As is now widely acknowledged, including by the company itself, Thames Water is now facing significant financial difficulties. That company has a £190 million debt to repay in April 2024 and is at present suggesting that it does not have the means to make settlement. This means that at a technical level the company might be insolvent and might need to enter into insolvency administration. The enormous quantity of debt that has been piled upon this company, coupled with the increase in interest charges over the last two years has placed it in a situation of financial unsustainability in its current format.
Insolvency is a dire situation for any company to find itself in. Thames is, however, in a very different situation from most companies for some very particular reasons.
Firstly, as should be obvious, the customers of Thames Water will need to be provided with water, whatever the financial state of that company. It is simply not possible to imagine that there can be a disruption to the supply of water to these people. Thames Water cannot then cease to trade, although in what form it will continue is not necessarily known.
Secondly, if that is to happen, the infrastructure that permits that supply must continue to exist. This means that the continued cooperation of large numbers of suppliers and contractors to the existing company will be required. In that case, they will need to know that they will not only be paid for services that they have already supplied to Thames, on which many will be dependent for their own financial stability, but will also need to know that they will be paid for their continuing services now that the company is in administration. In contrast to most insolvencies, where the unsecured trade creditors of the company usually lose out very badly, in this case that cannot happen unless continued water supplies are threatened, which cannot be acceptable.
In that case, the insolvency of Thames Water could not proceed under normal insolvency arrangements. That is because under those normal rules the priority of the insolvency administrator is to make repayment of the secured creditors before anyone else, with all other interests being sacrificed to this singular demand.
This leaves the government with three options. The first is to pass emergency insolvency legislation that guarantees continuity of supply in these cases. If it can make such arrangements to impose demands on personnel in public utilities who wish to withdraw their labour, then it could obviously do the same to ensure the continuity of water supply to a quarter of the UK's population.
Alternatively, it could take over the trade of Thames Water in the event of its insolvency to guarantee that continuing supply took place.
Thirdly, it could provide an unlimited guarantee to the insolvency administrator, but that would appear to be unacceptable because that is likely to still leave the insolvency administrator compromised with regard to the legal claims of secured creditors, which they would still be obliged to settle first and which the government might not wish to pay.
Of these options, I prefer the idea of emergency insolvency legislation to be used in the case of public utilities. This option would provide clarity at the time of insolvency that the other options look unlikely to deliver. That would, however, require that the government take emergency action in advance of Thames Water admitting its insolvency. Whether this government has the foresight to pass this genuinely necessary emergency legislation in preference to, for example, its Rwanda Bill is, however, open to question. I think it should be doing this now: this failure is now clearly foreseeable.
The advantage of such emergency legislation would be apparent when dealing with the other complications that this insolvency will unnecessarily create because of the complexity of the structures that have been created around Thames Water.
In particular, there will be charges secured by the loan creditors of Thames Water over many of its assets. Its last accounts suggest that there are approximately £23 billion worth of assets in the company, financed by borrowings that exceed £15 billion, most of which seem to be secured by complex cross-guarantee arrangements that will inevitably create a legal claim to ownership of the assets of the business in the event of its failure. It is likely as a result that unless measures are taken to protect the ongoing trade creditors might take action to claim the assets of the business to protect their own right to payment. However, given that those assets are critical to the ongoing supply of water, this possibility clearly conflicts with the public good and cannot, as a consequence, be allowed to take place, whatever the structure of the guarantees provided by the company to its loan creditors in the past.
This, almost inevitably, requires that emergency legislation will be required to deal with this situation. The normal claims of the secured creditors in insolvency will have, as a matter of fact, to be subordinated in the case of Thames Water to the claims of those creditors who must instead be paid to ensure the continuity of supply of water, for reasons noted above. In addition, the right of the secured creditors to demand the sale of the assets of the company in an effort to recover sums owing to them will have to be suspended in the case of this company.
This should not be a surprise to the creditors in question, but no doubt squeals of protest will arise at this suggestion. When they do, the question to be asked will be why these creditors ever thought that they could claim a charge over assets whose sale might threaten the water supply to one-quarter of the UK population, which would very obviously be an impossible outcome for any government to contemplate. However, without legislation, they have the law on their side, which is why new law is needed.
