Thames Water appears to be at the point of going bust. How on earth? Now, I can understand how some companies reach this point. If you treat your users as twits and alienate your advertisers, then business may suffer.
If you export cheese from the UK to mainland Europe and someone creates a raft of paperwork that makes it very difficult to get a lorryload of anything out of the UK, and that blows £600,000 of your business, it is likely to have an impact. If you run a village grocery, the population shrinks and a supermarket opens nearby you may well decide to close. If you make cars and ignore the need to switch from petrol and diesel to electric and hydrogen, then you will go the way of the penny-farthing. But water? And sewage?
Water supply is a monopoly
Water companies have fixed customers. Thames Water has 15 million customers. We have to use their services, so no competition. A little gentle regulation from Ofwat so they don’t overdo the pricing. They know the income. And anyone who does not pay gets put on a social tariff or in the worst cases, gets cut off. In the London area there will be constant new building which means new customers, new installation fees and new charges, so the money will be flowing in. How could this possibly go wrong? And yet it has.
Ofwat let Thames Water charge a fee sufficient to deliver clean water, remove and treat raw sewage and dispose of it properly, hopefully leaving enough for maintaining and improving the infrastructure and providing a reasonable dividend for shareholders. The Environment Agency should be ensuring that they are not polluting the rivers and beaches. The three legged stool of Thames Water, Ofwat and EA should be rock solid. But evidently it is not. It is in fact falling over as Thames Water is reportedly nearly bankrupt.
According to a key article in the Guardian, it has created debts of £14.3 billion and paid out £7.2 billion in dividends despite paying no Corporation Tax for at least 10 years. What? How?!? In less than three years it has paid CEO Sarah Bentley more than £6 million in golden hello, pay and bonuses – and then she left rather than face the possible bankruptcy and a hostile public. So the money trail stinks as much as the waterways..
HMG as “operator of last resort”
In the end, the Government may have no choice but to take over the operation of Thames Water. The water must continue to flow into people’s homes and businesses, and the untreated sewage must flow out. Renationalisation implies that the debts of this public utility will be carried over to the Government and eventually be repaid by the taxpayer. Renationalisation also implies that shareholders will be bought out and compensated for their loss. And the Government, which means the taxpayer, which means you and me, will still have to pay for the necessary infrastructure that should have been upgraded during the last thirty years.
On the collapse of any ordinary company something very different happens. An Administrator will be appointed and will attempt to sell the best parts of it. They will want the highest overall return, which may require reorganisation and restructuring. Ideally all of it can be sold to another organisation in the same field of business. This may be at a severe discount leaving little to pay outstanding taxes, salaries and redundancies, and debts.
Dealing with debt
Debts which cannot be met are lost. Banks and investors large and small who selected this company for loans have lent to a company that failed and those loans have failed. Some debts may be partially covered by assets such as plant and machinery but there will be no Government bailout to protect them. The shares may have little or no value depending upon the restructuring – so shareholders will lose their money. Staff may end up with nothing more than statutory redundancy paid by the taxpayer.
The Government has no choice but to recognise that the public utility that supplies water to homes and business and removes the untreated sewage cannot be allowed to collapse. The collapse of a biscuit factory may mean there are no biscuits for a few weeks whilst the Administrator gets the basics sorted. No water for a few weeks is not acceptable.
Allowing Thames Water to turn things around
Thames Water should be given an opportunity to show how the market can reconstruct this business to provide the regulated service to customers, a return for current investors and a plan to repay that massive debt which increases with inflation. They will need to find the funding to manage water and sewage every day, and the long term building or repair of the infrastructure that should have been undertaken over the last thirty years. They will also need to show how they will keep this fully working for the foreseeable future without loading excess costs onto the captive consumers. Sarah Bentley, their chief executive, said last year that they could do this with “patient capital”, but she has now resigned and no new investor has come forward
When they fail, the Government must take over the supply of water and the removal of sewage prior to a collapse. That will keep the water flowing and the sewage moving out, albeit for the time being into rivers and onto beaches. The Government would also need to offer employment to all necessary staff and build a new public or private organisation to run the utility.
Allowing Thames Water to fail
But what happens if they do not take over the company? The company will find itself without any income and it will inevitably collapse. The loans will go bad – so banks and other lenders lose their investment. The shareholders would be left with shares worth nothing. This may seem cruel and unreasonable. Some of the investors are North American pension funds and the largest is the UK University Superannuation Scheme (USS). It has been suggested that investors like these should be protected from such a loss. But if the professionals running your pension fund put some of it into a company that collapsed there would be no such protection. USS owns 20% of Thames Water and they and the people whose pensions they pay may suffer. USS has said this will not happen. If they are wrong, current and future pensioners may need a Government bailout, because if not, there may be a strike of University staff on this issue.
Capitalism’s two faces
This process – of allowing the private business to try and survive and recognising when it cannot – would highlight that capitalism has two sides – risk as well as reward. If you want the rewards of dividends, interest payments and salaries in the millions, then you – not the Government and not the taxpayer – you must take the risk. You cannot just have the rewards and dump untreated sewage on everyone else. Other Water companies, their senior executives and their investors and shareholders might come to understand that whilst the rewards for running these companies can be significant, there are also risks, and above all there is no Government or taxpayer with a ‘magic money tree’ waiting to deal with those risks.
If not this somewhat drastic option, then what? This is critical. What happens with the first collapsing water company gives the message to all the others – in the same way that saving Northern Rock told the banks and the bankers that they would never suffer the consequences of their actions.
Finding the funds
However we decide to manage our water utilities there must be provision for the long term infrastructure funding estimated by the Secretary of State at £56bn over 25 years, with customer bills rising by £42 each household over this time. See House of Lords report March 2023
Is there a way of looking to the market for investment? That would have to provide both the funds for infrastructure and a reasonable return for investors. Would anyone buy shares in a water company on that basis? Is there some form of renationalisation that does not simply protect the corporate vultures? Government could provide the funds but that money will have to come from one of two sources. It could increase taxes – but for whom? It could raise money from the bond market but there is still the yearly interest to pay on bonds and the lump sum paid back at the end.