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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Thames Water appoints Sir Adrian Montague as chair; squeezed households run down savings – as it happened

Thames Water Thames (Organization) Feargal Sharkey United Kingdom David Hall Ed Miliband Margaret Thatcher George Mann Philip Dunne LBC
A tanker from Thames Water pumping water into the supply network following a technical issue at Stokenchurch Reservoir last summer.
A tanker from Thames Water pumping water into the supply network following a technical issue at Stokenchurch Reservoir last summer. Photograph: Andrew Matthews/PA

Afternoon summary

Time for a recap:

Britain’s privatisation model is under scrutiny after Thames Water entered emergency talks with ministers and the regulator Ofwat, after the sudden departure of its chief executive, which came as it sought a multibillion-pound injection of cash from shareholders.

The water campaigner Feargal Sharkey has said crisis-ridden Thames Water must not receive a penny of public money in a bailout as it faces rising costs on £14bn of debt,

Sharkey, who has been crucial in raising public consciousness about the way privatised water companies are run, said he did not believe anyone in the UK would support using taxpayers’ money to prop up the company.

With its future in doubt, Thames Water has turned to business troubleshooter Sir Adrian Montague to become its new chair.

Montague says the water sector has reached a “critical” time, adding:

I now look forward to working with the Board and Executive team and Thames Water’s regulators and investors, to focus on the Company’s turnaround plan and its future financing needs to ensure it delivers on its responsibilities to serve its customers and communities well and benefit the environment.”

Academic research has found that England’s water companies are “environmentally insolvent” because they do not have the financial means to raise the £260bn needed to deal with their sewage spillages.

Bill Blain, strategist at Shard Capital warned of the risk of a potential investment crisis in the UK, writing:

Economic success is all about confidence and common sense. This is not about the collapse of a single company – it’s about how 40 years of miscalculations, mistakes, and the primacy of political will over common sense, have finally come due.

And in other news…

UK households are pulling money out of their savings accounts at the fastest rate ever recorded, drawing on rainy-day funds to weather the cost of living storm.

The crown estate has generated record profits of almost half a billion pounds from Britain’s offshore windfarms, as talks continue over how much of the windfall should be shared with King Charles.

Package holidays to popular Mediterranean destinations such as Mallorca and Crete have soared in price by up to a quarter compared with last year amid high demand and rising costs for providers.

The UK is to gain its first lithium mine in Cornwall after a British startup agreed a deal with a French mining company that could supply much of the country’s need for the crucial electric car battery mineral.

Shoppers searching for ways to trim their budgets have boosted sales at the discounter B&M and the fashion chain H&M in the latest sign of resilient trading on Britain’s high streets.

Serco expects to make higher profits during 2023 after reporting rising demand for workers to run immigration services for the UK government.

Back in the City, several UK water companies have ended the day in the red.

Severn Trent dropped 3.5% today, while United Utilities lost 2.8% and Pennon Group fell 3.2%.

As explained earlier, investors are reassessing the longer-term implications of Thames Water’s crisis for other firms in the sector…

Here’s something for Sir Adrian to chew on as he prepares to slide into the chairman’s seat at Thames Water – England’s water companies are “environmentally insolvent”.

That’s the conclusion of new research, which shows they do not have the financial means to raise the £260bn needed to deal with their sewage spillages, my colleague Rowena Mason reports.

The report, by Prof Richard Murphy of the Corporate Accountability Network and Sheffield University, recommends nationalisation without compensation and raising the necessary funds through government ISAs for the public and higher charges for heavy water users.

Murphy’s report looks at the accounts of nine major water companies, including Thames, and concludes that their estimate that they need £10bn over seven years to end sewage discharges is inadequate.

It also says the environment department’s tally of £56bn over 27 years is an underestimate. Instead it finds a House of Lords assessment that the problem requires £260bn of investment more accurate.

More here.

Thames Water appoints new chairman

Newsflash: City grandee and troubleshooter Sir Adrian Montague has been appointed as the new chair of Thames Water.

Montague will take over on 10 July, succeeding Ian Marchant, who told Thames Water’s board in April that he would step down in July.

He will join an embattled water giant struggling with heavy debts, the departure of its CEO this week, a sewage crisis, energy and chemicals inflation, and long-term underinvestment – and the possibility of temporary nationalisation if it cannot obtain new funding.

Montague, the former chairman of insurance group Aviva, is a favourite ‘go-to’ executive for governments seeking help. In 2004, he was appointed to chair Crossrail, and in 2021 he conducted a review of the UK’s housing market.

