How regulatory change can help drive the UK’s growth agenda

Posted January 16, 2025
by Guillermo Ardila, Nikki Deeley and Paul Smith

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The UK Government has put private investment at the heart of its agenda for economic growth. However, the shortcomings of the current regulatory regime are a key barrier for global investors.

In a report published by the Global Infrastructure Investor Association (GIIA), Guillermo Ardila, Nikki Deeley and Paul Smith delve into the issues and recommend changes to better attract private capital, helping the Government to achieve its aims. Key points from the report were also featured in Utility Week in a piece by Jon Phillips, GIIA CEO.

1. Introduction: Steps to date and investor sentiment

Since taking power, the UK Government has announced a series of measures to encourage private investment into the UK’s economy, including the creation of the National Wealth Fund (NWF), bolstering the Office for Investment, the creation of the National Infrastructure and Service Transformation Agency (NISTA) — which merges the National Infrastructure Commission (NIC) and the Infrastructure Project Authority (IPA) — and an independent review of the water sector regulatory system led by Sir John Cunliffe (‘the water review’).  

Apart from the water review, these measures, for the most part, represent a revamp of the existing government apparatus rather than an intent for far-reaching (and needed) regulatory reform set out by the Prime Minister at October’s International Investment Summit and by the Chancellor in her Mansion House speech the following month.

The Global Infrastructure Investor Association’s (GIIA) latest Q4 2024 Pulse survey, which examines investor sentiment towards the UK, reveals three worrying facts: 

  1. The key barrier to investment is the perceived unattractiveness of the UK’s regulatory regimes.1  
  2. The outlook for investment opportunities in UK sectors that are subject to traditional network regulation (i.e. water, gas, electricity and airports) is viewed as unfavourable.2
  3. The UK's attractiveness as an investment destination continues to decline, and it remains an “unattractive” destination overall.3

What once was a source of strength for attracting investment in the UK — the regulatory regime — today appears to be a barrier to it. The UK’s ‘investability’ or lack thereof, according to the survey results, is likely to be rooted in deep and complex issues. To address them, the initial steps taken by the Government need to be followed by more fundamental regulatory change, particularly in some sectors. 

2. High-level diagnosis: Main shortcomings of the UK’s regulatory regime  

The current shortcomings of the regulatory regime are multifaceted and complex, and vary across sectors. Different stakeholders will have their own perspectives. In this section we set out the issues that resonated most with GIIA’s members and that are widely accepted by interested stakeholders. We particularly focus on the regulatory regimes that serve to underpin infrastructure investment in the UK.  

Is there true regulatory independence? 

Sector regulators such as for energy (Ofgem), water (Ofwat) and aviation (CAA) are independent from the Government by design. This is built into the different legislative acts that serve to constitute them. But are regulators really independent from government?

We argue that regulators are only truly independent in the short run, during the period in which they make price control decisions. But even then, the political backdrop in which these fundamental decisions influencing the ‘investability’ of the UK are made has affected regulatory decision-making. In recent years, sector regulators have been the subject of huge political and media pressure to keep regulated prices down for consumers, arguably leading to underinvestment in some of these sectors. 

Regulators’ expanding responsibilities 

Over time successive governments have introduced incremental changes to the regulators’ responsibilities, which has led to regulators being asked to do more by policymakers. The increase in scope is generally implemented through the addition of incremental duties on the regulators. 

For example, in 1989 Ofwat had three primary duties: to protect customers, to ensure a long-term water supply and to ensure financial viability of water companies. Over the years these have been broadened to include three further primary, and eight secondary, duties. In Ofgem’s case, its duties have risen from eight to 21 since 1986.

The traditional role of regulators has evolved over time to move beyond simply setting price caps on a periodic basis, to incorporate a requirement to consider environmental, growth and social factors. The significant scope of the regulators’ duties has meant that they are required to balance competing priorities in their decisions, making these increasingly complex, less technical and more political over time. 

An ever-expanding set of regulatory responsibilities has meant that, over time, regulators have become bigger and more powerful agencies. This has created the risk that regulators feel compelled to justify their increased role by regulating more and more often where intervention may not be required. At best, this leads to regulatory red tape; at worst, to regulatory overreach that undermines regulated companies' ability to effectively run their businesses.  

Past governments’ (lack of) direction

While governments have asked more of regulators, the guidance they have provided often contains insufficient focus and clarity to assist the regulators’ decision-making. In fact, quite the opposite at times: government guidance is sufficiently broad that it can accommodate a wide range of regulatory outcomes. 

This lack of direction not only makes the regulators’ endeavours more difficult but also increases uncertainty regarding regulatory outcomes. This is particularly the case when regulatory decisions aimed at furthering the interest of consumers require trading short and long-term considerations, for example prioritising long-term investments and growth relative to short-term impact on regulated prices. 

It is precisely the lack of clarity that then creates an environment where independent decision-making is susceptible to being undermined. 

Complex and opaque regulatory decisions 

The growth of the scope of regulators has also affected how they make decisions. It has meant that over time, regulators’ decision-making processes have become more complex, opaque and have necessitated an unprecedented amount of information. In addition, increased scope has led to different regulators significantly deviating from one another on similar if not identical issues. This is particularly relevant to their approaches to making price control decisions and to how risks are allocated and priced. 

This divergence of approaches has a particularly negative impact on the ‘investability’ of the UK. It makes the regulatory regime difficult to navigate for investors and undermines their expectations of achieving balanced and consistent regulatory outcomes over time and across their investments.