This is not to say that the loan financiers to Thames Water would not have a claim for payment from any liquidator seeking to re-establish Thames Water as a going concern, whether under state or private ownership (and given that state money is inevitably going to be involved in this process, the first of these options seems to me to be very obviously the most desirable). Loan financiers should be paid the fair value of the assets over which they have charges subject to the fact that those assets will necessarily be used in the ongoing trade of the business, because no alternative is conceivable, and taking into consideration the fact that the business in question is, first of all, financially unsustainable its current format and, secondly, has substantial obligations to make investment to maintain the trade which must be taken into consideration when valuing existing assets which are not fit for purpose. Thirdly, the costs of the necessary transformation of the company to become net-zero compliant between now and 2050 must also be taken into account. I suggest that this valuation basis must be created by law.
What the remaining payment owed might be, I do not know. What I do know is that valuation on any other basis would be wholly unreasonable, and I cannot see a court supporting creditors in any claim that they might bring against this basis of valuation, which is a fair reflection of market worth given the current state of the business, even if it results in them suffering considerable losses – as I think would be likely.
There is, of course, one final point to make, which is that the shareholders in the business will necessarily lose all sums that they have invested in it. The pension funds that represent most of those holdings should, I think, take more care with their investments in future. They should not stake their members' interests on the folly of privatised utilities when it is clear that the supply of vital public services must be in public hands. There will be an expensive lesson for them in this – but it is an essential one that they must learn.
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When asked, “how did you go bust?”. Hemmingway replied “slowly then quickly”.
This was the problem with RBS in 2008 – there was no time. A suboptimal solution (ie. some of those who should have lost money walked away in tact) was inevitable. In the heat of the moment (and it was only a few hours) our country was, in effect, blackmailed.
So, whatever plan we choose it must be developed now so that it can be put into action instantly. If insolvency is inevitable then I suspect the current owners/creditors would like it to happen under this government than the next.
Ridiculous that we have come to this point with utilities that were once publicly owned
Related question- would it be viable for a political party to promise to fine shares from polluting water companies rather than cash which they can just build into their profit margins?
It could do that
But it would be a bit token gestury
5% of the shares of the company per incident would either provide suitable incentive not to pollute or end up with the water company nationalised. Of course no current UK party would implement anything so sensible.
No one would think that a proportionate fine
I will be amazed if this government does anything along the lines you are suggesting. Rather it will wait for the (apparently inevitable) collapse of Thames Water then shovel enormous amounts of money into compensating those of its ‘friends’ who stand to lose out financially. Leopards are proverbially famous for not changing their spots.
If the government is doing anything at present it will be seeking tenders to supply water bowsers. But even that is unlikely.
… or perhaps put out to tender (friends’ bids favoured) for bowsers, drinking water supplies, community tanks, water filters etc etc
The premise of needing new legislation or guidance isn’t quite right. There is an established system for water and energy companies being in trouble called SAR (special administration regime) and it’s different from a normal company being insolvent. A recent example is Bulb Energy – see https://www.nao.org.uk/reports/investigation-into-bulb-energy/
We don’t need new legislation or measures – we need to consider a new model following SAR which might be more effective such as a not for profit water company like Welsh Water. See https://theconversation.com/renationalising-thames-water-would-be-a-gamble-but-there-is-another-way-to-help-clean-up-the-industry-208880
Ok
I was unaware if that
But did it work?
And what is Thames suggesting it should nit be used?
I would add that Welsh Water has a pile of deep,y inappropriate debt on its balance sheet. It is not a model for any restructuring.
I asked a similar question (below) before seeing your comment.
Is Bulb the model? Well, it depends on what Bulb shareholders and creditors got. Do we have that data?
Also, I suspect Bulb, which was essentially a trading and invoicing company, had a far simpler structure than Thames Water. That will make it harder; you can be certain that the loan documentation will have been designed to be watertight against all outcomes (unlike their pipes).
To be fair, I cannot see how Bulb going bust is in any way comparable to the possibility of Thames Water failing. Bulb going under would not automatically have deprived anyone of gas or electricity supplies, as Bulb did not supply anything.