Montague was also chief executive of the Treasury’s Private Finance Initiative Taskforce, which pioneered the use of private capital and companies in the provision of public services.

He also has experience of the water sector, having chaired Anglian Water between 2010 and 2015. He also chaired British Energy from 2003 to 2010, leading a turnaround plan that resulted in its sale to EdF.

Monague says he will work to ensure Thames Water meets its responsibilities:

“It is a privilege to join the Board of Thames Water and follow Ian as Chairman.

I very much enjoyed my previous role in the water industry and am pleased to be re-joining the sector at a critical time given the challenges it currently faces. I now look forward to working with the Board and Executive team and Thames Water’s regulators and investors, to focus on the Company’s turnaround plan and its future financing needs to ensure it delivers on its responsibilities to serve its customers and communities well and benefit the environment.”.

Several UK lenders have announced another increase in mortgage rates offered via brokers today, Reuters reports.

The moves push many products above the 6% mark in painful news for many homeowners and potential buyers.

Barclays, NatWest and Virgin Money informed brokers that rates on many mortgage offerings will rise again on Friday, according to emails seen by Reuters.

Nationwide Building Society, another major lender, raised rates on products offered via brokers earlier on Thursday.

PA Media have pulled together a handy Q&A on the Thames Water crisis:

Q: Who actually owns Thames Water?

Through a series of holding companies, Thames Water is co-owned by a series of pension funds and foreign governments.

The biggest single shareholder is the Ontario Municipal Employees Retirement System, which holds around 32% of the shares. Another pension fund, the UK-based Universities Superannuation Scheme, holds another 20%.

Around 10% of the shares are owned by a subsidiary of the Abu Dhabi sovereign wealth fund, which is owned by the Abu Dhabi Government, and China’s sovereign wealth fund owns a little under 9%.

Other investors include the British Columbia Investment Management Corporation (8.7%), Hermes GPE (8.7%), Queensland Investment Corporation (5.4%), Aquila GP Inc (5%), and Stichting Pensioenfonds Zorg en Welzijn (2.2%).

Q: How much does Thames Water owe and how has its debt pile grown?

As of last September, Thames Water owed around £13.8bn to its lenders, a figure that was around £840m higher than six months earlier.

The company’s net debt has grown from just under £11bn in 2018. Much of the debt was added when Thames Water was owned by Macquarie, the massive Australian investor.

In December 2005, before Macquarie bought the utility, Thames Water’s net debt was just £2.4bn. When Macquarie sold it around a decade later, the debt pile had ballooned to more than £10bn.

Thames Water had no debt when it was privatised by Margaret Thatcher in 1989.

Q: What interest does Thames Water pay on its debt?

Interest rates have been soaring over the last year for most people, and Thames Water is no different.

On average the interest that Thames Water paid on its debt was 6.63% in the year that ended in March 2022, compared to 4.55% in 2020.

As of last March, around £5.6bn of Thames Water’s debt was at fixed interest rates, but around £7.7bn of it was linked to retail price index inflation (RPI).

The company says that its loans are linked to inflation because the amount it charges customers also rises hand-in-hand with inflation. However customer bills are linked to the consumer prices index (CPI), not to RPI.

RPI has been much higher than CPI in recent times, putting extra pressure on the water company’s finances.

In May this year, RPI was at 11.3% while CPI was only 8.7%. RPI peaked at 14.2% in October last year.

Q: What could happen if the Government has to step in?

While most companies enter administration when they fail, some companies are considered too important to go bust.

Water and energy companies are among these because if they stop operating people could lose access to vital resources.

So for these companies the Government or regulator Ofwat can apply to a court to appoint a special administrator.

If called in, the special administrator would continue to run the company as usual, ensuring that water supplies to homes and businesses continue.

The administrator would also try to find another investor or private company to buy Thames Water and bring it out of administration.

The special administration regime (SAR) has only been used once before, when Bulb Energy collapsed in late 2021. Bulb was later bought by its former rival Octopus.

Q: Is my water supply in danger?

No. If you live in one of the 15 million households in London and the South East of England your water supply is not going to be interrupted no matter what happens to Thames Water.

In every scenario, the taps will keep running for Thames Water’s customers.

As Ofwat explained in 2015:

“The purpose of the special administration regime is not to keep a company in business but rather to ensure that the provision of services to customers is maintained.”

Q: Are other water companies in a similar state?

There are other water companies that are in precarious financial positions, according to the water regulator.

In December, Ofwat flagged five firms which it said it was most worried about.

They were Thames Water, Portsmouth, Yorkshire, Southern and SES Water.

