Thames Water privatisation has failed – it's time to put public ownership on the table
Protest sign, River Wey, Guildford (Alamy)
6 min read
Who does Thames Water serve? It should be an easy question to answer: the public (or at least the 16 million people in England who rely on it for their water services).
Technically, of course, a company exists for the benefit of its shareholders. It is only fair, then, to look at how much equity they have invested in the company and what returns they have received. And yet these figures reveal that privatisation has not worked as intended.
Thames Water began life with retained earnings on its balance sheet of £969m (about £2.5bn in today’s prices). This is money the shareholders inherited, not capital they injected. The actual amount of new equity brought in at privatisation was only £360m, representing just 27 per cent of total shareholder funds. So, when Thames Water paid out £440m in dividends in 1989-90, it was eating into its retained earnings.
Now, 35 years later, those retained earnings have shrunk by almost £1.8bn from their £2.5bn starting point, and the total value of shareholders’ equity (retained earnings and equity investment) has actually gone down by more than £725m in real terms. The point of privatisation – bringing in equity and liquidity – has failed. There is less equity in Thames Water today than there was at privatisation.
What about the reasonable returns shareholders were expected to receive for boosting the company’s equity finance? There, the story is very different. A recent study by Professor David Hall shows that shareholders have extracted £12.9bn in dividends and have done so while accumulating £14.7bn of debt. And remember, in 1989 the government gave the water companies a grant of £5bn to enable them to start life debt-free.
These finances are the very reason that, last year, Thames Water discharged raw sewage for 107,000 hours into our rivers and lakes. A single discharge can be up to one billion litres of sewage. And we know that the judge who fined the company £20m for its previous pollution incidents stated that there was “inadequate investment, diabolical maintenance and poor management”.
So, where is all the money going? It is one of the fundamental laws of business that there are only two sources of finance – debt and equity. Essentially, Thames Water has perfected what is regularly performed on Westminster Bridge as the Three-Card Trick. In this version of the game, you pay shareholders a dividend you cannot afford. This is money that could and should have been invested in maintenance and infrastructure to stop leaks and pollution incidents. For a while, shareholders are happy. But there comes a time when the company’s performance is so poor and its assets so decrepit that investors no longer wish to put in more equity.
At this point, the company has a liquidity problem and, unable to secure more equity, starts to accrue debt, which it is obliged to secure at a high rate of interest. Any normal company providing a poor service loses its customers and hence its income. But water is a regulated monopoly. In this way, it almost defies the normal rule about debt and equity. In order to pay off its debt and the interest on it, the company simply uses the money it is guaranteed from billpayers – money that should go to improving the service. That is why Thames “customers” have ended up seeing 35 per cent of their bills siphoned away to service debt or pay out dividends, penalties and fines.
Over the past three years, the company has made successive attempts at a turnaround plan. It is almost a year since the proposed takeover of Thames Water by KKR fell apart. Few could see why a private equity company specialising in leveraged buy-outs would want to take on a regulated utility with dwindling liquidity, an 88 per cent debt-to-equity gearing, and with a credit rating downgraded by Moody’s from investment level to Caa – junk territory. Why indeed, unless KKR believed – as it suggested at the time – that it could use its size ($638bn) to “bully the Treasury into stopping Ofwat and the Environment Agency from imposing the penalties and fines”.
When it became clear that such ‘regulatory easements’ would not be granted, KKR pulled out, citing “creeping political interference”. Yet here we are, a year on, with Ofwat considering yet another turnaround plan that would allow Thames to pay no fines or penalties for any licence breaches, leaks, or sewage discharges for the next five years at least. The government is being played! Thames is due to run out of money in October 2026, and Ofwat must put any new deal out for a three-month consultation. Thames senior creditors are effectively holding a gun to Ofwat’s head and warning, “we won’t put equity into the business unless you exempt us from paying fines”.
So, we have a company that no investor wants to put money into unless it is allowed to fail to comply with its statutory duties. Yet this is the company we are told would be too costly to take back under public control. The government would like to insist that the value of Thames should be based on its Regulatory Capital Value. Under this methodology, Thames could have an RCV of £21bn.
This claim is simply wrong in law. Lithgow v UK is the case on compensation for nationalisation in the ECHR. It clearly states that “legitimate objectives of ‘public interest’… may call for less than reimbursement of full market value”. In English law, the government would be obliged to calculate not the RCV but the “fair” value of the company. This allows it to balance the cost of the necessary repairs to infrastructure against any notional market value. Those repairs are estimated at £23bn – more than the most inflated notion of the company’s RCV. Fair value also allows the government to take account of the excessive profits already received by the shareholders against their initial investment. As Moody’s has stated, “the level of compensation would fall within the wide discretion of Parliament”.
Why would anyone take on a company with a debt of £17bn that requires a further £23bn of infrastructure repairs, simply to earn a regulated stream of cashflow, capped by the regulator? Thames cannot sell its assets without Ofwat’s consent, so all the value of the enterprise is based on predicted cash flow over cost (mainly: how much can the company make from bills vs repairs).
In the latest deal, senior creditors say they will take a haircut of 30 per cent – but only if they are allowed to go on polluting without any penalties being applied. The fact is that when no buyer is willing to step in without concessions, the company’s value is nil.
The normal market solution for companies that cannot pay their debts and can no longer perform their statutory obligations is to go into liquidation. In such circumstances, the government could legislate to take Thames back into public control to ensure that essential water services are maintained without any obligation to pay the company’s creditors.
The government has stated in a written parliamentary question that it “has no intention to nationalise and therefore has not assessed the ongoing costs of continuing with the current privatised model versus public ownership of the water industry”. Surely this is precisely the calculation that any responsible government should make in order to secure best value for the public.
Barry Gardiner is Labour MP for Brent West