Agreed
One more thing, before we head down the emergency legislation path, do we know what is in the current license/contract that allows Thames Water to operate? Surely there must be some clause where the State reserves the right to intervene in extreme situations? It might be worth seeing what these are and seeing how far they can be pushed/bent to achieve a sensible outcome.
I think your observation about how we must protect trade creditors despite their junior position in the debt hierarchy is very important. The people that mend the burst water main are probably not directly employed by Thames Water and their continued functioning is essential. This will require government intervention of some sort. This could be emergency legislation that upends the hierarchy of creditors but this will be contentious – and almost certainly impossible under this regime that is in hock to the bankers’ lobby. It might be better to make some direct guarantee to contractors outside of anything agreed with Thames Water that would in effect make them “super senior”. Where do fines imposed by the regulator sit in the hierarchy? If (and they may not be) “super senior” a hefty fine could be used to pay trade creditors.
I can’t find that Conrad’s
I suspect it is out there somewhere
It did not stop the assets being charged and people accepting them accurately though and I suspect someone did some due diligence
Thames Water licence is here:
https://www.ofwat.gov.uk/publication/thames-water-utilities-limited-appointment/
In effect a rolling licence with a 25 year notice period.
Yes the Government can bring in an SAR – like an insolvency for 2 reasons. Performance and finance.
See comment elsewhere
An interesting question is what constitute Thames Water “assets”? Does this include, for example, the Thames Water ring main? Or is it only real estate etc?
If loans are secured on assets such as the ring main should they really be repaid? Maybe such assets should be “marked to market”. There is no market for a ring main on its own. “Pssst governor, want to buy a ring main at a knock down price?”
It is clearly a complex issue which reinforces the need for legislation.
I agree that, whilst it is undesirable that pension funds lose out, it is a necessary lesson for them to learn. But, equally, it seems to me that lenders should not be protected from losses that are secured on essential infrastructure.
The main thing is that the government should never again be forced to bail out the errors of investors and lenders to failed privatised utilities (I would include banks). I fear that will happen again. And, if it does, it will only encourage repeated failure in future.
You get the point, Tim
These assets have no independent value
And the Thames business model is bust
They will have a “book value” in the accounts. In the absence of any “market price” this might make sense.
Book values are never of relevance in insolvency – they assume the business is a going concern and that has ceased to tbe the case in that partocualr structure
So, they are of no relevance here at all
The Bulb SAR approach actually worked well and as it was recent it shows that if a utility company becomes insolvent the system could be used again. However, as you note, the Thames Water debt loading is very large and the company has performance challenges, so for Bulb, Octopus came along and took on their system and customers. Who might take on Thames is a challenge but there are options which would take a long time to outline. My preferred option is not for profit like Welsh Water which can utilise markets for finance but it has a single positive focus and reinvests any profit.
Bulb cost a fortune
How can that be defined as working well?
Bulb situation may actually make the Govt money. https://www.theguardian.com/business/2023/mar/29/bulb-bailout-may-cost-uk-government-billions-less-than-feared-says-watchdog
Maybe
But as Clive has pointed out, it was little more than an energy broker gambling on timing issues – which it got horribly wrong for a while
Thames Water is something quite different
Section P deals with a Special Administration
To desribe it as perfunctory would be overly generous
It is an absurd section that could mean almost anything
The only advantage to that riught now is that it mioght not help Thames Water because the chance that it is compliant with P14 right now looks to be remote
Just to add – nationalisation may mean that the shareholders and debt holders get Govt cash. SAR is very different as the company is effectively insolvent. So shareholders lose out.
There is no way any rational nationalisation would result in shareholder payment or payment in full to loan financiers
I think we can be reasonably sure of only two things.
The Tories will avoid nationalisation at all costs. To admit that the privatisation of even one utility has failed risks bringing down the whole pack of cards of the last forty years of Thatcherism. As it has been since 1979 their only response will be to tell ever bigger lies and, as you have pointed out, the need to keep up the lying will force them to become ever more divorced from reality.
