A completely privately run public water system is an experiment few countries have decided to try. The United Kingdom did, and it now looks likely to pay the price for one company’s incompetence and greed. The British government announced this week it is completely reworking water regulation and could take vital water supplier Thames Water under national control.
British utilities company Thames Water is responsible for supplying and managing water systems for millions of people across London and the south of England. Yet it is failing on almost all fronts.
Once owned by Australian multinational investment bank Macquarie, Thames Water’s poor management under a patchwork consortium of investors has seen it rack up billions in debts and outstanding fines over the past decade. So what went wrong, and what lessons can be learned from this situation?
Proactive Investment in Modernisation is Key
Thames Water is a great example of what happens when a company rests on its laurels, thinking it has a captive market, and fails to make the upgrades and advances needed to maintain good service.
The operator has been fined literally hundreds of millions of pounds by UK regulators in the past five years. Its ageing and no-longer-fit-for-purpose infrastructure regularly breaks down resulting in record levels of sewage spilling into the region's waterways.
On top of that, its computing systems are apparently not up to the task either. An investigation by one British newspaper in 2023, found that Thames Water was still using early 1980s computer systems for several key operations - which is almost certain to cause huge operational debts.
What is operational debt? That’s a measure of how much time and resources are needed to transition a workforce to newer, more advanced systems. Operational debt can compound, as a patchwork of older software can become difficult to extract key data and port over to new machines - thereby increasing the cost of adapting in the future.
However, this has been possible to fix for years. It's even easier now with new AI tools that can work out the integration kinks for any business. But clearly, Thames Water wasn’t paying attention.
Massive Shareholder Dividends are Unpopular With the Public
For many years, Thames Water paid out large dividends to shareholders, while continuing to rack up fines for poor performance. For a while this went under the radar, but in recent years rising water bills have led the government, journalists and customers themselves to take a closer look at the company’s financials.
The multimillion pound yearly dividends, while customers' bills go up, were not a good look for the company.
A long-term, well planned business must balance the need to return investment to shareholders with continued investment in delivering a good service. Otherwise customers will leave, and there will be less money for shareholders in the future.
In the case of Thames Water, their essential monopolized customer base didn’t have much choice in looking for another supplier.
So it seems they thought they could cut investment in the business and give shareholders better returns for a few years, in order to attract future investment. But, eventually, the service deteriorated and the plan caught up with them.
Too Many Stakeholders Spoil the Water Supply
Thames Water, in recent years, has been owned by a consortium of international finance investors. That includes:
- Canadian pension fund OMERS (32%),
The Universities Superannuation Scheme (USS - 20%) - Infinity Investments (a subsidiary of the Abu Dhabi Investment Authority) (10%)
- British Columbia Investment Management Corporation (9%)
- The China Investment Corporation (9%)
As well as several others. The company also has several shell operations, including Kemble Water Holdings, Kemble Water PLC and others. Plus it has a dozen or so top executives all on £100,000 plus salaries.
Then it has the Government and water regulator OFWAT (who may soon be made redundant themselves) on their back. And customers and local councils.
With that many stakeholders and people who want a slice of the pie, a business can become unwieldy and unmanageable.
Add that in on top of all the other problems, and you can see why Thames Water is one of the UK’s most troubled companies.
So What’s Next for Thames Water?
Well, as mentioned the Labour government may be looking to get rid of regulator Ofwat, or at least completely reform it.
It is also considering letting Thames Water deal with its billions of pounds of debts by itself, and then taking it back into national ownership once it (inevitably) goes bust.
That situation could end up costing the UK taxpayer billions anyway. Thames Waters’ creditors could attempt to chase up their debts against the public private partnership through the courts, arguing that the government should be on the hook.
Even if that doesn’t happen, the government will likely have to stump up for all the infrastructure upgrades that Thames has been stalling on for the past decade.
If by some miracle Thames Water does survive without more government bailouts, the new look regulator will likely have a lot more power to enforce on it how to run things. But exactly how that reform will play out is as yet undetermined.
