Thames Water: Who should own essential infrastructure?

Investment companies take a long-term approach and are transparent

The small town of Hoddesdon, most famous for an alleged conspiracy in 1683 to assassinate King Charles II, lies just five miles southeast of the county town of Hertford. Despite the short distance, the two towns have different water suppliers: Hoddesdon is supplied by Thames Water, while Hertford residents are reliant on Affinity Water when they turn on the tap.  

Affinity supplies water to just under 4 million people in parts of London and the Home Counties. Unlike Thames Water, it is not responsible for sewerage services in the areas it supplies.

That isn’t the only difference. While Thames Water has been hauled over the coals by Ofwat for its “poor” management of leaks, Affinity Water recently announced that it beat its leakage target, reducing leaks by 15.8% against a target of 14%. That’s all the more impressive given that the reporting year included record-breaking summer temperatures of 40 degrees and a severe cold weather snap in December that burst hundreds of pipes across the region.

Thames Water has been in the news recently for all the wrong reasons. Long-running issues with sewage discharge, the departure of the chief executive and talk of temporary nationalisation (which Thames executives insist will not be necessary) have led to a media furore. Familiar grumbles about excessive debt and underinvestment have resurfaced.

It would be wrong to suggest that Affinity hasn’t had its problems too – the combination of extreme weather and high inflation has been tricky for all water companies. But they aren’t making the headlines of national newspapers.

Ownership differences

While Thames Water is owned by a consortium of pension funds, sovereign wealth funds and other institutions, Affinity has three main owners: Allianz Capital Partners, infrastructure specialist DIF, and HICL Infrastructure, an investment company listed on the London Stock Exchange.

HICL’s ownership is significant for a number of reasons. Like any listed company, HICL is bound by extensive disclosure and transparency rules, and has an independent board of directors whose job it is to look after shareholders in the company.

These shareholders include institutions, wealth managers and private individuals. So if you happen to be living in Hertford, you could easily buy some HICL shares, and so own a small stake in the company that supplies water to your home.

You’d also be in line for a generous dividend: HICL’s yield is currently 6.3%, though of course that isn’t guaranteed. (It’s worth pointing out that none of these dividends came from Affinity Water last year: the company reinvested all of its free cash flow.)

HICL is not the only investment company with an interest in water. International Public Partnerships (INPP) has a stake in the Tideway project, which is building a 25-kilometre “super sewer” under the River Thames. INPP recently sought to reassure investors about its links with Thames Water, announcing that the company was well protected even if Thames has to be temporarily renationalised.

As the owners of large chunks of UK infrastructure, HICL and INPP have both gone out of their way to demonstrate that they are responsible owners. Their lengthy sustainability reports cover everything from biodiversity to social mobility. Both have aligned themselves with the requirements of the Task Force on Climate-Related Disclosures and the EU’s Sustainable Finance Disclosure Regulation.

As public companies, they are used to the full glare of investor scrutiny – there’s nothing like facing questions from shareholders at an AGM to concentrate the mind. They are also bound by disclosure and transparency rules, like any London-listed company. They are part of a £34bn supersector of infrastructure investment companies (including renewable energy infrastructure) that has grown rapidly since the launch of HICL and INPP in 2006 – even if higher interest rates have created a more challenging environment of late.

Investment companies are also able to take a genuinely long-term approach to their assets, as they have permanent capital and do not have to redeem investors’ shares. That sits comfortably with the multi-decade horizons of infrastructure investing, encouraging a patient approach to stewardship rather than extracting maximum short-term value.

While some will always remain committed to the belief that natural monopolies such as water and gas networks should be owned by the state, the listed company model has several advantages, including accountability, transparency and the opportunity for small as well as large investors to participate. This isn’t the kind of thing that makes headlines – but it does make a refreshing change.