Secondly, whatever nonsense they do come up with will be designed only to cover up the whole mess till at least the General Election. Their ownership of so much of the Old media and their current cosying-up to the moguls of the New media gives them a chance of success in this venture, but fortunately we are not yet Putin’s Russia and the many sites like this one means that there is also a good chance they will fail.
Good points, which is why so many experts are talking to Labour now to educate and inform what are sensible options for the water industry and what are just posturing.
“Good points, which is why so many experts are talking to Labour now to educate and inform what are sensible options for the water industry and what are just posturing.”
Is Richard one of those?
No
Given that Starmer is no economist, and those that purport to be are neoclassical banker wankers, is there any hope? Nationalisation has already been ruled out – or will there be another U-turn (Starmer U-turn count got to be over 30 by now).
This situation reminds me somewhat of the Railtrak crisis, particularly following the Hatfield rail crash. In short Railtrak was in trouble before the crash. After the tragedy when told to inspect and assess every foot of rail it became clear they had neither the financial resources nor the engineers who had gone following privatisation. I seem to remember a moderate government bung went straight out of Railtrak’s back door and into the pockets of investors. Clearly insolvency couldn’t be allowed to break up the vast infrastructure, end rail travel in the UK, or put further lives at risk. The result was some sort of bankrupcy protection put in place by the government.
https://en.wikipedia.org/wiki/Railtrack
Twenty odd years later we are here again with another critical utility going to the wall.
Please forgive any typos or poor readings, my sight has deteriorated somewhat.
Thanks
Sorry, your view is unlikely to be true – see https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2019/07/UPDATE%20Nationalisation%20July%202019.pdf
This is from 2019 but outlines key issues that a law firm would be arguing.
I have read that – and consider it wishful thinking, to be polite
It is opinion abstracted from reality
It does not consider an SAR
Under SAR, assets to be broken up or sold are very limited as they are protected as part of the national infrastructure.
Dunno…
If the taps ran dry in Westminster it might get the message over that privatisation isnt working
Passed this thread onto weownit.
As you know they were talking about shares instead of fines, but it’s probably gone past that now.
https://weownit.org.uk/blog/stop-fining-thames-water-take-shares-instead
This is just two days ago that Thames Water were talking about paying out a £37.5 million dividend.
https://www.independent.co.uk/news/business/news/thames-water-dividend-ofwat-shareholders-b2458875.html
I thought that it was illegal to pay a dividend if the directors know a business is insolvent. Clearly the directors of Thames water know that it may be insolvent.
What’s the chance of them being prosecuted if the business goes bust in the near future?
They are arguing the crediotrs should roll their loans over and so they are not insolvent
Gooid luck with that, I say…
I work in water industry insight, and I would like to offer up some really good information sources around this subject – I have quickly added a comment so you know what the papers cover:
HELPFUL LINKS ON THAMES WATER AND FUTURE OPTIONS FOR THE UK WATER INDUSTRY
My article which skims over the subject: https://www.themintmagazine.com/which-way-will-water-flow/
Thames Water
GOOD ARTICLE ON OPTIONS
https://theconversation.com/renationalising-thames-water-would-be-a-gamble-but-there-is-another-way-to-help-clean-up-the-industry-208880
GOOD ON OPTIONS AND EARLY INTERVENTION USING SAR
https://www.common-wealth.org/publications/repairing-english-water-in-the-wake-of-the-thames-water-crisis
THIS WEEK’S ENVIRONMENT SELECT COMMITTEE THAMES AND OFWAT HEARING – VIDEO AS WELL
https://committees.parliament.uk/committee/52/environment-food-and-rural-affairs-committee/news/198844/efra-committee-calls-thames-water-in-to-give-evidence-following-concerns-over-its-finances/
Sector and Thames Debt Structure
https://www.hymans.co.uk/insights/blogs/blog/thames-water-market-view/
Thames Water licence
https://www.ofwat.gov.uk/publication/thames-water-utilities-limited-appointment/
https://www.theguardian.com/australia-news/2023/jul/28/vampire-kangaroo-macquarie-boss-defends-management-of-debt-ridden-thames-water
Water Industry history, finance and models
GREAT PAPER ON HOW WE GOT HERE AND FINANCIALISATION OF THE SECTOR
https://www.tandfonline.com/doi/full/10.1080/13563467.2022.2084521
CRITICAL PAPERS ON WATER INDUSTRY DIVIDENDS (2)
Yearwood paper
https://gala.gre.ac.uk/id/eprint/21097/
Hall paper
https://gala.gre.ac.uk/id/eprint/34274/14/34274%20HALL_Water_and_Sewerage_Company_Finances_%28Rev.2%29_2021.pdf
LAW FIRM VIEW ON NATIONALISATION COSTS (PRO WATER INVESTORS)
https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2019/07/UPDATE%20Nationalisation%20July%202019.pdf
DEFINITIONS
https://www.investopedia.com/terms/n/natural_monopoly.asp ‘regulation may be an issue’
NICE OVERVIEW ARTICLE
https://www.neweconomybrief.net/the-digest/thames-water-and-the-ownership-of-utilities#:~:text=Now%2C%20however%2C%20they%20are%20collectively,remaining%20to%20cover%20interest%20payments%E2%80%9D
Welsh Water model
Water companies change to Welsh Water model.
