Here comes Thames Water’s creditors’ “ambitious” plan to rescue Britain’s biggest and worst water company. Unfortunately, the ambition does not include obeying environmental rules in full, at least not for another decade or so. Rather, the creditors want Thames to be held to lower standards so that it can avoid a torrent of fines that would otherwise land in its lap.
This unattractive pitch is accompanied by an appeal to blunt pragmatism. The creditors’ argument runs roughly like this: “Get real, dear Ofwat, Environment Agency and government: Thames is in a proper mess. All previous turnaround plans have failed because they were fantasies. The assets will take a decade, minimum, to fix. There is no point whacking the business with a billion or two of fines along the way because the cash is needed for investment. By all means fine us for failing to hit lower targets, but make them ones we stand a chance of achieving. Look, we’re even volunteering for a £4bn, or 25%, write-off on our debt and we’ll inject £3.15bn in equity. We may be the best you are going to get.”
Their argument is self-serving, naturally. The nightmare for the creditors comes if Thames does indeed end up in special administration – temporary (definitely not permanent) renationalisation. At that point, they would lose control and their losses would be greater as the administrator looked to reorganise the business, sell it or list on the stock market. Under their own proposal, creditors have a medium-term hope of recouping their upfront losses by earning a return on their new equity – they’ll be aiming by internal rates of return of 13%-14% of that slice on the recapitalisation.
The strong-arm tactics may succeed, it should be said. The government is clearly terrified of special administration – or terrified its backbenchers would demand permanent nationalisation, which ministers have ruled out. The Treasury’s strong preference is for a “market-led” solution, of which the creditors’ plan is the only one on the table. Politicians prefer to have somebody to blame.
Yet this is the point in this saga at which outsiders – the poor old customers – deserve to see proper detail on what compromises are being contemplated in the name of realism and pragmatism. The creditors’ plan is too murky – still.
How much regulatory, legal and environmental leniency is being demanded? The creditors trumpet an ambition to reduce pollution by 30% up to 2030. Is that really the best Thames, even in its beaten-up state, could do? Remember the company now has its supposedly transformative Tideway super-sewer in operation. And remember the government’s target for the industry is a halving of sewage pollution by 2030.
Other operational targets are minimally described, or are self-selected highlights. Then there are acres of guff about “a new customer-centric, high-performance culture, underpinned by a philosophy of acting responsibly”. It is meaningless. As for the “new world-class board”, only one name has been mentioned – the former Openreach boss Mike McTighe – and he would only be chair.
The lack of detail is infuriating. This saga is being conducted as a behind-closed-doors negotiation with Ofwat, a regulator due to be abolished anyway. Meanwhile, Steve Reed, the environment secretary until last month’s reshuffle, declared in July that the rules did not allow a struggling company to be given leniency on sewage fines. So why has Ofwat been allowed to conduct talks that have always envisaged special treatment?
Reed’s other contribution was to say preparations were being made for special administration, in case they were needed. Let’s also hear those details, because whatever the complications and delays of going down that route, it offers the prospect of a chunkier debt write-down and a root-and-branch reorganisation.
The Thames crisis was always going to end in a choice between two unappealing options – a recapitalisation in which the creditors’ main motive is to minimise their financial pain, or special administration. Even at this late stage, though, neither Ofwat nor the government has offered Thames’ customers a meaningful analysis of many trade-offs. Amid the murk, special administration looks the cleaner solution.
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