Potential Thames Water Collapse Looms as Headache for Incoming UK Government
As the UK prepares for its upcoming general election, one issue that is sure to be on the agenda for the new administration is the potential collapse of Thames Water. The company, which is currently burdened with a staggering debt of £15.4bn, has already prompted the government to develop contingency plans, known as Project Timber.
This concern about Thames Water’s financial stability is also reflected in a dossier compiled by Sue Gray, chief of staff for Sir Keir Starmer, detailing potential crises that a new Labour government would face.
The latest developments in this ongoing issue include talks of a possible collapse, which have intensified due to the refusal of Thames Water’s owners to inject more equity into the company. This group of owners includes Canadian pensions giant Omers, the Universities Superannuation Scheme (USS), a unit of the Abu Dhabi Investment Authority, and the China Investment Corporation.
Previously, these owners had offered to inject an additional £3.25bn into the company, on top of the £500m that was injected last year, under the condition that Ofwat, the water regulator, supported the company’s plans. However, Ofwat has rejected Thames Water’s request to raise its levels of investment and customer bills to the extent proposed by the company.
Thames Water had initially asked for an £18.7bn investment, which would have resulted in a 44% average increase in customer bills over the next regulatory period (2025-2030). In April, the company revised its submission to raise investment to £19.8bn during the same period with no additional bill increases.
Ofwat was originally scheduled to publish its final decision on investment plans and customer bills for the entire water industry, including Thames Water, on June 12. However, due to the general election, this has been postponed to July 11.
Recent reports have indicated that Ofwat is likely to reject the requests of most water companies, including Thames Water, and allow only a fraction of the bill increases they had asked for. This aligns with Ofwat’s historical approach of prioritizing low water bills over higher investments to address issues such as sewage spills.
However, there are indications that Ofwat may be open to compromising to some extent. The Financial Times reported today that the regulator is considering a special “recovery regime” for Thames Water and other financially stressed UK water companies in an effort to avoid nationalization. Under this regime, companies could receive fewer or no regulatory penalties and be given more realistic targets for reducing sewage and water leaks and outages.
While Ofwat has not commented on these reports, the fact that they have been attributed to “people close to Ofwat and the water companies” suggests that the regulator may be open to alternative solutions that would prevent Thames Water from being nationalized and transferring its debts to the public.
This dilemma highlights the challenge facing Ofwat, as they do not want Thames Water to collapse, but also do not want to be seen as lenient towards a company with a history of misconduct. Additionally, they want companies like Thames Water to continue investing in water infrastructure.
In an effort to find a compromise, Ofwat recently stated that it was “minded” to punish Thames Water for breaching license conditions by paying a £37.5m dividend to shareholders in October 2019. However, it remains to be seen if this compromise will be enough to stabilize Thames Water’s financial situation.
Despite being fined £175m by Ofwat over the last three years, this amount is relatively insignificant compared to Thames Water’s debts. In the first six months of the 2023 financial year, the company spent £208.7m on servicing its debts alone. This raises questions about whether this compromise will be enough to persuade the company’s shareholders to inject more equity.
The uncertainty surrounding Thames Water’s financial future has already taken a toll on its shareholders. Omers, the largest shareholder, has written off the entire value of its 31.7% stake in the company, while USS has written down the value of its shareholding from £956m to £364.4m.
With the deadline for Ofwat’s decision fast approaching and both sides showing signs of impatience, it seems as though a special administration of Thames Water may be the most likely outcome – a situation that neither the Conservative nor Labour party would want to see.