https://law.gov.wales/now-time-privatised-water-companies-become-not-profit-organisations
Bulb Energy
We do have a good recent case study for SAR – the Bulb energy situation – see https://www.nao.org.uk/reports/investigation-into-bulb-energy/
SAR does offer an opportunity to move to a more equitable model but unless a white knight (or two) steps up, like for Welsh Water, there may just be an ‘open market’ sale of Thames Water. Doesn’t look like a good business opportunity though, unlike Bulb/Octopus.
NAO AUDIT INTO BULB/OCTOPUS – HANDY READING ON HOW SAR WORKS
https://www.nao.org.uk/reports/investigation-into-bulb-energy/
https://committees.parliament.uk/work/7413/bulb-energy/#:~:text=In%20June%202022%20the%20NAO,administration%20regime%20in%202021%2D22
I will have to review that lot
Thank you
So far what I have reviewed has not changed my mind
Thanks for these
The Commonwealth and New Economy Briefings are probably most useful
I have also read the legislation
BUT all this misses a critical point – it does not give a statutory basis for vauation of the assets subject to security. It leaves it open to market value given their required use and fails to mention a) the currtent state of the market b) the fact that the assets are not meeting need c) are not net zero compliant and so I think my call for new legisaltion remains entirely appropriate.
The suggestion that the Welsh model avoids costs that nationalisation would create looks to be completekly fanciful to me. I can see no logic to it at all when Railtrack is in the National Debt.
Appreciated, but not perusasive. We are not ready for this crisis IMO.
Less ready for this crisis than Covid? At least Johnson is not PM!
Very useful, thank you.
Bulb was a good model to ensure that customers could keep the lights on but it is unclear if it is a good model for the treatment of equity and debt holders. What happened to shareholders of creditors? I am guessing (it is only an educated guess) that equity holders where wiped out and creditors made whole. This was simple, easy to execute, and it appears that Bulb did not have a lot of debt.
Now, this won’t do for Thames Water where bond/loan holders need to take a haircut (equity holders wiped out, of course).
So here is the question….
Can we put Thames Water into SAR so that the day-to-day activity continues. Can the Government appoint a liquidator/administrator who will then try and salvage what they can for the current creditors (and shareholders)…. as is their duty.
Piecemeal asset disposal is almost certainly not possible – the assets only have value to the organisation supplying water so the SAR will be the only bid in town. So, as long as bond/shareholders get something they will not (out of spite) force a real liquidation. Now, what is that “something” to keep them quiet?
It needs to reasonable – after all, the reservoirs, pipes, etc. DO have some value – quite a lot of value. (I accept that book value is not necessarily a good starting point. Depreciated cost? Some other measure rather than something totally arbitrary?).
So, give them (say) £10bn to split up amongst the loan/bond/equity holders – and leave it to them to fight like ferrets in a sack. The new SAR company could make a separate undertaking to make good trade creditors and government could off direct loan support to them to tie them over until the New company could honour those undertakings.
This brings water under public ownership. It protects trade creditors. It punishes existing investors… but does not get us bogged down in” who gets what” – they can fight over it.
