A lifeline for Thames Water
The utility is drowning in debt and under pressure from the government, regulators and shareholders. Will it sink or swim? Simon Wilson reports
What’s going on?
The ongoing stand-off between Thames Water, its shareholders, the UK government and industry regulator Ofwat is “beginning to resemble the final scene of Reservoir
Dogs”, says The Guardian. How long can the beleaguered utility remain standing in its present form? Who, if anyone, will be prepared to deliver the killer blow – in the form of bankruptcy, nationalisation, or a temporary government takeover and possible carve-up of the business? Thames Water has been under pressure for months, pulled down by its £18.3bn group debt pile and years of financial mismanagement, and pitted against a newly combative regulator, Ofwat, apparently determined to make up for years of lax oversight. The situation escalated in late March when the nine shareholders – led by Omers, a Canadian municipal pension fund, and the UK-based Universities Superannuation Scheme – said they would not inject the £500m of equity they had promised by the end of the month.
Why not?
The company’s shareholders, who also include Chinese and Abu Dhabi wealth funds, say Thames Water is now “uninvestable”. That’s after Ofwat refused to approve a massive 56% real-terms rise in bills by 2030 – nor would it agree to more leniency on dividend rules and fines for pollution. The crisis intensified last Friday when Thames Water’s parent company, Kemble Water Finance, formally notified bondholders that it had defaulted on interest payments on a £400m loan, increasing the chances of a temporary nationalisation (or “special administration regime”). Kemble has asked creditors to hold off for now and let it explore “all options”, including a debt for equity swap that would see lenders take over. But it also has a separate £190m loan due for repayment by 30 April that it can’t pay and probably won’t be able to refinance.
What’s the government doing?
It doesn’t want to get involved, but is busy war-gaming scenarios if it has to. Thames Water going into administration is not what the government wants in an election year, and may not happen – the company insists it has enough cash to keep going for 15 months. But behind the scenes, Whitehall has assembled Project Timber, a cross-department team planning for a Thames collapse and “special administration”, and how to ensure its 16 million customers still get supplied with water. Within this, a team labelled Project Telford is looking at the future scenarios for structuring and regulating what would emerge from a collapse, including the option of breaking up Thames Water into three operating companies.
How did it all end up in this mess?
It’s essentially a tale of greedy owners and feeble regulators that let them rack up huge debts, pay out large dividends, underinvest in infrastructure and relentlessly dump sewage. Thames has monopoly access to 16 million customers and should be able to make a decent profit, assuming steady investment in maintaining the assets, and not getting too ambitious. However, following water privatisation in 1989, the UK idiotically allowed the water industry to gear up its balance sheets and pay out the proceeds to investors. That financial engineering became all the easier in the era of ultra-low interest rates and quantitative easing. But it’s come back to bite Thames (and, less severely, others) in an age of rising inflation. Thames Water was bought in 2006 by the Australian investment firm Macquarie in a leveraged buyout, and by the time it was sold again in 2017 its debt had ballooned from £3.4bn to £10.8bn. Across the wider industry, at a time of chronic underinvestment, more than £72bn was paid out to shareholders between privatisation in 1989 and 2021.
What should happen now?
Britain has left itself exposed thanks to its open-door policy on foreign ownership of critical national infrastructure, says Ben Marlow in The Telegraph. In future, “offshore structures should be banned, dividends capped, and executive pay tied to strict performance measures”. More immediately, Thames Water should be allowed to go bust, says The Times. Plenty in the City are opposed to that on the grounds that wiping out shareholders would discourage investment at a time when the UK is crying out for more infrastructure spending. But the even worse alternative is to let the bulk of the costs fall on customers and taxpayers. That would be another example of “heads I win, tails you lose” capitalism – letting capital take its profits but socialising the losses – that undermined faith in capitalism in the financial crisis. “That is morally unacceptable and politically dangerous.” Some form of temporary nationalisation seems inevitable.
To what end?
The debt will need to be restructured, preferably with bondholders taking a haircut, but taxpayers are likely to be on the hook for a large chunk. Freed of debt and stabilised, the company could then be sold off again. The energy economist Dieter Helm has argued that the best solution would be a special administration that splits up the complex, unwieldy business into four new listed companies: separating London from the rest of the Thames catchment area, and separating water supply from sewerage.
Alternatively, says Bryce Elder in the Financial Times, given that new investors may be thin on the ground, why not “engineer a shotgun merger for the common good”? Next door to Thames Water’s patch is Southern Water, 62% owned by Macquarie, that expertly extracted £2.7bn in dividends and £2.2bn in loans from Thames Water from 2006-2017. Macquarie says it wants to “play a leadership role” in improving UK water-industry infrastructure. What better way than “with a bit of regulator-aligned benevolent M&A to create a national champion? If nothing else, it’d be a welcome example of a utility owner cleaning up its own mess.”
“The ongoing stand-off is beginning to resemble the final scene of ‘Reservoir Dogs’”