, which itself is hard to define, leading to a negative cycle of low investment, poor returns, inability to attract and motivate strong management teams, and greatly reduced incentives for institutional investors to invest time and capital to pursue upsides, an outcome which would play out through AMP7 and over future regulatory periods.”……

“ We are concerned at the arguments being put forward by Ofwat and their advisers ….which imply a low likelihood for reduced investment with too low a WACC. This may not lead to a collapse in investment since regulatory obligations need to be fulfilled in AMP7, but it could be the start of a negative cycle which is hard to reconcile with the upcoming risks from climate change and, in the case of Anglian Water, population growth and reductions in the amount of water permitted for abstraction from rivers.”

 "Actions of Ofwat through PR19 have created significant uncertainty over the near-term and long-term returns"

Chris Rule goes on to say that it ”does appear odd that at a period when cost of capital is going to be the lowest in the history of the water sector, and when the UK government is talking about investing in the future to take advantage of growth, the focus for Ofwat has been to reduce the scope of investment as far as possible.”

“….We do not believe it is simply the bills in AMP7 which should be paramount in setting the WACC, but that the CMA should include a broader interpretation of “the protection of consumers” in the future.”

The submission continues:

“We see significant competition for our capital with a pipeline of potential investments which are offering compelling returns versus the risks and rewards presented by a regulated UK water business at the revised cost of capital.”

According to GLIL, it is "precisely the type of investor that UK regulators should be seeking to encourage to act as a long-term shareholder in the UK water sector."

“However, the actions of Ofwat through PR19 have created significant uncertainty over the near-term and long-term returns available to investors in the sector, and for Anglian Water in particular…”

“The CMA is proposing to reduce the cost of capital available to investors at a point in time when the risks to investors’ returns are heightened through regulatory challenge, and while the competition for capital from other infrastructure sectors makes for a compelling pipeline of investments away from UK water assets.”

Chris Rule concludes the submission by saying:

“We strongly recommend for the CMA to reconsider its approach to the balance of risks set out for revised the cost of capital published in the 8th January 2021 consultation.”

Click here to read the GLIL submission in full

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