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Adia’s Thames Water write-off could discourage UK FDI

Thames Water serves more than 16 million households in England but is holding £15 billion of debt Reuters
Thames Water serves more than 16m households in England but is holding £15bn of debt
  • Adia wrote off 10% Thames Water stake
  • Investors ‘more cautious’ about UK
  • UAE FDI trending downwards

Abu Dhabi’s decision to write off its investment in Thames Water will make international investors more cautious about backing UK projects, despite efforts by the UK government to make its water sector more attractive.

The Abu Dhabi Investment Authority (Adia) owned 9.9 percent of the UK’s largest water supplier, but according to reports citing accounts filed in June it has written down the value of its stake from £263 million ($344.21 million) to just £1 at the end of last year.

The Abu Dhabi sovereign wealth fund wrote down the entire value of its investment in Thames Water “due to the challenging regulatory environment and operational performance,” the Financial Times reported.

Thames Water provides water and sewage services to more than 16 million people households in England, but has lurched from crisis to crisis in recent years.

The company is languishing under £15 billion of debt, and is facing renationalisation if it does not raise at least £3 billion in equity between 2025 and 2030 to prevent this. Without new investment, it said it would run out of money by May 2025. 

A UK government spokesperson said it was “closely monitoring the situation and the company remains stable”. They added that the government “is working to make the sector more investable into the decades to come”.

The UK will host an investment summit on October 15 in an attempt to drive further foreign investment in UK markets, and it has worked hard to court Gulf investment.

The latest figures released by the UK suggested that Emirati investment in the UK is trending downwards.

Despite a deal that the UAE would invest £10 billion ($13 billion) over five years, in 2021, foreign direct investment from the UAE was £7.4 billion – 2.8 percent or £213 million lower than in 2020.

In 2021, the UAE accounted for 0.4 percent of the total UK inward FDI stock.

Andreas Schindler, a consultant in foreign direct investment at the Berlin-based FDI Center, said: “Regulatory issues and recent economic instability, as highlighted by the Thames Water situation, have led to increased scrutiny and a more cautious approach from international investors when considering long-term FDI projects in the UK.”

“Adia’s write-off risks initiating a broader trend of caution and risk-awareness in the UK market, especially in sectors like utilities that face significant regulatory, operational, and financial challenges. 

“Investor confidence is crucial for institutional investors due to the scale, long-term nature and risk management involved in their decisions. Key investors such as Adia will influence other investors interested in the UK market, likely leading to re-evaluations by potential investors.”

While Adia’s sell-off could affect confidence from other investors, the UK also faces broader challenges, and Schindler said interest in investments in the UK has shifted since the Brexit referendum in 2016. 

“Despite a recent resurgence, there has been a general decline in FDI and a noticeable drop in greenfield projects, with success coming primarily from cross-border M&A deals,” he said.

Schindler said investor confidence varied according to sector and while the UK excels in attracting renewable energy projects and investment in the technology sector, “it lags behind its Western European counterparts in other key strategic sectors such as electric vehicle and semiconductor manufacturing”.

Stuart Cole, a former Bank of England economist, said Thames Water was previously an attractive offering for investors such as Adia because the UK had a weak regulatory environment, there was little pressure to keep consumer bills down and the company offered generous dividend payments.

While “things are now changing” and the regulators are getting more forceful, Cole nonetheless believes Abu Dhabi’s experience with Thames Water is an isolated case that will not affect Gulf appetite for investment into the UK.

“We have a budget later this month where the chancellor is expected to promote and highlight the attractiveness of investing in the UK,” he said.

“So while investing in Thames Water has not turned out well for Adia, I would not expect it to have broader ramifications for inward investment into the UK.”

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