Thames Water in crisis talks over potential £10bn
black hole
Minister tells Guardian government has ‘no grasp’ of
cost involved in preventing possible collapse
Anna Isaac,
Alex Lawson and Jillian Ambrose
Wed 28 Jun
2023 19.44 BST
The
government has “no true grasp on the costs” involved in preventing a collapse
of Thames Water, with estimates presented to ministers and regulators
suggesting the company could be facing a hole of £10bn in its finances, the
Guardian can reveal.
The water
company, which serves 15 million customers, is in emergency talks with the
water regulator Ofwat, ministers and government departments after the departure
of its chief executive and concerns over its ability to continue operating
without a multibillion cash injection.
Measures
under discussion include placing Thames into temporary national ownership, in
order to secure a refinancing package. That could mean public funds and higher
bills for customers may be needed.
Other
options involve an onward sale of the company. The existing shareholders are
large Canadian and UK pension funds, and investment vehicles for state money
from China and Abu Dhabi, which could now be at risk of losing at least some of
their investment.
Those
involved in the discussions, which began in recent weeks, have been told Thames
could require as much as £10bn more than already budgeted to get its
infrastructure up to regulatory standards, although officials are still
scrambling to estimate the eventual cost.
It is
understood that figure does not include the cost of making interest payments on
its £14bn debt pile.
A minister,
who asked not to be named, said government had “no true grasp on the costs
involved”, or how much support may be ultimately needed from the taxpayer, but
that Thames and other water companies were in distress, with “wounds which need
to be cauterised”.
The UK
business minister Kemi Badenoch told Sky News the government was looking at
what it could do in order to make sure that “Thames Water as an entity”
survived.
A
spokesperson for Thames declined to comment on the size of the cash injection
needed, but said the company maintained “a strong liquidity position”. They
added that the company was working “constructively” with shareholders to secure
“further equity funding expected to be required to support Thames Water’s
turnaround and investment plans”.
It is
almost 30 years since England’s water companies were privatised, a period
during which investors in the sector have been accused of asset stripping and
overloading the utilities with unsustainable debt.
Recently,
mounting public outrage over beaches and rivers strewn with evidence of sewage
dumping, poor preparations for drought, and water leaks have led to company
bosses vow to improve performance.
On Tuesday,
Thames’ chief executive, Sarah Bentley, stepped down to the surprise of many,
with sources citing concerns over the company’s financial reporting and
shareholder confidence as key triggers for her departure.
Bentley
became a “casualty” when she presented shareholders with a “terrifying picture”
of the true state of Thames Water’s problems, a source at the company said.
The largest
shareholders are the Canadian pension fund, Ontario Municipal Employees
Retirement System (Omers) and the Universities Superannuation Scheme (USS),
which invests retirement savings for UK university lecturers, while other
shareholders include China Investment Corporation and Abu Dhabi’s Infinity
Investments. They injected £500m in March, and had committed to a further £1bn
in funding, but it is understood discussions about further funding faltered
after the board was warned billions more would be needed.
Any
measures would have to factor in the need to maintain the confidence of foreign
investors, the minister said: “We have to consider the impact on dampening
investor appetite for UK plc and its infrastructure but also bill payers.”
The crisis
has added to growing alarm about the broader state of infrastructure across
England’s 11 regional water monopolies, and the potential risk posed to the
taxpayers and customers.
In
December, Ofwat flagged concerns about the finances of other companies,
including Yorkshire Water, SES Water and Portsmouth Water.
Whitehall
insiders compared the situation to the government investment required after the
collapse of Railtrack in the early 2000s. About £33bn was pledged to upgrade
infrastructure afterwards. One source familiar with the Thames talks said the
problem may “dwarf” the cost of temporarily nationalising energy supplier Bulb
during last year’s energy crisis.
One option
facing Thames is being placed into special administration. Ofwat says in its
guidance that this process is designed “not to keep a company in business but
rather to ensure that the provision of services to customers is maintained” –
meaning investors “bear an appropriate level of risk in relation to the
decisions that they make” and reducing the “risk to taxpayers that they will
have to bear costs relating to a failed company”.
Since
privatisation, water companies have collectively taken on close to £60bn in
debt. This has triggered repeated warnings from Ofwat about the sustainability
of their finances. The Australian bank Macquarie was widely criticised for its
stewardship of Thames from 2006 and 2017 and faced accusations of asset stripping.
The consortium that took over ownership in 2017 has not taken a dividend since.
A former
Thames executive told the Guardian the water company faced “intractable”
problems that were rooted in “over 100 years of underinvestment”.
They said:
“We have Victorian pipework which just hasn’t been able to keep pace with
massive population growth and the impacts of climate change. Thames’ debt was
intended to accelerate its work correcting the infrastructure gap but no
investor would want to cover the cost of the challenges it now faces without a
return.
“Thames’
investors thought they would get a 3-4% return. This has been an absolute
bloodbath for them. It was supposed to be a stable, long-term infrastructure
investment but has become a joke of a situation.”
A
spokesperson for Ofwat said: “We monitor the financial position of all the key
water and wastewater companies. We have been in ongoing discussions with Thames
Water on the need for a robust and credible plan to turn the business around
and transform its performance for customers and the environment. We will
continue to focus on protecting customers’ interests.”
A range of
models for managing water companies operate within the UK. Scottish Water is
owned by the taxpayer and has invested £9bn in the decade since its formation
in 2002.
Darren
Jones, Labour MP who chairs the common’s business and trade committee told the
BBC his party would not drive for wholesale nationalisation.
“If we end
up in a situation where the private owners of these companies have completely
messed it up, then there is no choice for the government other than to bring it
into public ownership and to run it,” he said.
Jones
suggested regulators had failed to effectively police the behaviour and board
directors had failed to in their duty to the companies they control.
“For too
many years, decades even, we’ve allowed these companies to be operated with
high risk stakes, with high levels of debt, with wealth being extracted from
the companies, with investment not being high enough,” he said.
A
government spokesperson said: “This is a matter for the company [Thames] and
its shareholders. We prepare for a range of scenarios across our regulated
industries – including water – as any responsible government would. The sector
as a whole is financially resilient. Ofwat continues to monitor the financial
position of all the key water and wastewater companies.”
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