The news that Thames Water’s investors have pulled the plug on future investment in the ailing utility, leaving it vulnerable to future nationalisation, is the culmination of a long game of brinkmanship with the industry regulator, Ofwat.
As talks behind closed doors reached their conclusions in recent weeks, tempers were fraying. One insider described the discussion as very heated.
At their heart was the issue of how to save the privatised water industry’s biggest beast, which is struggling under £14bn debts, and trying to agree a plan to replace its long sweated assets, keep its investors happy and stop it being fined for polluting the environment.
On one side of the standoff were officials from Ofwat, which stands accused of allowing water companies to run amok for decades, and has toughened up its act of late. On the other were the shareholders, drawn in the first place to invest in an essential public utility and a monopoly because, as one researcher put it, “it was an ATM for investors”.
They include the UK’s largest pension fund, the Universities Superannuation Scheme, as well as the Ontario Municipal Employees Retirement System, the sovereign wealth fund of Abu Dhabi and the Beijing-owned China Investment Company.
Asked by Thames to provide an initial cash bailout of £500m by the end of March as part of an overall £3.25bn extra cash they need, the shareholders, who feel short-changed of late, want one thing in return – a fatter return on their cash.
Their demands are: higher dividends, a 40% rise in customer bills to underpin the investment, and regulatory easing by Ofwat. This translates as lower fines for the kind of environmental pollution that is caused by decades of patching up pipes, and pumping sewage into rivers, to ease the pressure on ageing treatment plants that are so full to capacity they cannot treat sewage as required by law.
But the regulator, mindful perhaps of the public outrage about environmental pollution including the revelations this week of a record 3.6m hours of water companies discharging sewage into rivers and seas last year, has refused the demands of Thames and its backers.
Thames Water shareholders were blunt in their response on Thursday, indicating clearly that the tense talks have now run into the sand. “After more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces. As a result, shareholders are not in a position to provide further funding,” they said.
Thames Water says the refusal of Ofwat to allow them to pay higher dividends, increase bills and dodge environmental fines, makes their business plan to the end of the decade “uninvestable”.
The new chief executive, Chris Weston, tried to issue reassurance, saying the company would try to secure extra equity from new and existing shareholders. But without the promise of higher returns, that is unlikely.
Ofwat is for now holding firm, and publicly talking about the possibility of special administration for Thames Water – something the regulator has dodged for years even in the face of the illegal dumping of billions of litres of raw sewage by Southern Water into protected waters, which resulted in a record £90m fine.
“Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water,” the regulator said. Under the newly updated legislation covering water insolvency, the company can be taken over as a going concern to make sure water and wastewater services continue for 16 million people.
In a sign of government backing for Ofwat’s stance, Michael Gove, the communities secretary, said he had no sympathy for Thames. “The answer is not to hit the consumers, the answer is for the management team … to ask themselves why they are in this difficult situation.”
The crisis at Thames puts the whole privatised model under intense scrutiny. To fend off renationalisation, water executives seek to argue there will be a domino effect if Thames is allowed to fall, claiming investors will pull out of the industry wholesale, despite being rewarded dividends of £2bn on average every year since privatisation.
Others disagree. As the Green party peer Lady Jones pointed out on Thursday: “The water companies had the public money to invest and failed. Shareholders have been paid out over £56bn since privatisation, which is roughly the same amount of money we need to spend in the next decade to fix the broken sewage system.
“Either they can do what they were paid to do already, or if not, go bankrupt and we can buy them.”
