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What’s the message coming out of water regulator Ofwat concerning the future of the UK’s water industry, and what effect is this having on potential investors in the sector?

he UK’s water industry is at a signifi cant infl ection point. All of the country’s water companies have submitted business plans to water regulator Ofwat and have received

detailed feedback from Ofwat. These regulated business plans will determine how the companies can operate and how they can be funded over the next fi ve years.

Ofwat’s position is that the water industry has had a good time of it in the last fi ve years. Infl ation has been higher than expected and throughout the economic slowdown the prices that the water industry has been able to charge have been index linked. At the same time, the cost of borrowing has been cheap, thanks to interest rates remaining at a record low. Ofwat is now pressing water companies for price reductions, or at least for price increases lower than the rate of infl ation.

The next fi ve-year price control period will plainly be different to the last one. It is time for investors to decide whether they are happy that the industry will be making lower returns on the basis that interest rates are low. They need to consider that water is still a stable, low-risk sector to invest in, which gives a guaranteed regulated return.

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