You might think that England’s largest water company, a regulated monopoly supplier serving prosperous London and the South East, would be in reasonable financial shape. Indeed, Thames Water reported an operating profit of more than £400m in its last half-year accounts – albeit thanks to large increases in bills to businesses and households.
Yet with a debt of almost £20bn and counting, Thames Water is in almost permanent crisis and is threatened, if that’s the right word, with nationalisation. Collapse never feels far away.
Emma Reynolds, the environment secretary, has objected to the latest rescue plan designed to put the firm on a sustainable footing. Its lenders want to inject £9.4bn to clear about half of its crippling debts in return for Ofwat waiving fines for pollution offences until 2030. The regulator cannot relax its rules without permission from ministers, hence Reynolds’s intervention.
Ms Reynolds insisted her views on the proposal “should not be taken as, nor do they constitute, a direction from government to Ofwat”, but she said: “The 16 million Thames Water customers are front and centre of my consideration, and I am primarily worried about the impact on them. There is an expectation in the proposal for customers to fund and therefore bear an undue cost for investment in the company.”
And she warned the proposals would mean delays to required environmental improvements of wastewater treatment facilities and projects that were important for drinking water safety and supply.
A lot of it is historic. After privatisation of the water companies in England and Wales in 1989, institutional investors such as hedge funds gradually took over from smaller shareholders. They loaded up the company with debt while paying themselves in the form of bumper cash dividends – a not uncommon practice in debt finance, with tax advantages.
Making matters more acute for Thames Water, the debt was index-linked to inflation, and the firm kept being hit with huge fines for dumping sewage in rivers while being unable to invest in preventing such incidents.
So Thames Water finds itself in incipient bankruptcy, but, unlike other debt-crippled institutions such as British Home Stores, it stands likely to be rescued because running water is a crucial element of a civilised society. Successive governments have been preparing for the inevitable with a standby “special administration regime” (SAR) to keep services going until matters can be resolved.
One would be to simply take Thames Water – and possibly the other distressed water companies – into public ownership. However, this would be extremely costly; although the company’s shares are now worthless, the state would be obliged to take on the £20bn debt, which cannot be justified with so many other demands on public spending. It would also represent a politically indefensible “reward for failure” benefitting largely foreign owners and lenders at the expense of the hard-pressed taxpayer and Thames’s blameless customers.
Another option is to support a privately funded solution that would keep Thames Water in the private sector and off the Treasury’s balance sheet, but would nonetheless involve some public subsidies and a temporary acceptance of serious pollution. So the smart thing to do is wait for the company to slide into SAR, see the debts wiped out, and start afresh – but the taxpayer and Thames Water customers would have to meet the cost of investing in the business.
It is very tempting to conclude that privatisation under the Thatcher government was a mistake, partly driven by the wish to avoid the cost of investing in Britain’s Victorian water and sewage system. On the other hand, successive governments have failed demonstrably to manage the sector properly, with a fatal combination of weak operational regulation and zero financial oversight, as was the case with other privatised utilities that ran into severe difficulties, such as rail firms. There was always an unresolved contradiction between running a utility for profit and as a public service.
Curiously, Labour, the Liberal Democrats and Reform agree that an SAR nationalisation is both inevitable and desirable. The Greens favour immediate nationalisation, though they’re less clear about what that might cost. The Tories seem the odd ones out, unable to quite drop their traditional hostility to public ownership; thus Victoria Atkins, the shadow environment secretary, argued last year that the government should support yet another debt-holders’ plan to refinance Thames Water.
Potentially, yes. For example, Thames Water is only one of six water companies blocked from paying bonuses to its senior management because of serious pollution incidents – the others being Anglian Water, Southern Water, United Utilities, Wessex Water and Yorkshire Water. Such is the scale of their collective debt that the government says it would cost in the region of £100bn to nationalise them all immediately; that’s unfeasible, so the great British water disaster is likely to drag on for some years yet.