These companies all have higher-than-average gearing levels – which mean they have a higher proportion of debt compared to their equity.

However, Thames Water had the highest gearing level last year and the largest debt pile out of the five companies. Ofwat said it was monitoring and engaging with the five firms in a bid to strengthen their financial resilience.

Strong US economic data = more interest rate hikes, the market believes:

From the archives….

Updated

The pound has hit a two-week low, after today’s strong US data pushed up the US dollar.

Sterling has dropped below $1.26 for the first time since 14 June.

Full story: UK households withdrawing savings at fastest rate on record

UK households are pulling money out of their savings accounts at the fastest rate ever recorded, drawing on rainy-day funds to weather the cost of living storm, my colleague Richard Partington writes.

Figures from the Bank of England show households withdrew a net £4.6bn from banks and building societies in May, the highest level of withdrawals since it started collecting the monthly data in October 1997.

The figure suggests those able to do so are running down their funds to sustain living standards or to pay off mortgages or loans before needing to refinance at higher interest rates.

Richard Lane, the director of external affairs at the debt charity StepChange, said:

“This is the latest in a long line of warnings that more and more people are struggling to cope with the cost of living.”

Here’s the full story.

Updated

Looking back at the Thames Water crisis… Downing Street said it is for Ofwat “in the first instance” to monitor the financial resilience of water companies.

Rishi Sunak’s official spokesman told reporters:

“Of course the government is carefully monitoring this but it is for the regulator in the first instance.

“Ofwat are focused on doing their job to keep companies’ financial resilience under close scrutiny.”

Asked whether Rishi Sunak was confident the watchdog is on top of the issue, the official said:

“Yes. You’ll know the Chancellor met with regulators including Ofwat recently to talk about what more can be done, but as I say they have emphasised both the resilience of the sector and stressed that while there are clearly issues with Thames Water they have secure and committed funding.”

In another boost to the US economy, the number of Americans filing new unemployment claims has dropped.

There were 239,000 initial claims last week, a drop of 26,000 from the previous week, suggesting that the US jobs market remains robust.

US economy growing faster than thought

Just in: The US economy grew faster than previously estimated at the start of this year.

New official data show US GDP grew at an annual rate of 2% in January-March, the equivalent of a quarterly growth rate of 0.5%.

Growth had previously estimated at an annualised rate of 1.3%.

The upgrade is because exports and consumer spending rose faster than previously estimated.

Updated

Over in the eurozone, the latest inflation data paints a mixed picture.

Annual inflation in Germany has risen to 6.4% in June, up from 6.1% in May, further from the European Central Bank’s 2% target.

On an EU-harmonised basis, German inflation rose to 6.8% from 6.7%.

Core inflation (stripping out food and energy), a measure closely watched by central bankers, rose to 5.8% from 5.4%.

The increase is partly due to ‘base effects’, as train travel and petrol in Germany was subsidised a year ago, making it cheaper than today.

But in Spain, inflation has dropped below the 2% level.

Spain’s consumer prices rose 1.9% year-on-year in June, their slowest increase since March 2021, preliminary data from the National Statistics Institute (INE) showed on Thursday.

Spain is the first among the euro zone’s large economies to have inflation fall below 2%, the European Central Bank’s target, the Economy Ministry said in a statement.

Bloomberg Intelligence: Thames Water special administration could lead to 25% debt haircut

Thames Water might need to write off a quarter of its debt if the government takes control of the company, according to a Bloomberg Intelligence report.

Paul Vickars, senior credit analyst at Bloomberg Intelligence, says that if Thames Water enters a special administration regime, finding a new owner may require a haircut of up to 25% on the nominal value of its ring-fenced debt, of aroudn £14bn.

Vickars writes:

A special administration regime would facilitate a transfer to new owners but leave ring-fenced bondholders unable to enforce any security and with no guarantee of being made whole in a new financial structure.

Taking a 25% haircut would reduce Thames Water’s regulatory gearing to “the notional 60% set by Ofwat to enable a company to finance its operations at high grade level”, Vickars says, which a new owner could reasonably stipulate.

As explained earlier, Thames Water’s complicated structure means that the operating company (the bit actually supplying clean water and taking waste away) is ringfenced inside a Whole Business Securitisation (WBS) shell along with the holding company and financing company.

But there are holding companies outside the ringfence, which have also issued debt, and rely on dividends from the WBS to service it.

