Drip, drip, drip. No, not Thames Water’s leaky pipes on this occasion. Rather, the dripping sound comes from the highly conditional cash injections from the company’s consortium of shareholders.
The chair of regulator Ofwat suggested to parliament last week that £1bn was the minimum required from Thames’s owners before 2025 (on top of the £500m that arrived in March), but the consortium has indicated it is prepared to cough up only £750m in the period. So there is a £250m shortfall. Don’t worry, it’s just a minor matter of phasing, says Thames, pointing to a further £2.5bn injection from shareholders that is “expected” in the next regulatory period, which runs from 2025-30.
Well, OK, it is possible to believe the company wouldn’t be capable of spending the missing £250m before March 2025 even if it tried – supply chains in the construction industry are genuinely stretched (thanks HS2) and Thames reckons it alone accounts for 1% of current national activity. But it’s absurd to call Monday’s funding announcement “a major milestone”, as new chief executives Cathryn Ross and Alastair Cochran did, when the financial pledges came with such heavy conditionality.
The £750m requires “a business plan that underpins a more focused turnaround” and support from “appropriate regulatory arrangements”. Similar wording was applied to “nature and level” of the £2.5bn: “finalisation” of the business plan will be needed, plus support from the “regulatory framework” during the 2025-30 cycle.
Rather than reaching “a milestone”, Thames still seems engaged in a dance around the funding standpipes. The threat of special administration has receded now that the shareholders have proved they are awake, but the outside world – especially Ofwat – will surely want to see the cash arrive before declaring that Thames has achieved financial stability.
Note that the new business plan will be the third since 2017, which marked the end of the brazen dividend-extraction era of Macquarie’s ownership. This one will be “high quality, realistic and prioritised”, says Ross, but her two predecessors made similar noises about theirs. If there is a meaningful difference, it lies in the word “prioritisation”, but there’s no hint yet on what Thames wishes to deprioritise, which will presumably be the regulator’s first question.
Indeed, the whole tone of this announcement only served to emphasise how much hinges on the next regulatory price review for Thames. Companies make their spending submissions in October and Ofwat makes its draft determination next May or June. Everybody knows bills will rise substantially to fund new infrastructure, but the open question is what costs the regulator allows the companies to recover from customers to repair existing pipes and sewage plants that should have been upgraded already.
“This price review is pivotal for the sector’s long-term future,” said Thames. Well, yes, that’s true. But it is also true that some companies could handle a tough-ish price review better than others. Ofwat is under no obligation to define a fair rate of return as one that suits the most overborrowed and underperforming companies.
Thames’s shareholders seem to have decided that that’ll (probably) pony up enough to get to the review – that’s the £750m. But they also seem overly anxious not to commit to the £2.5bn until they know how much slack, if any, Ofwat will cut them and until they have greater faith in their own management to spend efficiently. The position is a marginal improvement on the uncertainty of the past fortnight, but the big decisions still lie ahead. The water torture on funding continues.
