UK’s privatisation model under fire amid Thames Water crisis

Introduction: UK water sector faces biggest crisis since Thatcher

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Britain’s model of privatised utilities is facing its biggest crisis since Margaret Thatcher was selling off the family silver in the 1980s.

Thames Water, the UK’s latest water company, is in emergency talks with the water regulator Ofwat, ministers and government departments, amid concerns it needs a multibillion cash injection to keep operating.

The water company, which serves 15 million customers, could be put into temporary national ownership by ministers to secure a refinancing package.

A map showing Thames Water’s

Yesterday, Thames Water said it was working “constructively” with its shareholders on injecting more equity into the company, to support its “turnaround and investment plans”.

Thames Water’s shareholders 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.

Estimates presented to ministers and regulators suggesting the company could be facing a hole of £10bn in its finances, the Guardian revealed last night.

Thames Water has accrued a £14bn debt pile – around a quarter of the privatised water industry’s collective debt burden of £60bn. Thatcher sold them off debt-free, and endowed them with a further £1.5bn of public money, known as a “green dowry”, to help with improving their networks.

A graphic showing how much debt is owed by water companies

Since privatisation, shareholders have been paid £72bn in dividends, while bills have risen 40% in real terms.

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Green MP Caroline Lucas told parliament last night that “privatisation of water was a serious mistake and it needs to be permanently rectified.”

Caroline Lucas, “Water companies had no debt when privatised. They have since borrowed £52 billion and paid £72 billion in dividends. Meanwhile we have a sewage scandal. Privatisation of water was a serious mistake and it needs to be permanently rectified.” pic.twitter.com/XrQSnjYV4L

— Farrukh (@implausibleblog) June 28, 2023

Environment minister Rebecca Pow, though, insisted that “The sector as a whole is financially resilient”, adding:

“Government of course is confident that Ofwat as the economic regulator of the water industry is working closely with any company that would be facing financial stress.”

A former Thames executive told the Guardian the water company faced “intractable” problems that were rooted in “over 100 years of underinvestment”.

There are estimates that the water industry needs to spend £70bn in total over the coming decades to fix the sewage discharge problem, and secure water supplies.

Thames Water’s difficulties have highlighted the key question – is it really possible to keep bills down, make profits and invest to make water clean? Or would nationalisation. removing the pressure to pay shareholders, help?

The consortium that took over ownership of Thames Water in 2017 has not taken a dividend since, but the company has paid internal dividends – including £37m in the year to March 31 2022.

The agenda

8.30am BST: Sweden’s Riksbank interest rate decision
9.30am BST: UK mortgage approvals figures for May
10am BST: Eurozone confidence figures for June
1pm BST: German inflation report for June
1.30pm BST: US Q1 GDP report (final reading)
1.30pm BST: US weekly jobless figures

Key events

Feargal Sharkey has also told GMB that the water companies have been “effectively ramraided by their owners for cash”.

Those shareholders have made off with £72bn, Sharkey says – which could have been spent fixing leaking pipes and addressing the sewage problems.

.@Feargal_Sharkey has campaigned tirelessly about improving our water facilities and has accused firms of leaving the nation’s waterways in a desperate state.

He joins Kate and Ben to discuss the current water crisis. pic.twitter.com/ps39hkjdTc

— Good Morning Britain (@GMB) June 29, 2023

Feargal Sharkey: water industry could be teetering on the brink of insolvency.

Environmental campaigner Feargal Sharkey says Thames Water’s financial woes have exposed that the industry is “very financially fragile”.

Sharkey told Radio 4’s Today Programme that failures in the regulatory system and political oversight had led to the current crisis.

There have been warnings over recent years that problems were building, Sharkey points out, so the regulatots have “clearly known the situation is developing”.

Sharkey says:

We’ve seen the symptoms of it, in terms of the sewage crisis, in terms of London’s water supply running out, in terms of leaking pipes not being repaired.

And it’s now exposed this deeper underlying structural issue that the industry is clearly very financially fragile, if not teetering on the brink of insolvency.

Sharkey argues that the government could issue enforcement orders this afternoon, to take control of the management, so ministers would determine what the company spends on investment, dividends, executive pay and debt payments.

But Philip Dunne MP, chair of the Environmental Audit Committee (EAC), argues that this would not fix the “fundamental issue” for those water companies which are over-geared (borrowed too much).