Vickars writes that they are most at risk from a government takeover:

“The risk of Thames Water being placed into a special administration regime is most acute for bonds outside of the securitization ring-fenced group, namely the £400m 4.625% 2026 bond from Thames Water Kemble Finance Plc that has fallen by 35 points to a price of about 50*.

The Class B second-lien instruments within the ring-fenced group look to be next in line, though by some distance, with the £250 million 2.875% 2027 bond from Thames Water Utilities Finance Plc down by 4 points to a price of 79.”

* – ie: half its face value.

Updated

Key event

In the City, shares in water companies have dropped this morning as investors fret about their long-term financial resilience, given the scale of investment needed to hit environmental improvement targets.

Severn Trent are among the third-biggest faller on the FTSE 100 index, down 3%. United Utilities, which supplies water in the North West of England, have dropped by 1.6%.

Pennon Group, which services the South West of England, and the Bristol and Bournemouth regions, are down 3% on the FTSE 250 index of medium-sized firms.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says investors are reassessing the longer-term implications for other firms in the sector.

Streeter writes:

Shares in Severn Trent, Pennon and United Utilities have fallen back more steeply amid the focus on the costs looming for firms which are set to become under increasing pressure to meet environmental targets set by Ofwat. Although their immediate financial situation is considered to be more stable compared to other companies, who have been red flagged by regulators for their high levels of debt and dividend payments, the scale of the mountain to climb in terms of the investment needed is sparking fresh concerns.

Arguably, publicly listed companies have fewer shadows to hide in when it comes to transparency about dividend payments than firms with more complicated investment structures. However, as the next regulatory timeframe looms for the period 2025 to 2030, there is set to be much bigger demands from regulators on infrastructure improvements to reduce sewage spills, increase capacity, and meet net zero targets. Capital expenditure will have to increase sharply as a result – United Utilities, Severn Trent and Pennon have already had to push up spending, but budgets will need to expand, and debt levels will rise as a result.

Updated

Drought likely in Cumbria and Lake District, government committee told

Cumbria and the Lake District are likely to be plunged into drought, leaked minutes from the government’s National Drought Group reveal, with reservoir levels in the regions having dropped significantly.

Other popular summer holiday destinations including Devon and Cornwall are also likely to be hit by water supply problems, the group heard, and holidaymakers may be be told to curb their use.

Sources present at the meeting – at which attenders included officials from No 10, farming groups, water companies and the water minister, Rebecca Pow – told the Guardian experts warned the high levels of visitors to drought-stricken areas in summer was potentially unsustainable.

Though the country has enjoyed some rainfall over recent weeks, it has not been enough to offset the prolonged dry weather and increased water use. The leaked minutes, seen by the Guardian, reveal:

“Some reservoirs have seen large drops in recent weeks, and there are concerns in the Lake District, where at Haweswater and Thirlmere there was a decrease of 13% in reservoir stocks between the end of April and end of May 2023. The Teesdale reservoir group in north-east England also recorded a 13% drop over this time. Water companies continue to closely monitor the position and take action to reduce demand and maximise storage.”

Here’s the full story:

Bill Blain: UK’s long-saga of economic decline is turning critical

The Thames Water crisis risks creating a potential investment crisis in the UK, warns Bill Blain, strategist at Shard Capital.

Blain points out that the public utility privatisations decades ago have left “a legacy of underinvestment and broken services”.

And he fears that “the imminent collapse” of the UK’s largest water company will become the fundamental crisis point when “the country’s long-saga of economic decline turned critical”.

Blain writes:

Economic success is all about confidence and common sense. This is not about the collapse of a single company – it’s about how 40 years of miscalculations, mistakes, and the primacy of political will over common sense, have finally come due.

Today’s crisis will have massive market, political and economic consequences as the travails of Thames Water ultimately reveal just how disjointed, hollowed-out, ineffective, but most importantly, how bust and broken the last 40 years has left the UK economy

Global investors looking at the UK today see “a nation of decaying infrastructure, a massive bill to rebuild it, a planning process that actively stops anything – and a nation showing little realisation of the crisis”, Blain adds.

Updated

An engineer walking inside a section of the Thames Tideway Tunnel.
An engineer walking inside a section of the Thames Tideway Tunnel. Photograph: Kirsty O’Connor/PA

One of the biggest shareholders in Thames Tideway, which is building a 25km Super Sewer under London, has reassured its investors that the project is independent of Thames Water.

International Public Partnerships Limited, which owns a 18% stake in Tideway, has issued a statement to the City, saying that “in order to provide clarity” to its investors, “Tideway is a completely separate company to Thames Water”.

