How will it end? What will Thames Water look like in 2030? And, more importantly, what will be the state of the River Thames, the security and quality of water supplies, and the costs? There are at least three possibilities: muddling along, lurching from crisis to crisis; new owners and new structures; and nationalisation.
Right now, Thames Water is seen through the immediate financial crisis it faces, and the drawn-out tussles between the debtholders, the equity owners and the management. The government is desperate to avoid special administration, for fear that its army of backbenchers will push it to follow through to full renationalisation. The regulator is determined to see off special administration, for fear that it would reveal just how bad regulation has been and because it would lose control. The debtholders want to avoid special administration because they fear they would have less influence over the proceeds from the sale to new owners, whilst the equity owners have already written off their investments.
The result of a strategy of “anything but special administration” has resulted in an outcome that looks more like all the downsides of special administration without any of the obvious upsides. Through its “special measures”, Ofwat is effectively in control of Thames Water’s board and now controls all the main decisions that the board would otherwise wish to make. In effect, Ofwat controls the dividend and the bonuses, overseas Thames’s corporate plans, and holds the future of the company in its hand by its rejection of a price determination that does not remotely meet what the board says it needs.
Piled on top of this is the government’s new legislation, which is largely political and cosmetic, rather than targeted at solving the many and obvious problems of the water industry. Just to make being a director of a water company even more unattractive, the government is threatening criminal action and jail.
In all this heat and noise, the main players have lost sight of where they want to get to. What would the government, the regulators and the citizens of the Thames Water catchment regard as a stable, sustainable and successful Thames to emerge as the endgame?
2030 and a successful endgame
Success would see Thames radically improving its performance. It would see a dramatic reduction in the amount of sewage going into the rivers. It would see the great capital maintenance backlog dealt with. There would be a radical reduction in leakage. Thames’s customers would be incentivised to use water wisely. Thames would treat its customers well, dealing with complaints, and dealing with leaks and burst pipes and pollution incidents with speed. In return, its customers would pay a fair price for water and sewerage services. The costs would be transparent and easily understood. All citizens would access the water and sewerage systems, and would be able to do so in an affordable way. This means there would be adequate protection and special tariffs for those who struggle to pay, and all customers would be encouraged to manage their water use, through universal smart metering, with tariffs to incentivise the optimum usage in the context of the system needs and costs. It should be a digital utility, not an analogue one.
For the regulators, “good” in 2030 means that regulation is everywhere transparent. It means digitalised detailed mapping at high resolution and in real time, open and available on websites for all to see. Sewers should not be able to discharge without instant observation. Leaks should be monitored digitally, and the smart digitalisation of the water and sewerage networks should be publicly displayed in real time.
The licences and obligations of the water companies should be clear and easy to understand. What exactly constitutes good performance must be obvious to all the parties.
This should not be too much to ask by the time we enter the fourth decade of the twenty-first century, yet it is a million miles from where we are now. Getting from here to this world in 2030 is analogous to hitting net zero for electricity by 2030. In both cases, the chasm between what is and what ought to be is huge.
With this in mind, how do the three endgames for Thames listed above measure up?
Muddling through
Let’s start with the most likely endgame: muddling through. Suppose that the bondholders cobble together a financial deal that writes off some of the debt, possibly via a partial debt-for-equity swap. Let’s assume that new equity is sold to infrastructure funds and private equity at a deep discount to the regulatory asset base (RAB). Let’s suppose that Ofwat fudges the periodic review, sticking to its public answer at the interim determination, but adding in a series of ex post “adjustments”, “re-openers”, and “uncertainty mechanisms” that can be passed through if and when Ofwat agrees.
Whilst all the parties are pursuing all of the above, there is little chance that their overriding occupation is improving the performance of Thames Water, and dealing with the very real challenges that confront water and sewerage in the Thames catchment. The day job is inevitably given a back seat when the very survival of the company is at stake. My guess is that almost every meeting of the company’s senior management team is dominated by questions about whether new equity can be raised, how to pay the interest on the debts, how to roll over the existing debt and borrow even more, and how to get Ofwat to a more realistic place on prices.
Yet the main challenge is actually about how to turn around a failing company, how to transform its performance, how to get the assets properly maintained, and even more basically how to even understand the assets and the state they are in. When the previous CEO, Sarah Bentley, was asked at a parliamentary select committee meeting how she responded to the data that Professor Peter Hammond had analysed and the results he found on his own, she replied that Thames needs to understand what he had done and the results from it. The clear implication is that the company did not.