Is it £1bn, £10bn ?? That is the (multi) billion dollar question…. but it is, ultimately, within the gift of government. It needs to be large enough to prevent excessive legal battles . Also, it does need to been seen as “fair”…. whatever that may mean. I don’t know what that is.
Clive
I have already answered this
Book values are always ignored in these situatiions as being utterly irrelevent
The SAR rules say market values in current use apply
BUT since current use cannot generate a profit market value = zero
And gievn the assets are not fit for purpose becauise of leaks and non net-zero compliant they may be worth even less
£14 bn is owing. 20p in the £ would be very generous I suspect
I already agreed that book value was not the right answer.
The point is that under an SAR with trade creditors taken care of outside the settlement you can resolve things without primary legislation.
The question is “what pay-off to existing bond/loan/equity holders will work?”.
You say the value is zero because it can’t make a profit….. but is that true? If you gifted me the assets (so that I had no interest to pay to anyone) I suspect it would be profitable. (I accept this is not certain given its environmental liabilities but the world has yet to see things this way).
Does 20p in the pound work? Maybe but I suspect more would be required. You probably have to throw a bone to the equity holders to keep them out of court, too.
In short, it is tempting to turn this into a morality tale and absolutely stuff the existing owners/creditors… but this desire must be tempered by pragmatism.
This blog is about real world solutions.
We’re going to dsiagree again Clive
This company is profoundly bankrupt
There is no chance of a profit being made from water supply for 30 years or more once depreciation and the cost of capital are taken into account
So what are existing assets worth if they are to be used in that activity? In the real world the answer is nothing
So why should those who made the mistake oif inbvesting in / lending to this business be bailed out when disabkled people are being denied benfits? Is it just that they make more noise?
I am looking for real world solutions here. 20p in the £ would be staggeringly generous in my estimate
Clive,
You say: “You say the value is zero because it can’t make a profit….. but is that true? If you gifted me the assets (so that I had no interest to pay to anyone) I suspect it would be profitable.”
To me, it seems even gifted the assets have no value whatsoever without being licensed with The water regulator. Given the problems with Thames, leaks, raw sewage dumps etc., as a regulator I’d want a lot more investment. It doesn’t seem that likely that there would be a profit with these additional requirements.
This is the real world because, if Thames fails, the politics ensure the regulator will be have to act tough to cover it’s own ass.
I can see where you’re coming from, but it doesn’t look to me like the assets have any value.
We agree, Tim
I am not sure we are in massive disagreement. We both (all?) want Water under State ownership; we want equity holders to lose everything; we want bond/loan holders to lose “a lot”; we want trade creditors protected (despite them being lower in the pecking order than secured creditors); we think SAR can achieve this.
The only disagreement is what is the payout to lenders….. although even here I said “£10bn but could be £1bn” which actually covers your suggested “£3bn and count it as generous”
Don’t get me wrong, I have a lot of sympathy with the idea that they get nothing. If one takes the view that any owner of these assets MUST also agree to be liable to supply clean water/deal with sewage at a regulated price then they may be worthless (depends on what price regulators set etc.). Indeed, I have suggested something similar as a good way to bring Energy supply under State ownership without “nationalisation” (which would probably require some compensation). The idea being that current owners will be only too willing to “hand back the keys” when faced with future liabilities/fines etc (or competition from a State owned Bulb in the case of electricity supply).
Of course the (spurious) counter argument is “so, you think the pipes, reservoirs and treatment plants are worthless? Then go build your own!! It will cost not £1bn or £10bn but £100bn!!”.
However, if we want this to happen in timeframe we are looking at, zero is not realistic. If we are to avoid lengthy uncertainties and judicial reviews equity holders need to be thrown a bone (cf. Credit Suisse “take-over”) and bond holders need something substantial. I am inclined to be a bit more generous than you to ensure we don’t miss this golden opportunity to bring Thames Water into public ownership and to make it happen smoothly. I would pay out senior bond holders at better that 50 cents on the dollar but be pretty brutal to sub debt holders (10 cents??)
