For their next session with Thames Water, the MPs on the environment select committee should summon the people who really matter: the shareholders who must find £3bn-plus in coming years if they wish to keep their over-indebted, underperforming and waterlogged company afloat.
The committee may need a bigger room because the ownership collective is not small. It takes in two Canadian pension funds (with holdings of 32% and 9%), the pension fund for UK university academics (20%), the governments of Abu Dhabi (10%) and China (9%), the manager of BT’s pension fund (9%) and an Australian fund (5%). The first question to such a gathering would be simple. Are you trying to hold the regulator, Ofwat, to ransom before you commit more cash?
That is the way it looks from outside. The hired hands, the stand-in co-chief executives, Cathryn Ross and Alastair Cochran, and non-executive chair, Sir Adrian Montague, repeatedly told the committee that the owners were waiting for “clarity” from the regulator over the price controls that will operate from 2025-30.
The desire to see the new financial framework covers even the £750m of equity earmarked for delivery before March 2025, not just the suggested £2.5bn for next regulatory period. The parent company, Kemble Water Holdings, will even try to extend a £190m loan due next April until the fabled “clarity” arrives. In that sense, the row over this year’s £500m injection – was it debt or equity? – is a sideshow. The next rounds of investments are the ones that matter.
“The shareholders have not had a dividend for six years. It has not been a great investment for them,” said Montague. “I think they are saying: ‘We want to know that this is an investable company. We want to know at least the general lines of the outcome of the determination that Ofwat is making. We need to understand whether sufficient cash is going to come into the company to support further investment by the shareholders.’”
Put like that, the stance can be presented as sweetly reasonable – the owners aren’t charities, after all. Yet the towering problem here is this: what Thames’ owners might regard as an “investable” proposition can equally be viewed as a naked plea for a bailout at the expense of the poor old customers.
Thames, in its business plan submission for 2025-30, wants to crank up bills by 40%, reset performance targets that it should have achieved already and have potential penalties capped. As the Investec analyst Martin Young summarised recently, Thames is seeking “higher returns, downside protection and scaling back ambition”.
Why on earth would Ofwat, now in supposedly tougher mode, agree to all that? Other water companies that have run their businesses better, and haven’t financed them with extreme financial leverage, aren’t in such a fix. Severn Trent raised £1bn for investment via a rights issue with no difficulty only last month. Why should the sector’s multi-year laggard be rewarded for failure, in effect?
Thames’ warning-cum-threat is that worse outcomes might follow if Ofwat doesn’t play ball. Cochran, who doubles up as chief financial officer, said the company’s first step if it doesn’t get a satisfactory settlement would be to revisit the business plan and shrink spending plans to fit. If the position sounds like a standoff until Ofwat delivers its preliminary verdict next June, that’s because it is.
It was therefore mildly encouraging to hear Ofwat chief executive, David Black, talk about special administration for Thames as a credible option in extremis. Quite right, too: a position where Thames has seized the regulator by the “short and curlies”, as committee member Barry Gardiner put it, is unacceptable.
The saga of Thames’s underperformance has now been running for so long that it can’t all be blamed on greedy dividend extraction under Macquarie’s ownership, which ended in 2017. The current main shareholders entered with their eyes open, or should have done, and have had a chance to reset standards. If ownership by a collective spread around the globe (which may be half the problem) hasn’t worked, that’s their problem.
Ofwat cannot be seen to be bullied into submission. If the shareholders have no appetite to invest on terms that are fair to customers, they should be wiped out. Let somebody else have a go. Special administration, AKA temporary nationalisation, would be a reasonable solution at this point.
