The UK’s biggest water company, Thames Water, seems to have staved off collapse for now. It has secured an agreement from its shareholders to inject £750m of new equity into the business. Although the funding comes with conditions, it’s a step in the right direction for the enterprise.
Pulled down by the weight of £14bn in debt, years of mismanagement, and the unresolved contradictions of its privatised monopoly model, several weeks ago CEO Sally Bentley abruptly departed two years into her promised eight-year turnaround plan, igniting a crisis at the company.
Its biggest shareholders – a range of mostly foreign pension funds and sovereign wealth funds – have baulked at pumping in the billion pounds the company says it needs to keep going. They stumped up £500m as recently as March but had resisted pumping in the additional £1bn previously promised. They are fearful of throwing good money after bad.
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The new investment is welcome, but it comes with several conditions. The money will be paid by April 2025 if the group develops a business plan “that underpins a more focused turnaround.” It must also set out targeted performance improvements and agree to “appropriate regulatory arrangements,” which hints at proposals across the industry to raise customer bills.
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What happened to Thames Water?
Thames Water, which enjoys monopoly access to a captive customer base of 15 million people in the south-east of England, is a classic example of “spectacular regulatory failure”, says Dieter Helm in the Financial Times.
The UK’s privatisations in the 1980s and 1990s were supposed to create private-sector balance sheets that would allow utilities to borrow to invest. “But there was a flaw: the belief in light-touch regulation.”
Government allowed the water industry to gear up its balance sheets and pay out the proceeds to investors. That became even easier in the era of negative real interest rates and quantitative easing. Running a water utility should not be too difficult, assuming steady investment in maintaining the assets, and not getting too greedy.
Instead, “financial engineering became the main game in town, and a very profitable one”. Thames Water, for example, 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. As Feargal Sharkey, the water-industry campaigner (and former pop star) colourfully put it: shareholders “ramraided these companies for cash”. At a time of chronic underinvestment, more than £72bn was paid out to shareholders between water industry privatisation in 1989 and 2021.
So it wasn’t just the weather?
No. Before she jumped ship, Bentley blamed the weather for the huge amounts of water (630 million litres a day) lost to leaks, and the 7,000 hours in which raw sewage was pumped into London’s rivers last year.
Changing weather patterns may have made it harder to manage fluctuating loads and demand, but a more proximate factor in Thames Water’s woes is the end of the low-inflation era. The interest Thames Water pays on more than half its debt pile is index-linked to RPI inflation (currently 11.3%), but it can only raise bills by the more accurate CPIH metric (currently 7.9%).
What should we learn from this?
The first lesson from this “fiasco”, says Patrick Hosking in The Times, is that monopolies sold to the private sector must be “regulated with an unremitting and unforgiving rigour if they are not to misbehave”.
In the case of water, the industry’s relationship with the regulator has been too “cosy”. The second lesson concerns the “convenient myth”, prevalent from 2008 to 2020 and stoked by UK policymakers, that inflation had been tamed. Believe that, and it made sense for water companies with “nicely predictable balance sheets to borrow more”.
The UK water industry now has debt of about £61bn. Meanwhile, customers have seen service levels fall and prices rise. Between 1989, when the ten main regional water suppliers were sold off, and 2015, water bills rose by 40% above inflation – with more to come to meet the huge investment needed to improve infrastructure.
Is renationalisation the answer?
Few countries have copied England’s Thatcher-era experiment in fully privatising the water supply, but renationalising companies now would be prohibitively costly, complex and time-consuming, with minimal likelihood of a more favourable outcome.
There’s also the risk of wider damage to the UK infrastructure sector’s ability to attract investment – and to Britain’s credibility as a safe destination for overseas investors. Even so, says the FT, the way they are managed and supervised as private entities needs a “comprehensive rethink”.
Ofwat has new powers to force companies to align their dividend policy with performance for customers and the environment. It should now “be given further powers to police balance sheets and financial structures and health; a cap on leverage should be considered”. What must not happen, says Ben Marlow in The Daily Telegraph, is for the shareholders to be able to walk away from the business, leaving “ministers to pick up the pieces of another failed venture”.
Is a taxpayer rescue on the cards?
Not necessarily: following the £750m funding round, Cathryn Ross, the company’s co-interim chief executive, told the BBC the company has £4.4bn of liquidity. “That’s absolutely enough to pay everything that we think we need to pay this year, next year and into the future,” she said.
However, the company has also warned it will need a further £2.5bn from investors by 2030 to keep the lights on, water running and creditors at bay.
Other water groups have also raised money from their investors in recent weeks to stave off liquidity concerns. Yorkshire Water’s shareholders have pumped £500m into the group, while Southern Water has received £550m from shareholders, mainly Thames Water’s former owner, Macquarie. The Australian company rescued Southern Water in 2021 injecting £1.1bn in equity to help fund £2bn of new investment in its network.
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