3. Call for action: Recommendations to policymakers

As a result of the shortcomings set out above, investors perceive that the UK’s regulatory regimes are increasingly complex, intrusive and open to discretion. Taken together, these factors mean that investors perceive UK regulation as increasingly risky and therefore they require higher (than otherwise) returns on their investments. Absent these increased returns, committing to incremental investment for long-term deliverables becomes increasingly more difficult. 

In what follows, we set out recommendations that seek to address the core issues. Some are straightforward and can be implemented relatively quickly, for example following the water review. Others are more ambitious and will require legislative changes. Where relevant, we highlight relevant regulatory precedent to support the proposals. 

Recommendation 1: Clarifying the scope and priorities of regulators 

Regulators’ duties should be reviewed and simplified to prioritise economic duties which have a clear focus on delivering an efficient and sustainable service to customers over the long run. Such duties could include a requirement to protect consumers, to facilitate sustainable growth, to promote long term investment and to promote effective competition. This will likely require legislative change.

Where regulators are required to balance a range of duties, the Government should also provide strategic guidance that provides clarity on how best to do so. Given the challenge of climate change, a particular focus should be on creating the right conditions to transition the economy towards net zero. This will require regulators to balance the long-term needs of future generations with the short-term cost impact on current consumers. The Government could provide guidance to regulators without the need for further legislative change.

A good example of how the Government could deploy strategic guidance or steers is the Department for Culture, Media and Sport’s Strategic Policy Statement for fibre roll-out, which provided the telecoms regulator (Ofcom) with the clarity needed to prioritise investment (over cost) to create stability for ten years.   

Recommendation 2: Ensuring consistency of approach across regulators 

At a minimum, the most contentious areas of price control determinations, particularly the calculation of the cost of capital, should be determined using a consistent methodology which provides certainty between regulators. There is a particular opportunity to improve alignment between regulators as regards decisions on market-driven parameters of the costs of capital. If a more consistent methodology across regulators for setting cost of capital can be agreed in advance of price control reviews, it can allow the price control review to focus on the most efficient means of delivering for customers and the required investments to enable this. 

The UK Regulators Network (UKRN) has published guidance to promote more consistent approaches for setting the cost of capital that its member regulators have agreed to follow. Nonetheless the reality is that — even with this guidance — there are significant differences between regulators’ decisions. By contrast, the Australian energy sector sets the cost of capital every four years to apply to all determinations. While it is unclear whether the allowed cost of capital in this example provides sufficient incentives to invest to support the transition to net zero, the principle of setting a unique cost of capital across multiple determinations is a potential means of providing more consistency over time. 

A consistent approach to setting the cost of capital between regulators over time will act to minimise the complexity of the regulatory regime, the scope for uncertainty arising from regulatory judgement, and the scope for adversarial engagement between regulators and the companies they regulate. 

In Germany, a more radical approach has been adopted with the consolidation of several regulators into a single entity. The Federal Network for Electricity, Gas, Telecommunications, Post and Railway is the single body responsible for promoting competition in these markets and protecting consumers. In addition to ensuring consistency of approach over time, it is argued the creation of a single regulatory agency could help to consolidate skills in areas such as regulatory finance, cost and engineering assessment, all generating improved outcomes for consumers. While potentially appealing, this would require significant legislative change in the UK context. 

Recommendation 3: Structural changes to provide more clarity over the long term 

As the Government gears up to publish its first ten year national infrastructure strategy in the spring, it is important that the strategy provides clarity to private investors on the Government’s approach to infrastructure. To do so, it is essential that the strategy clarifies the areas where significant private investment is required, and the potential structural and regulatory changes needed to facilitate it.

To provide regulated companies and their investors with greater certainty, there needs to be consensus around a longer-term plan for infrastructure development, created by an independent body, and bought into by the relevant regulators, policy makers and stakeholder groups. The emerging NISTA could, with the right powers and direction, be perfectly placed to do so. In addition, to ensure that NISTA’s recommendations are followed through by government and sector regulators, it should be given a statutory footing. Companies and their regulators should be required to report on how their plans and decisions align to this long-term plan. Government guidance on how regulators should balance their statutory duties needs to complement the approach to infrastructure development.

In Australia, the energy market operator regularly publishes a plan for infrastructure development, with projects that are included within the plan subject to a lighter touch regulatory process. The new UK energy system operator is intended to provide greater clarity about required investments to achieve net zero but its effectiveness in doing so is still unclear. Longer term predictability allows companies and their investors to mobilise capital. Market forces can then be leveraged in a way in which the best outcomes are achieved for consumers. 

4. Conclusion: Greater investor confidence

These recommendations, if enacted consistently, would address many of the shortcomings identified and help to create greater confidence among investors over the longer term. 

In particular, they would provide confidence that UK regulators have a clear set of duties to follow, clear guidance from governments about their policy objectives and a long-term plan for infrastructure development. Regulators can then be held to account for delivering regulatory outcomes that meet their duties and are aligned to government guidance.

This report was prepared by Guillermo Ardila, Nikki Deeley and Paul Smith of Fingleton, and Nick Elliott of the Global Infrastructure Investor Association.

  1. Q4 2024 Infrastructure Pulse: Europe and the Americas. Barriers to infrastructure investment
  2. Q4 2024 Infrastructure Pulse: Europe and the Americas. The outlook: 2024 and beyond.
  3. Q4 2024 Infrastructure Pulse: Europe and the Americas. The outlook: 2024 and beyond.