Taking control of the companies wouldn’t address the problem of their outstanding debt, or the debt that will have to be raised to fund infrastructure investment, Dunne tells Today.

Accountancy professor Prem Sikki argues that the government should pass emergency legislation to take control of Thames Water, for £1, rather than bailing out the company’s shareholders:

Thames Water shareholders include Canadian/UK pension funds, vehicles owned by govts of China & Abu Dhabi.

They condoned leaks, sewage dumping. Since 2006 took £1.6bn in dividends.

Now they want UK govt o bail out Thames.

NO. Pass emergency legislation. Buy Thames for £1.

— Prem Sikka (@premnsikka) June 29, 2023

The Thames Water crisis is covered on the front page of many national newspapers today:

Thames Water’s financial plight is an “extraordinary state of affairs”, says Mathew Lawrence, the director of the Common Wealth think tank.

A business with a regional monopoly over an essential service has lost its financial footing due to an “extractive ownership model” that loaded the company with debt, and prioritsed returns for its investors over the needs of both people and the environment, Lawrence writes in the Guardian today.

He explains:

In real terms, bills have increased by around 40% since privatisation, yet investment by the companies has gone down by 15%. The consequences are glaringly evident: up to 2.4bn litres of water a day (equivalent to nearly 1000 Olympic swimming pools) are leaked by English water companies. Every day, raw sewage is discharged into our rivers and seas more than 1000 times on average, for a total of over 9m hours since 2016. With this scale of neglect, it’s hardly shocking that just 14% of English rivers have adequate ecological status.

Who, then, benefits from this model, if neither people nor planet? International investors, for one. Indeed, over 70% of English water companies’ value is foreign owned. Thames Water, specifically, counts among its top investors a subsidiary of the Abu Dhabi investment authority, the China Investment Corporation, and two Canadian public sector funds. The Universities Superannuation Scheme, too, has a sizeable stake, in a paradoxical relationship that sees a vital service many beneficiaries of that scheme may use, faltering under the strain of demand for high returns for a pensions system equally under pressure. Neither can we forget the perks for water executives: the outgoing CEO of United Utilities, the UK’s most polluting water company, made an impressive £1.4m this year by selling his shares before his retirement.

More here.

Professor David Hall of University of Greenwich said investors are reluctant to take on the risk of further investment due to fears it will not be repaid.

If the government is forced to step in, Professor Hall told the BBC, shareholders rather than the public were likely to lose money.

“If you go through special administration the shareholders take the hit.”

Professor David Hall, a visiting professor at Greenwich University, tells @seanfarrington on #R4Today if Thames Water is renationalised the taxpayer won’t pay the whole bill.
https://t.co/tggdgigEqK

— BBC Business (@BBCBusiness) June 29, 2023

Dieter Helm, professor of economics at Oxford University, said the business model of the water companies was “built on the era of cheap debt and low inflation”.

He told the Financial Times:

“If interest rates are negative in real terms, then the debt is ‘free’. But what happens when it is 5 per cent plus, and when there is only a slim equity buffer to absorb the inflation shocks?”

For the answer, take a look at the price of a 2026 bond sold by Thames Water’s parent company, Kemble Water Holdings.

It plunged yesterday into distressed territory, dropping by 35p to 50p (where 100p is the par value of the bond).

Bloomberg explains:

These notes are dependent on receiving dividends from the operating company, and a regulatory decision in March — which came into affect in mid-May — to curb water companies’ dividend payments made it harder for the unit to receive payouts from its subsidiary.

Labour ‘cautious about nationalisation’ despite ‘total scandal’ of water industry

Labour’s shadow climate and net zero secretary, Ed Miliband, has called the feared collapse of Thames Water “a total scandal”.

However, Miliband says Labour are ‘cautious about nationalisation of water companies.’ – pointing out that it would require buying out the current shareholders.

Miliband told Tonight with Andrew Marr on LBC last night that:

‘It is a total scandal, the dividend pay-outs, the debt taken on and customers paying the price. We are cautious about nationalisation of the water companies. And why are we cautious of it?

Because it would involve… billions of pounds of public money being given to the water companies’ shareholders who have already made a big bonanza. We have a whole plan for changing the regulatory system mandatory fines when they pollute, Ofwat will have the power to cap bills because it shouldn’t be the bill payer that is paying the price of this, the companies should be paying the price of it.’