As we wait for Thames Water’s crew of international investors to decide if they want to inject more capital into their ailing and over-borrowed asset, it is hard to escape the thought that a recapitalisation – if it’s doable – would have happened by now if only the company were listed on the stock market. In essence, what’s needed at Thames, if the owners wish to save it, is a large rights issue or debt-for-equity swap. The stock market tends to be good at such exercises. It cuts to the chase.
Recall the crisis in the outsourcing sector a decade ago, which has parallels with water in terms of scandal (with overcharging, rather than the sewage) and loss of confidence on the part of government and the outside world. The stock market was admirably brutal with companies such as Serco: it whacked the share price down 90%, thereby inflicting necessary pain on owners; it forced management change; then it became possible to raise funds.
By contrast, everything moves in slow motion in the murky world of non-quoted water companies. At Thames, the current dance started in June last year when the company said its owners – led by Omers, a Canadian pension fund, and the UK’s Universities Superannuation Scheme (USS) – would put in an extra £1.5bn of capital. Except it was only a plan to put in more money.
The first £500m arrived only in March this year. The other £1bn was billed as “subject to certain conditions”, and the process grinds on as the likely numbers get bigger. Thus we have the spectacle of USS telling the FT that it backs a turnaround plan subject to “an appropriate regulatory environment”, whatever that means, while other members of the consortium say nothing.
It is ownership by investment committee. Or, rather, ownership by several investment committees scattered around the globe with different risk appetites. It doesn’t work. Yes, the financial engineers of Macquarie, who “hollowed out” Thames and exited in 2017, are mostly to blame. But indecision seems to reign supreme among the infrastructure investors who supposedly signed up to haul Thames out of the gutter.
Regulator Ofwat’s ability to force events seems extremely limited. But leisurely timeframes are par for the course. Extracting these companies from the lobster pot of over-leverage – the product of the absurd buyout boom of 2006-2008 that should never have been allowed – has been a regulatory mission for about a decade.
Southern Water had to be threatened with “virtual special administration”, as rating agency Moody’s put it, before its disengaged financial owners, led by funds advised by JP Morgan and UBS, could be forced to accept a loss and sell to a new owner with new capital in 2021 (which, grimly, turned out to be Macquarie).
Or look at Yorkshire Water. Last October, Ofwat ruled the company was in breach of its licence obligations because £940m-worth of inter-company loans (approved by the regulator in 2008 and 2009) had subsequently been shuffled within the capital structure of the broader Kelda group. But Yorkshire was given until 2027 – almost half a decade – to get itself into compliance in stages. The first £400m unwind happened only last week.
Once again, this column concludes that the current privatised water system, if it is to survive, would work better if the companies had to have a stock market listing. Accountability and transparency are better. Is it a coincidence that Southern and Thames, the duo that have copped the heaviest fines for environmental offences over the years, were also the most financially over-extended? Nobody thinks that.
And one strongly suspects that Severn Trent and United Utilities have got themselves to the top of the environment performance tables because they are members of the FTSE 100 index and their boards of directors cannot play “round-tripping” games with debt. They are obliged to comply with regulatory norms of gearing of 60%-ish. The correlation isn’t perfect because South West Water (Pennon), the only other member of the quoted club, has had a terrible pollution record recently. But it’s close enough.
In his book about his regulatory years, Sir Ian Byatt, chairman of Ofwat from privatisation to 2000 (so before the buyout excesses), noted that he appealed as early as 1996 for the licensed companies, as opposed to holding companies, to retain a listing of some form on the stock exchange. His intention was to prevent the leakage of dividends to non-regulated activities. “My plea went unheeded,” he wrote.
Or note last year’s comments from Jonson Cox, chairman of Ofwat from 2012 until last year (and so the inheritor of the buyout madness). “I regret there aren’t more publicly listed companies because it gives real visibility,” he told a House of Lords committee. Investment banks created skewed incentives and created “the predisposition of thinking of water companies as financial assets”, he argued.
None of which excuses past regulatory failures, but it ought to give the Labour party, which has ruled out renationalisation, a direction for a policy. Here’s one idea: force the private owners to list at least 25% of the shares in their water companies on the London Stock Exchange, as advocated by voices as varied as Jonathan Ford, former FT leader writer and podcaster, and Will Hutton, advocate of “purposeful” companies.
It wouldn’t be a cure-all, but it would be a step towards saner financing models and greater accountability, which is a bare-minimum requirement if customers are to be told to shoulder bigger bills. It would also give Labour something to say. Its current policy silence on water is embarrassing.
