First Sentier Investors (FSI), managers of infrastructure assets on behalf of institutional investors in the UK with in excess of £1.2 billion of equity, including an investment in Anglian Water, has told the Competition and Markets Authority it is “disappointed and concerned to see the CMA reversing key aspects of its Provisional Findings”.

Niall Mills Managing Partner, Head of Global Infrastructure Investments, was commenting in the FSI ’s response to the latest working papers published by the CMA in its current PR19 appeals inquiry.

The majority (>90%) of the equity it manages is from pension funds, including several large, high profile UK pension funds representing many thousands of members.

The submission says FSI supports the robust, evidence based process that the CMA undertook in arriving at a cost of capital for the U.K water sector in its Provisional Findings(PFs), which had gone “some way to address concerns” relating to the poor balance of risk and reward resulting from the asymmetry in the design of certain regulatory mechanisms and financeability.

Provisional Findings were “a welcome and rational improvement to an unprecedentedly unfair Final Determination (FD) by Ofwat"

It describes the PFs as presenting:

“a welcome and rational improvement to an unprecedentedly unfair Final Determination (FD) by Ofwat, one that shook investor confidence in a regulatory system that was once considered the “gold standard” and has been copied multiple times around the world.”

“We are now disappointed and concerned to see the CMA reversing key aspects of its PFs. The CMA has cited no new evidence to support the decision to do so, notwithstanding the unprecedented level of engagement that took place, with detailed submissions from each of the appellant parties and over forty third-party submissions.”

Niall Mills explained that PR19 had raised “significant concern" from IFS’ investor base around the validity of the investment thesis for Anglian Water.

His letter concludes:

“When considered ‘in the round’ …. the resulting regulatory envelope falls short and raises questions around its suitability to attract the necessary long term capital (debt and equity) required for the efficient financing of this essential infrastructures.”

“Moreover, it forces well-run companies that are focused on long term resilience to take short term decisions to the detriment of the stated goals of PR19 in securing long-term resilience, protecting customers and making markets work………..

“Ultimately, this is harmful to customers and undermines trust in the regulatory system.”

“As long-term investors in the sector, we have a responsibility to represent our underlying pension funds and their members. We take this responsibility very seriously and must ensure that our risk vs return balance is fair for the members. At present we feel that this balance has been significantly tipped to greater risk and that will impact on our appetite for ongoing investment in the sector.”

Click here to read the First Sentier Investors response in full