A turnaround plan for Thames is a very demanding challenge, and as countless private sector examples show, it involves lots of additional cost in a transition, and typically things get worse before they get better. Genuine turnarounds start by establishing how bad the status quo actually is, followed by the restructuring of the workforce, of procurement, and of the information, data and analysis that the board receives. Trying to do this in the largest water company in the UK, which combines both water and sewerage, and the capital city as well as rural areas, and in the teeth of a financial crisis for the company, is a huge ask. If the regulator weighs in along the lines of “no extra money without reform”, as in the current NHS situation, it is likely to end badly.
This takes us to the fundamentals of what needs to happen if Thames Water is to get to 2030 in good shape. It is hard to imagine any serious analysis of Thames’s problems and performance without confronting deep structural issues and requiring not just an internal reshuffling and tightening up of the organisation, but rather a structural and organisational change. It is hard to believe that Thames’s problems are confined to it being badly managed. A more plausible view is that it is not only uninvestable but also unmanageable in its current form – too big to manage, too complex to manage, and too many different parts to run as an integrated whole.
If this possibility is entertained, then the question facing the government, regulators and the board of Thames is how a fundamental structural transformation can be made. It could be done by the existing company. It could break itself up. It could split off London Water from the rest, and it could split off the massive sewerage investment programme from the day-to-day supply of clean water. But how likely is this?
The answer is in several parts. First, it would have to get the agreement from the existing debtholders and existing shareholders. This would at best be one hell of a process, and would probably take years. Second it would require Ofwat (and the government) to facilitate new licences, create new RABs, and new prices and corporate plans would need approval. Third, it is not clear how existing management would take to running smaller entities (though many may want to leave anyway).
Special administration
The special administration route gets the company to this outcome without the need to negotiate directly with debt and equity owners. The special administrator takes over and administers the company, and has plenty of money to do so because it controls the monies from customer bills too. There may need to be a government guarantee for contracts, but this does not in itself have significant costs, and these costs can in any event be recovered from customer bills and the proceeds of sale.
The job of the special administrator is to make itself redundant, by passing the assets on to new owners. Unlike the internal approach from the company itself, the special administrator is open to bids from all and any interested parties. These may well be for parts of the business. The special administrator can (and should) go further. This is the unique opportunity to put in place a structure for the Thames catchment that best matches the challenges to, and opportunities for, future management to achieve “good” by 2030 and beyond. Elsewhere I have suggested that Thames should be split between London and the rest of the catchment area, and that it should split its water services from sewerage.[1] Whether this is agreed as the best structure is something that can be debated and decided under special administration.
Nationalisation
There remains a third possible outcome of the current crisis at Thames. It could get nationalised. The irony of the desperate attempts by the government and the regulator to prevent renationalisation now is that they are making this outcome much more likely later this decade and in the run-up to the next general election. Why? Because muddling through is very unlikely to turn Thames Water around. By trying to prevent special administration, and the only viable way of getting any serious restructuring done, they condemn Thames to more and more crises, and a preoccupation with financial matters for the foreseeable future. The financiers are going to be very much in charge, as the tail that wags the dog.
Nationalisation is not a particularly appealing outcome. Network Rail and the rest of the railway renationalisation point to where all this could end up. The state once had the capabilities to run the commanding heights of the British economy, but no more. More pressing is the politics of renationalisation, with the state effectively setting the prices and the balance between taxpayers and customer bills. The recent settlement of the ASLEF industrial action without any agreement for changes to working practices is a straw in the wind.
Delaying action means that the underlying state of the company may well deteriorate and there will be little understanding from the customers (and the media) as and when the state of the rivers continues to be unacceptable and perhaps even deteriorates. Thames Water’s need for equity and debt will continue to dog the sector as a whole, and continuing difficulties inevitably open up the question of whether Thames is an isolated bad apple, or whether there are systemic issues in the industry as a whole.
Delaying action leaves the fundamental issue of making the industry investable again hanging in the air. In the end – the endgame – the industry needs a lot of new capital to finance a large infrastructure investment programme on a scale not seen for many decades. That finance needs to be funded. Funds can only come from customers’ bills and from taxpayers. As the Thames saga drags on and on, what little faith customers and taxpayers might have in the company solving its problems keeps sapping away. In the end, the public demands renationalisation, and at the next election in 2028 or 2029, that will inevitably find itself on the ballot paper.
What muddling through does is make the renationalisation of the whole of the water industry more and more likely. Doing exactly what is provided for in the current regulatory regime when a company fails to meet its licence conditions – calling in the special administrator – is probably the only way this will be avoided. What is more, the special administration route is probably the only way under which Thames can be restructured and start with a clean slate, with the ability to raise money. Special administration is the route to making Thames and the sector investable in the medium and longer term. The tragedy is that the government and Ofwat are likely to carry on trying every possible way to head it off, and in the process only bring about their worst fear: renationalisation.
[1] See Helm, D. (2024), “Putting Thames Water into special administration and breaking it up”, 7 March.
