Thames Water is in trouble. The UK’s largest water supplier has had a checkered history, but recent struggles have highlighted the broader issues facing UK utilities.
Since COVID-19 and the collapse of another beloved utility, Bulb, infrastructure investment has dwindled. UK infrastructure spending now makes up only 2.75% of GDP (compared to 2% in 1990), revealing the impacts of this lacklustre investment.
Multiple water companies have requested help from the regulator, with Ofwat closely monitoring Southeast Water, Southern Water, and Thames Water.
Although these companies hold monopolies on water services in the UK, their ability to raise cash is restricted by regulator-imposed price caps, like those on energy bills.
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Water services were privatised in 1989, leading to a 40% increase in costs, though recent years have seen slower increases due to regulatory controls. While privatisation introduced market competition, the fixed nature of service areas means that true competition is limited, leaving the regulator as the primary check against further price hikes for consumers.
This scenario raises questions about the adequacy of investment in operations and infrastructure, especially when consumer bills also fund executive salaries, dividends, and bonuses.
Thames Water’s financial woes are significant. The company’s net cash fell from £1.83 billion to £1.15 billion over 12 months ending in March, fully drawing down their revolving credit. Meanwhile, debt has risen to £16.2 billion, with over £1 billion in loans needing refinancing by the end of the year.
Debt-laden utilities are poised to raise bills across the board to manage sector challenges, with interest rates holding steadily higher than market expectations. Recently, Moody’s has downgraded Thames Water to ‘Junk’ status, forcing the company to breach its licence agreement. Thames Water has now entered “special measures,” exploring multiple avenues to resolve its financial crisis.
Options on the table include splitting up the company, raising bills, and seeking fresh equity. All these measures hinge on investor confidence. Without new investment, the company could remain in special administration for years or face complete nationalisation.
Would that be so terrible? Both the regulator and the government are striving to avoid nationalising failing water companies, despite the potential benefits for UK infrastructure. The current Labour government aims to improve services without resorting to full nationalisation, mindful of the economic challenges it has inherited.
Chancellor Reeves is expected to stress the difficult economic choices ahead, balancing European-style services with American-style taxation levels. Hence, the Labour government prefers to avoid direct Treasury intervention, which would require significant funds to address years of under-investment.
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However, nationalisation, or partial nationalisation, is just what the country needs. We have privatised so many services without recognising that when shareholders are not the same as the service recipients, the incentive to improve the service diminishes.
Furthermore, a signal towards some government ownership would spur the confidence required to make at least some parts of the company look re-investable and perhaps even increase their credit rating. Under Macquarie’s ownership, Thames Water has doubled its debt and prioritised shareholder returns over essential improvements such as reducing leaks and sewage issues.
We need to re-nationalise vital services like energy and water, ensuring that the primary stakeholders are the consumers who depend on these services.
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