TThirty-five years ago, investors flocked to invest in the water sector, a vital public service and a monopoly, in a sell-off by Margaret Thatcher that was deeply unpopular with the public, but saw shareholders earn 40% on average on the market. the first day of trading.
Despite the £56 billion in dividends paid to the sector’s shareholders since privatisation, investors in the biggest beast, Thames Water, now appear to be fleeing.
The water industry has become a bad bet. Billions are needed to repair pipes and treatment plants that have been left to rot for years, to invest in building resilience to the climate crisis and to meet a stricter environmental regime – one arguably imposed on the regulator , Ofwat, by public outrage over wastewater. discharges.
Add to this higher interest rates on the £18 billion debt held by Thames and its parent company, more than half of which is index-linked, the appeal of what was once considered a cash cow is fading considerably.
The nine owners of Thames Water appear to have had enough. Some talk of ‘not throwing one money after another’ and needing to protect their own investors, as Thames struggles to repay its debts and, according to insiders, faces a £4bn shortfall by the end of the decade.
On Thursday, investors, including the Canadian public pension fund Omers (Ontario Municipal Employees Retirement System), the United Kingdom’s University Superannuation Scheme, the Abu Dhabi sovereign wealth fund and the China Investment Corporation controlled by Beijing, renounced their commitment to provide £500 million of equity capital – out of a total of £3.25 billion of additional liquidity sought by the company – said Ofwat’s intransigence had made Thames ” impossible to invest.”
Their decision comes a day after water companies were criticized for record discharges of wastewater into rivers and seas, which reached 3.6 million hours in 2023.
Ending liquidity was an about-face from shareholders’ position last July, when they agreed to inject £500 million into the company by the end of this month, in the first equity injection since privatization, and have promised another £1bn. to the conditions.
But since then, investors have found themselves in a long-running standoff with Ofwat, demanding that in return for billions of dollars earmarked for running the Thames, they be allowed to increase bills by more than 40%, raise the dividend threshold and to pay lower fines for environmental pollution.
Backed by the government, the regulator remains firm, refusing to allow the bill to rise, lift dividend limits or give Thames a free pass on environmental pollution, much of which is caused by decades of sweat out your aging assets, » admits the company in its latest business plan. Thames Water’s ability to service its total debt, which includes that of its parent company Kemble, is now under threat. Kemble has to repay a £190 million loan next month and said it would not be possible to pay further interest on the loan, nor repay it before the April 30 deadline.
Liberal Democrat Treasury spokeswoman Sarah Olney believes the difficulties at Thames Water and its parent company have now exceeded the threshold required to place them into special administration.
Under the recently updated water sector insolvency rules, special administration can be triggered by the regulator or government if a company cannot pay its debts or fails to meet its legal obligations. – which include the legal obligation to treat wastewater and comply with permits on its treatment plants. Thames Water is one of six companies being investigated by Ofwat for potentially illegal discharge of sewage from its treatment plants – a clear failure, if proven, to fulfill its legal requirements.
“Thames Water is a failed company,” says Olney. “The country is on the brink of collapse and it is clear that things cannot continue as they are. Drastic measures are needed to keep the taps working for millions of customers.
“The board should hang their heads in shame. This company should no longer be allowed to mistreat their customers and destroy our environment with their dirty sewage. »
Chris Weston, chief executive of Thames, said a special administration was still a long way off, but now that it is forced to potentially seek funding from new investors, he admitted it was a possibility.
For their part, investors and directors of Thames Water place the blame directly on the regulator for having applied a regime which, according to them, has not allowed them to generate enough income to invest since 2015.
Ofwat would dispute this claim. David Black, the regulator’s chief executive, made this clear to water companies in letters to their bosses in 2021, when the blame game began.
And last year he said £60bn of debt carried by privatized water companies – including Thames, which has the highest debt ratio in the sector – was ‘their problem to solve’ .
In June 2021, Black clarified the legal obligations of water company owners to “provide, improve and extend…a system of public sewers”, to “provide for the emptying of such sewers” and to “negotiate effectively”, by means of of wastewater disposal. works… with the contents of these sewers.”
Later that year, Black made it clear that if companies needed more resources, they could say so. Company boards certify to Ofwat that they have the necessary resources to carry out their regulated activities, he writes, and “all companies have received funding to comply with their legal obligations”. The regulator seems ready to fight.
