Set your watches: Ofwat, the water regulator, has fixed the date for when it will publish its so-called “draft determination” – in other words, its first view on how far each water and wastewater company should be allowed to raise its bills in the five-year period that starts next spring.
Wednesday 12 June is the day when the outside world will be able to look at the assessment that caused the current owners of Thames to say a fortnight ago that Ofwat had made their company “uninvestable” and they wouldn’t be putting in another penny. Thames’s murky future may become slightly less murky at that point.
Two possibilities can probably be ruled out. The chances of the Kemble crew – the Thames shareholders led by Omers and USS – changing their mind about investing £3bn-plus is zero or close-to-zero. The gap with Ofwat’s expectations for a five-year business plan sounds unbridgeable. Equally, a full-blown nationalisation of Thames looks highly unlikely in the short term because there’s no appetite for it in government or at the top of the Labour party.
So, in practice, we’re probably talking about a financially reconstructed Thames in which the current shareholders are wiped out. That’s life. The owners overpaid for a company in 2017 that had too much debt, thanks to its spell under the unlovely Macquarie, and borrowing at Thames has risen further since. The current shareholders haven’t taken dividends for themselves, which is to their credit, but nor have they ever got to grips with the operational headaches. They have gone through two sets of “fresh start” managements before the current one.
So the endgame for Thames looks to be some form of debt-for-equity swap, either enforced through the “special administration” regime for failing water companies or undertaken voluntarily. The bond market is limbering up. Kemble’s debt, which is outside the regulated entity and is already mostly in default, is trading at pennies in the pound. Meanwhile, the junior bonds at regulated Thames are trading at a wide discount to the senior ones, reflecting the hierarchy of financial pain in a reconstruction. All that is to be expected at this stage.
Nor, incidentally, should tears be shed for the bondholders, even if they’re managing a lot of pension money. They were lending to an overleveraged private company and, if they thought their IOUs were effectively underwritten by the government, they weren’t paying attention to the public outrage over the state of the waterways for the past 20 years.
But, out of these complexities, one can see how a financially viable Thames Water mark 2 might emerge. It would have a few billions-worth of debt removed from its £15bn pile. And, if Ofwat (under an obligation to ensure companies can attract capital, remember) leaves a few financial carrots for future owners, new shareholders might arrive once there’s room to breathe on borrowing.
Bills would still go up meaningfully because they are the primary way to fund investment – there’s no escaping the fact. The important thing is that the government isn’t bullied into bailing out bondholders in their entirety at the cost of billpayers, which would be an outrage too far.
But bubbling away in the background is an add-on idea that could smooth a transition: a break-up of Thames. The economist Dieter Helm is the chief proponent and is surely right when he argues that Europe’s biggest water and wastewater company is “too big to be effectively managed – too big in scale and too big in the multiplicity of functions”.
A basic split would create “London Water” to serve the capital and a “Thames Valley” or “Greater Thames” to look after the rest. The London-only entity, argues Helm, would be better placed to coordinate work with organisations such as Transport for London. Or one could go further, as he suggests, and separate sewerage and have a new vehicle carry out the infrastructure upgrades via a tailor-made 15-year regulatory set-up. Yes, that might inject more clarity and accountability. So would forcing the new companies to be listed on the stock market. (Ofwat, circa 2003-07, was asleep at the wheel when it permitted the take-private rush of private equity and its imitators.)
Thames could not, of course, be broken up overnight. A debt-for-equity swap would have to happen first within the current structure, and the “Thames Valley” end would probably always look a safer bet than the “London” creation. The point, though, is that the current crisis is a chance to rethink the model. First: make the shareholders and bondholders suffer the consequences of their foolishness. Second: organise the company in a better way.