For what it’s worth, prices for this debt are a bit thin on the ground but it appears Thames Water (Kemble) 2026 bond trades at about 45 to 50 (% of face value). It is subordinated but I do not know its full details. Senior bonds issued directly by the operating company, Thames Water Utilities (presumably with a claim against the assets) still trade closer to 90 (% of face value) I think…. but, again, it is a very thin market and I no longer have access to really accurate data
United Utilities (another water company that is publicly quoted) still has its share price close to its highs offering a dividend yield on just over 4%. It’s bonds trade at “normal” levels.
In short, the market may well be in for a big surprise at some point.
Thanks
We ate it so far apart
And I agree: no payment is implausible
Is there anything in to suggest that loans were taken out for share buy backs or anything like that? What were the loans for?
Privatisation has not brought about more resources for investment as those who were involved thought it would do. Our much vaunted markets saw only opportunity to make huge sums of money instead of being the custodians of a life giving resource.
But then again, that was all predicated on the faulty thinking that government only had limited funds to invest and sustain the services and that tax payers would have to pay for it (which has been politically exploited by the Tories ever since and that narratives still sticks).
The companies and shareholders have not kept to their part of the bargain. Therefore their rights are under question and could also be revoked as far as I am concerned.
That to me would be natural justice.
I mean, just think if this was happening to the air that we breath. Would that help?
I am in favour of nationalisation.
I would argue that the loans funded dividends because these could not have been paid without them even if they were legal
Apart from the GBP850,000 annual salary, the pension allowance of 12% of salary, the GBP15,000 car allowance and the performance-related pay plan that could pay out 156% of salary…
Apart from all of that…and with the dire financial situation the company is in, what could possibly have motivated Chris Weston to want to join Thames Water as CEO on January 8? I suppose if he fails to get a grip, the City will say, well, no one could have done any better, and if he succeeds in even making minimal improvements, he will be a hero. Meanwhile, he will need a wheelbarrow or wheelbarrows for all those benefits.
Before suggesting emergency legislation is necessary, it might be worth looking at the existing legal regime in Chapter 2 and Schedule 3 to the Water Industry Act 1991, and related regulations.
https://www.legislation.gov.uk/ukpga/1991/56/contents
I hope some people at the regulator and in Whitehall are up to speed with all of this because I fear we may need it sooner rather than later.
I have, and commented elsewhere
I think it inadequate on the treatment of secured loans, which will be the major issue here, imo
What a pig’s ear!
Can I float another suggestion, which might achieve the same ends, but without legislation.
The Government simply makes a conditional loan of £190m, secured against the company assets.
Since this would be a loan aginst assets, it would not show up as debt in the Government’s books.
The conditions woud be
1) No new private secured loans. Additional secured loans would only come from the Government.
2) Use a mixture of carrot and stick to buy out private secured loans now, using Government secured loans. Either accept a reasonable deal now or take your chance.
3) No dividends or major bonuses to be paid until debt fell to an acceptable level.
The aim would be to make the Government the sole secured creditor. Then when the company went into liquidation, the Government would have full freedom to act.
Maybe a bit more expensive in the short term, but avoiding a legal quagmire of untreated sewage.
Under ONS this would be a government loan
But it would not be debt of course, because it is an asset
I rather strongly suspect that your suggestion would contravene existing loan arrangements
If an energy company is considered good enough for the private sector, then it must be good enough for ownership by the public sector… without the £million salaries and bonuses to the executives, without the £billion in payments to the shareholders. Since energy companies used to be run without problems in the past, the same can be done in the future. Investment in infrastructure can be paid by the government by fiat, and the spending will enable a new group of tax payers.
Silly and not practical, but could the government not buy the assets back less the dividends paid to the shareholders since privatisation. I feel certain that would be a negative figure.
As I said not legally possible but somehow it feel the moral thing to do.
Certainly not legally possible
Oddly, there may be a germ of an idea here (well, to me at least). In the 34 years of private ownership total dividend payments have been £7.5bn.
So, when taking Thames Water into SAR it might suggest a pay out to existing investors as follows
Equity owners. For screwing things up so badly they should get (virtually) nothing.
Bond holders should get the 16.5bn face value of the debt LESS the £7.5 that was taken out of the business…. or £9bn…… or about 60 % of face value.
Again, fairly arbitrary…. but it is another way of looking at it.
