Unloved but worth holding

Consumers may be irritated by the performance of water utilities, says Alex Brummer, but their solidity and growth potential make them sound investments

Britain, as in many other areas, has been among the pioneers in water privatisation. But, as Katrina Manson writes on page 30, it is still in its infancy globally. It is estimated that at present, only 10 per cent of the world’s population is serviced by private companies, which gives some idea of the potential scope for the industry including those – like some of the UK companies – which have the skills to bolster income by selling their expertise overseas.

In the immediate future, Europe would seem to have great potential with just 34 per cent of the population currently served by the private sector. Pressures on domestic budgets mean that governments and municipalities can be expected to offload water assets as they seek to shrink the size of the public sector and raise money to pay down debt at the same time.

Macquarie, whose infrastructure funds have shown how assets of all kinds, from toll roads in France to bridges, can be turned into milch cows, is one of the more enthusiastic investors in water assets. Investment can be accessed through the CF Macquarie Global Infrastructure Securities Fund. At the moment it believes the best opportunities are in Western economies because of the tendency of emerging markets to hold tariffs low through subsidisation.

In the Western economies, water can be a good hedge against inflation, since tariffs respond to overall price levels. Water is a secure investment during economic hard times and also a necessity. For those investors concerned about the degree of government interference and regulatory risk, Britain’s water sector provides insight into the potential pitfalls of the industry as an investment. Among the main reasons for cutting water free from government budgets was to remove responsibility from government for a huge investment programme in modernising Victorian drains, cleaning up polluted beaches and rivers and developing a more sophisticated water grid. The idea was to switch infrastructure investment from the public to the private sector. It is the requirement for capital expenditure to meet leakage and pollution targets which creates concern about regulatory risk.