S Poddar
Thames Water has been able to win a much-needed £3bn injection of capital following a decisive High Court victory that will see the debt-ridden firm escape state control. It would have fallen into nationalisation on a temporary basis otherwise had it not had the capital infusion, using up all its finances by March end.
The ruling gives Thames Water the financial leeway it needs to embark on a massive financial restructuring. But doubt still hangs over its future, with debts of an eye-watering £19bn and the prospect of an appeal against the ruling.
Thames Water has been increasing under fire from years of continuing sewage leaks and overflows that have angered the public and triggered regulatory attention. The utility company supplies about 25% of the UK with water, which includes London and southern England areas, and operates with 8,000 staff. Due to the severity of its financial collapse, the government had been in waiting mode to intervene and rescue it using a special administration regime.
In spite of the financial crisis, customers will still be provided with water and waste services uninterrupted. The water regulator, Ofwat, reiterated that Thames Water is still under tight control, guaranteeing that services are protected. The company indicated that the emergency funding will enable it to restructure its debts and attract possible new investors.
Securing this funding was not easy, however. Some creditors were resistant to the deal, claiming the 9.75% loan interest rate offered was too much. The green light from the High Court was necessary to try and force through the plan regardless.
In handing down his judgment, Mr. Justice Leech held that the “relevant alternative” to the company’s planned financial strategy was short-term nationalisation. Recognising the public interest in preserving essential services, he eventually approved the plan. He also added that neither Ofwat nor the Environment Secretary objected to the ruling.
Not all were happy with the decision. A coalition of objecting creditors confirmed they would appeal, claiming that another financial plan might have offered the same money on better terms. “Having this judgment reviewed by the Court of Appeal is critical in the context of predatory lending to a vital utility with a clear public interest,” a spokesman for the objecting creditors said.
The decision has fueled wider arguments over the long-term viability of Thames Water. Those in favor of the bailout see it as a necessary measure to shore up the company, while others see it as simply kicking the can down the road. Thames Water chairman Sir Adrian Montague described the decision as a “significant milestone,” and chief executive Chris Weston said it placed the company on “firmer financial footing.”
But not all stakeholders are so optimistic. Charlie Maynard, Liberal Democrat MP for Witney, was forcefully opposed to the extra debt. “Letting Thames Water accrue £3bn more in debt is not in the interest of their millions of customers. They will all be footing the bill for this pointless, costly, and incredibly short-term rescue. This restructure is mere throwing good money after bad,” he said.
Environmental campaigners have also complained. Henry Swithinbank, policy and campaigns manager at Surfers Against Sewage, described the rescue package as a “sticking plaster” that only props up Thames Water until it needs to be bailed out again. “Today the High Court gave the go-ahead to the fat cats and bosses,” he continued, referencing wider anger about corporate incompetence and regulation.
Thames Water’s financial woes are the result of a mix of factors, such as past regulatory shortcomings, shareholder choices, global warming, and mismanagement. Others believe the company should have been permitted to fail and be nationalized, as its present financial difficulties are the result of choices by past owners, who loaded the company with debt while paying huge dividends.
Others, and most notably those in the water sector, argue that the issue at hand is actually underpriced services. As the population rises and so too do environmental issues, they argue that prices have been artificially depressed for far too long. The pricing controversy has contributed to the tensions between Thames Water and the regulator.
The initial £1.5bn instalment of the rescue loan will keep the firm going through the autumn. The second instalment is aimed at helping Thames Water appeal Ofwat’s ruling on how much it can put up household water bills. The process of appealing can last a maximum of a year.
Thames Water had initially been expected to pay off £200m of debt in March. However, following the High Court judgment in its favour, all payments of debt have been suspended for two years. The extension offers temporary reprieve but does not eradicate the root financial instability.
Thames Water has already submitted an appeal to increase domestic bills above what has been allowed by Ofwat. The regulator limited rises to 35% over the course of the next five years, but Thames Water contends that it needs a 53% rise to finance critical investments and enhancements. The bill caps are also being appealed by other water businesses. Southern Water is opposing a 53% rise authorized by Ofwat, although it initially requested an 84% rise. Anglian Water and South East Water have also appealed.
Conversely, six water companies have chosen not to appeal their bill settlements: Severn Trent, United Utilities, Pennon, Dwr Cymru Welsh Water, SES, and Hafren. Their actions indicate that whereas some companies embrace regulatory limitations, others are prepared to resist in order to achieve greater revenue streams.
The Thames Water case raises wider issues of whether privatized utilities are economically viable, the function of regulators, and the balance between cost affordability for consumers and investment needs. While the company goes through its restructuring process, the results will determine the future direction of water regulation and financing in the UK. Whether this £3bn bailout acts as a watershed or simply postpone further crisis is yet to be known.
