Thames Water is collapsing – there’s only one way to save it
A Thames Water sign (Alamy)
5 min read
If the Tory government won't nationalise Thames Water, then it is going to have to be radical to avert a disaster.
Thames Water is in trouble. The company that provides water services to 25 per cent of the population of England has too much debt — £18.3bn, giving it a gearing of debt to value of more than 80 per cent. OFWAT says the ceiling should be 60 per cent.
It has historic poor performance. Last week it was revealed to have dumped a record 72bn litres of raw sewage into our rivers, more than the previous two years combined and would face fines of millions of pounds to add to its financial woes.
The company desperately needs to invest in its ageing infrastructure — £3.25bn is the estimate of what is required by 2030 to address spills and leakages. But its investors, having sucked money out of the company, are now reluctant to put that investment back in.
Worse than that, its £18.3bn of debt is becoming much more expensive to service because of the rise in interest rates — more than 50 per cent of its debt is linked to inflation, and its creditors are now calling for Thames to pay up.
If you want to understand why we have record raw sewage spills into our rivers, you have to understand the Byzantine financial structure of Thames Water. In June 2022, they stated that the company was “in good financial health”. That was a lie. By the December, Moody’s had downgraded their parent company Kemble Water Holdings and warned that Thames needed an additional £1.5bn of equity capital.
For years, OFWAT had allowed holding companies to borrow against the water companies' assets, not so they could invest in their creaking infrastructure, but to increase dividends to shareholders. Borrowing for consumption, not for investment. One year, Thames paid out more than £650m in dividend even though their profit was only £241m. When OFSTED finally ruled that dividends should not be paid out to external shareholders, they found that they only had the power to regulate one of the seven companies that make up Thames Water.
Thames could claim they were not paying dividends to external shareholders — only “servicing the debt” they owed to the other companies in the group. It was those companies that paid it to external shareholders. Those shareholders are the true owners of Thames water and more than 70 per cent of them are overseas investors. They are rumoured to have regarded U.K. Water companies as their “bespoke ATMs”.
The special pleading has now begun. Thames is demanding that OFWAT allow them to charge you and me 40 per cent more! Kemble has to pay those foreign shareholders £190m by the end of this month. The only place they can get that money from is Thames, and Thames reckon that is why we are called the bill payers? Thames' solution does not simply hit the public in the wallet, it also demands that OFWAT allow them to pollute more and not penalise them with fines. That, they claim, is the only way they will be able to sucker in new investors — or as they might put it, raise the necessary £3.25bn of capital from the markets on the basis that OFWAT will allow them to go on charging more for a worse service.
So what will the government do?
In the run up to a general election one thing is sure, they won't be too keen on re-nationalisation. Michael Gove says it is all their senior executives' fault, so you might wonder why he didn’t introduced legislation to block the £26m the industry's bosses have taken in bonus payments in just the last five years. If he were a better capitalist, he would understand that rent seeking is just what capital will do in a monopoly situation, and water companies are simply monopolies.
Investors have no incentive to properly restructure the debt. Writing off the £5Billion of the Holding company's debt, as some of Kemble's investors have mooted, would still leave Thames as a permanently over-leveraged company unable to extract itself from the cycle of under-investment and under-performance.
There is a more radical and effective solution. Government should use the Special Administration Regime established in the 2004 and 2011 Energy Acts to eliminate the excessive debt. The Secretary of State approves an application by OFWAT to the court to put the company into administration. The court appoints administrators, and the government provides financing during the period. This ensures the company can continue to supply water services to the consumer before refloating the company by an IPO on the London Stock Exchange — minus the debt burden that would otherwise doom it to fail a little bit further down the line.
This is not a BULB situation and anyone who thinks there is a water services equivalent of Octopus Energy out there waiting to take Thames onboard would be making a serious mistake. Preparing for an IPO would require the administration regime to be set up and carefully structured to that end.
But for a government loath to admit that the privatisation of a natural monopoly has been a public fiasco, this represents a free-market solution that says to the external shareholders, "Tough! You made a bad investment. Didn't anyone ever tell you investment returns can go down as well as up."
Barry Gardiner is the Labour MP for Brent North.
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.
