Water. We rely on it every day: turning on the tap, pouring a cuppa or having a wash, and not giving it a second thought. But behind the scenes? Well… it’s been a bit of a mess.

After eight months of digging, the Independent Water Commission has delivered the Cunliffe Review – named after its chair, Sir Jon Cunliffe, a former top civil servant. Its findings? Let’s just say they don’t pull any punches. The largest review of the water sector in England and Wales since privatisation at the end of the 1980s said regulators need sharper teeth, ownership models need a rethink, infrastructure needs a serious upgrade and, above all, trust – which has all but drained away – needs restoring.

Sir Jon even compared it to the “Great Stink”, that delightful summer of 1858 when the Thames was basically one long, smelly sewer. Back then, it sparked a revolution in sanitation. This time, the hope is the Cunliffe Review can do the same - minus the stench.

In this video, Phil Kent, CEO of Gravis and Investment Adviser to GCP Infrastructure Investments Limited, gives his take on the report and the potential opportunities for investors.

A full transcript is provided below and you can view the press interview on the findings here

The review can be summarised by trying to address two of the challenges that we see in the water sector. The first is environmental, so the state of our rivers and water systems more broadly from an environmental perspective. Secondly, from an economic perspective, the price of water, and the in the water sector over recent years.

Perhaps the first thing that the review pointed to, and indeed the government has already acted on, is scrapping the existing economic water regulator Ofwat. They pointed to the need to replace the regulator and replace it with a regulator that thinks holistically across both the economic and the environmental aspects of water regulation and monitoring, which were previously separated between Ofwat and the Environment Agency. Bringing those two things together was a key part of the review.

The second part I'll point to is how water companies are controlled and their ownership. There was a lot of speculation ahead of the review about nationalisation of certain water companies, and that's certainly something the government has sought to avoid at all cost in respect of Thames Water. The review pointed to the need to exert more control on owners of water companies, but stopped very short of the desire to actually nationalise and bring those companies back into government ownership, which we think is a positive thing.

We think that these are core, regulated utility assets that, if they're regulated and managed properly, can form attractive long-term investments for investors looking for long-dated, inflation-protected income, backed by critical physical assets.

My other observation from the review was that they were very clear that there aren't any short term fixes here. Some of the challenges that we have on both the environmental side, but also the economic side, are relatively entrenched - a function of a period of underinvestment. It was quite clear that bills are likely to increase as a result of some of the recommendations that come through, and we're not going to see any changes overnight. It's going to take some time before those environmental or economic benefits, both in terms of better environmental conditions and ultimately, lower bills, eventually come through.

I think some of the positive things we've seen in the water sector are the possibilities of private sector investment coming in under models such as a Direct Procurement for Customers model. To the extent there is a discrete water project that has been the purview of two water authorities, or is a minimum level of Capex, that project now has to be offered up under a private sector finance procurement model.

So there has to be opportunity for third parties to develop, build, and operate those pieces of infrastructure. We think that's really positive. We saw one of the first of those announced recently in terms of the Haweswater Aqueduct project that reached financial close earlier this week. And we hope that there's a strong pipeline of other projects that have been earmarked for the direct procurement model moving forward. So that's something we'll certainly be looking at closely in terms of the funds we manage at Gravis and opportunities for investment there.

You can watch the press briefing outlining the findings here.

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This article has been prepared by Gravis Capital Management Limited (the "Investment Adviser“ or “Gravis”) and is for information purposes only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients of this article outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction and are treated as having represented that they are able to receive this article without contravention of any law or regulation in the jurisdiction in which they reside or conduct business.

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