We cannot just rely on Thames Water to get itself out of this mess
Thames Water van (Credit: Sinai Noor / Alamy Stock Photo)
5 min read
Both Thames Water and Ofwat tell us that Thames can get itself out of the mess it is in. But a lot of what we have been told by the company has been wrong: they told us that their shareholders would inject more capital, and at the Select Committee in 2023 they didn’t know the quantum of their own debt, or its terms – staggering for a company in financial trouble.
Thames Water has £17bn of debt, and needs a major equity injection (thought to be between £3-5bn) or it will run out of cash at some point next year. It is politically untenable to allow the water and sewage system for a large part of the country to fail, so in the end the company knows that government has to bear the risk of stepping in. Given the ratings downgrade of Thames Water in July, this could be months earlier than the May 2025 date the company has publicly stated. If a guarantee is to be avoided, Thames, Ofwat and Defra need to change the way they are doing things.
Thames is still being caught out by entirely predictable events – the latest being a downgrade of its debt to “junk”. The company itself indicated in a presentation to investors about its annual results that it is starting a “formal launch of equity raise” in September, and is targeting receiving final binding offers at some point in 2025. This was announced before the credit rating downgrade to junk status.
Both Thames Water and Ofwat appear to have been wrong-footed by events far too often
Thames appears to have been caught out by the timing of the rating downgrade, which adds significantly to the urgency to repair its finances. Bizarrely, the investor presentation (published on the Thames Water website) lists its director of corporate finance as participating in the presentation – who now appears to have left the business, during the capital raising process he was leading.
But clarity from Thames about the CapEx required to put the company into good operational shape is vital. Investors cannot be expected to throw money into an unquantified and potentially bottomless well. That is why Ofwat's draft determination, which rated the Thames Water business plan "inadequate", is so damning.
It was also unusual in that Ofwat did not confirm the level of investment required in Thames wastewater infrastructure. It is difficult to see how an investor will provide the level of funds required if Thames has not agreed with Ofwat on its investment requirements.
The revised legislation now in place for a special administration regime significantly increases the scope for Ofwat and Defra to determine how this plays out. Given the delay and prevarication from Thames, city restructuring advisers are now talking about how different mechanisms can be applied to effect a restructuring, using special administration instead of (or in conjunction with) Section 26A of the Companies Act.
This would use special administration as part of the process for cleaning up Thames, rather than as a medium-term operational structure which would cost the Treasury dearly. This may be the only way to avoid the company coming cap in hand to Rachel Reeves and asking for a guarantee up front. This is similar to the process that was used to rescue Bulb, but – given the size of the Thames debt pile – needs to be executed more effectively and can be done much faster with the proper planning.
Both Thames Water and Ofwat appear to have been wrong-footed by events far too often. The challenge for the government will be to ensure that the management of Thames (who may not deserve much confidence) in conjunction with Ofwat act with the necessary speed both to improve their operational performance and to secure the required new money – without new funding, operational performance cannot be improved and risks further rapid deterioration.
In this respect the announcement of increased fines, whilst welcome indicators to the public of the seriousness with which the regulator is taking leakages and unauthorised discharges, don’t actually help improve current performance. At the moment, these just take cash out of the Thames operations and essential expenditures. There’s an important role for these once things stabilise, but their impact right now won’t actually help Thames dig itself out.
There is a small plus to the recent ratings downgrade. This puts Thames in breach of its licence, and gives Ofwat more control. This needs to be used without delay to secure the information necessary to identify possible investment and bring it forward to the earliest date possible. That money has to be invested now in the Thames network to reduce pollution and leakage – and if a government guarantee is to be avoided, we need to make sure Thames Water and Ofwat are focused on securing it. The key question is whether an acceptable source of new funding is out there and, if so, how to secure it and rapidly deploy the investment in the infrastructure that so badly needs it.
As to whether we can avoid a government guarantee? Probably not if we allow the company to continue to outline its restructuring plans and CapEx requirements at the current snail’s pace. But there’s a good chance we can if Ofwat and Defra act now to force Thames to accelerate its financing plans.
Barry Gardiner is the Labour MP for Brent West
PoliticsHome Newsletters
Get the inside track on what MPs and Peers are talking about. Sign up to The House's morning email for the latest insight and reaction from Parliamentarians, policy-makers and organisations.
