The cautionary tale of Thames Water

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It was a grim irony that as new questions were swirling over the future of debt-laden Thames Water — Britain’s largest water utility — this weekend, the annual Oxford-Cambridge Boat Race had to go ahead despite “dangerous” sewage pollution in the river Thames; some rowers complained of sickness. Environmental campaigners blamed Thames Water; the company blamed excessive rain. Oxford’s coach declared the situation a “national disgrace”.

Many of Thames Water’s 16mn customers might feel the same way about the state of water 35 years after Margaret Thatcher’s government privatised England’s water companies. The story is not the same everywhere. But the possibility that Thames may have to be taken back at least temporarily into public ownership as shareholders refuse to put in new equity is a further sign of the failure of the great experiment in privatising natural monopolies.

With water leaks and sewage spills rising, public discontent is understandable. The water companies were, after all, privatised with zero debt, selling a basic necessity to a captive market.

The government insists investments have doubled since privatisation, and efficiency gains have restrained bill increases. But acquisitions by financial buyers in the mid-2000s turned many of the companies into playgrounds for financial engineering. A regulatory regime focused on consumer price, and on regulating the operating entity but not the arcane, multi-layered corporate structures put in place by new owners, proved inadequate. The sector has paid out more than £72bn in dividends while running up £60bn of debts. A rise in interest rates has left several companies facing concerns over their financial security.

Things have come to a head at Thames Water, whose £18.3bn group debt is in part a legacy of its 2006-17 ownership by Australia’s Macquarie, which extracted jumbo returns. Its nine current shareholders are refusing to inject £3bn of vital equity unless the regulator, Ofwat, agrees to allow it to raise bills by 56 per cent by 2030, loosens rules on dividends and eases some regulatory fines. The regulator seems unlikely to fold. Finding new investors will be hard. The only realistic option may be to put Thames Water into special administration, enabling a debt restructuring — though the government is wary of sending a negative message to other foreign investors whose help the UK will need to fund a major upgrade of creaking infrastructure.

How then to avoid any repeat of this sorry episode? Southern Water already got into similar difficulties in 2021 before being rescued by, of all people, Macquarie. Unless other companies start to fail, the cost of renationalising the sector could be prohibitive. One possible structural change would be to stipulate that water licence holders are listed on the London Stock Exchange. Convoluted financial engineering and structures are harder for quoted companies; the three remaining listed water utilities appear more financially stable.

A more holistic regulatory framework is also needed. Ofwat has already taken on more powers to stop dividends if they would risk a company’s financial resilience, and to ensure payouts are linked to performance. It should be given further scope to scrutinise balance sheets, and financial structures and health.

Few have followed England’s lead in private ownership of water supply. Scotland and Northern Ireland remain in the state sector, and David Hall, visiting professor at the University of Greenwich, says globally about 90 per cent of water and sewage services are publicly owned and run. If England is to remain an outlier, it needs to find ways of making its privatised sector work a lot better for customers, and for the environment.