One problem is that not all money extracted was in the form of dividends; some came as high rates of interest paid to connected parties. No idea how you could quantify this.
Now, 60% pay-out to senior creditors of the operating company may seem high to you… but I do think that this is the sort of number required to make this work in practice.
I think excess interest is very interesting
Not very hard to work out – bond details are in the accounts
Yes, current outstanding issues are not to tricky – but going back 30+ years and estimating whether the debt was “fairly priced” is not a simple job!
It would need someone with a lot more Corporate Finance/Private Equity experience (and time!) than I have to do this.
Agreed
My pint is, it could be done…
Wouldn’t it be great if Thames Water collapsed next spring and caused a huge amount of problems for the government? Too big to collapse and cease trading, requiring huge amounts of public money in a bailout. One more nail in the coffin for Rishi.
I would rather it was planned
Agree with you totally. But if ‘something’ happens and it discredits the Tories then that would be a great thing. Of course nobody’s water or sewage is going to be turned off.
A little bit harsh on the people who need a working sewage and water supply to live, don’t you think?
Call me cynical, but this is the one public service that affects all our current ruling class profoundly. There is no private facility for water and sewage and Thames Water covers the area most of our government live, London and the South East. We’ve watched austerity affect those without money, whilst it’s architects are largely insulated as they don’t rely on the public services stripped to the bone.
I’ve worked for Thames Water and it has been systematically asset stripped by it’s various owners. I believe it no longer owns it’s head office or any of the main office buildings which Macquarie sold off for then to be leased back.
It seems no one is really interested in what seems inevitable. When it fails it should be brought back into public ownership, but I agree this government will do everything to avoid this even if it costs a fortune. Part of me would love it to contribute to the final downfall of this awful government, but maybe Labour would take it back into public ownership rather than do anything rather than admit the Thatcherite experiment has failed caterstrophicsally.
[…] We need emergency legislation to prevent a total water supply and financial meltdown if Thames Water… Richard Murphy […]
There is plenty of value in the assets, that’s why a fair value will be ascribed to them by experts, not some random diminished value invested by a retired accountant from Norfolk.
And there was me thinking professors of accounting are considered experts
I’m so pleased you’ve put me right
And let me offer you some advice: stop reading Tim Worstall, who doesn’t even seem to know which county I live in, let alone my employment status
Which retired accountant is that? The one who works really hard at trying to teach people basic facts about finance? The one whom government and opposition front benches should take note of? The one who could get this country out of the big hole it’s in if only those in charge would listen?
This is interesting.
How much of your water bill is swallowed up by company debt? – interactive
Find out which English water companies have the most debt, who is proposing the biggest bill increases, and which ones have paid the most to shareholders
https://www.theguardian.com/environment/ng-interactive/2023/dec/18/how-much-of-your-water-bill-is-swallowed-up-by-company-debt-interactive
For my bill 11% goes on servicing debt.
My water monopoly provider, Severn Trent has £6.9 billion of debt (£1454 per property). They have paid out £8.2 billion in dividends since 1990.
You will find that I am one of those who advised on the development of that model.
Maybe this just shows how flawed the model is.
With a normal business, say a supermarket, if they wish to expand or provide additional services, they first borrow the money and invest it. Then, once they have a service, they charge the customers.
With a nationalised utility they say they need money for investment and put up their prices before providing the service. Essentially they are allowed to charge today’s customers for tomorrow’s improvements. They can only get away with this through the agreement of the regulator (who is supposed to be a proxy for customer competition) and because the utility is a monopoly.
This seems wrong to me. If a utility wants the benefits of being a commercial company then they should behave like one and borrow first before charging the customer. Instead they borrow to pay dividends.
These aren’t nationalised utilities, Tim.
They are privatised.
But you are right, their regulation is dire.
Oops. Sorry for the slip. 🙁
If Thames Water is likely to do down the drain (sorry) next year, my advice is to take the following steps:
1) Make friends with a senior Tory
2) Set up a company that has the word “water” in there
3) Tender for the contract
4) Sit back a relax and enjoy the money coming in while taxpayers try and sort out the mess and customers resort to buying bottled water while this happens