It added:

“Whilst Thames Water does possess a licence requirement to collect Tideway’s revenues from its customers and pass those amounts to Tideway, statutory and regulatory protections are provided in the event that Thames Water encounters difficulties.”

It said that if Thames Water falls into a special administration regime (SAR) [temporary nationalisation], the process is designed to “mitigate the risk of disruption” to Tideway collecting its revenues, as well as to protect water customers.

Tideway will also be allowed to recover any shortfall later.

Tideway can also directly charge some customers to use the tunnel, IPPL adds, although this option is “unlikely to be utilised”.

Updated

Thames Water offered £17.5m to debt collectors

Debt-ridden Thames Water offered to pay debt collectors up to £17.5m to recover unpaid water bills weeks before crisis talks to rescue the failing water company, my colleague Jillian Ambrose reports.

Thames, which has debts of over £14bn, opened a tender for debt collection agencies earlier this month which promised a commission to agents able to recover water debt under a three-year contract.

The company, which serves 15 million customers in London and surrounding areas, reported unpaid bills totaling £36m at the end of September 2022 which is likely to be higher as rising costs continue to press on hard-hit households.

The water company added.

“With the cost of living rising, we recognise the importance of collecting debt in a socially responsible manner.”

Squeezed households ran down bank savings at record pace in May

UK households ran down their bank savings at a record pace last month, new Bank of England data shows.

During May, households withdrew £4.6bn from banks and building societies, which is the highest level of household withdrawals on record.

This was only partly balanced by £800m moved into National Savings and Investment accounts, by savers looking for higher rates than are available from deposit accounts.

It is a sign that households are now using savings to sustain living standards, says Daniel Mahoney, UK economist at Handelsbanken.

Mahoney explains:

This provides strong evidence that households are dipping into excess savings built up during the pandemic (estimated to be circa £200bn) to sustain living standards during the current cost of living squeeze caused by the high inflation environment.

Charlotte Nixon, mortgage and financial planning expert at Quilter, says these “scary figures” show the impact of the cost of living on people’s finances.

Nixon explains:

This morning’s Money and Credit statistics for May now look very out of date as they paint a much rosier picture than the one we currently are suffering even though they are still nothing to celebrate about. These figures don’t account for the last few weeks of mortgage mayhem which will have further muddied these incredibly turbulent waters.

However, there were problematic signs appearing in May as people raided their savings during the month. Households, on net, withdrew £4.6bn from banks and building societies, which marked the highest level of household withdrawals on record (for this monthly series starting in October 1997). These scary figures show just what an impact the cost of living is having on people’s finances.

There have been calls for banks, which have been quick to up mortgage rates, to also raise the interest rates on their savings accounts too. However, bank executives have rebuffed this request saying that if they were to do this then mortgage rates would need to get pushed even higher for them to still achieve their margins.

However, this might be short-sighted as it is not helping incentivise people to save when times are this tough and as a result we have seen that the combined net flow of both household deposits with banks and building societies and National Savings and Investment (NS&I) accounts amounted to -£3.8 billion in May which was a significant fall from £5.3 billion in April. With people’s incomes stretched they want to be getting a decent return on savings if they can even afford to save at all.

Analysts at Capital Economuics fear that UK mortgage lending will remain weak over the coming months, despite the rise in mortgage approvals in May.

They explain:

The interest rate on newly drawn mortgages continued to rise by 10 basis points, from 4.46% to 4.56%.

But this precedes most of the recent surge in mortgage rates, which climbed to just above 6.0% last week for the first time since 2007. That suggests mortgage lending and housing activity will take a big step down in June and July.

Updated

UK mortgage approvals nudge higher

Back in the UK housing market, there has been a small uptick in the number of new home loans being agreed.

New Bank of England data shows there were 50,000 new mortgage approvals for house purchases in May, up from 49,000 in April.

Approvals for remortgaging also rose, from 32,500 to 33,600.

Overall, net repayments on mortgage debt dropped from a record £1.5bn in April, to £0.1bn in May (meaning borrowers paid back £100m more than they borrowed).

Hina Bhudia, partner at Knight Frank Finance, points out that mortgage approvals are still well below the long run average, as rising interest rates dampen demand.

Bhudia explains:

Rising mortgage rates are showing few signs of slowing and pretty much all of the major lenders have repriced higher over the past week.

“The pressure on borrowers is likely to continue until we see two or perhaps three encouraging inflation figures. If that happens, swap rates should ease and we’d expect lenders to pass that through to borrowers quite quickly.

“In the meantime, higher mortgage rates will continue to drag on activity. It’s going to be a subdued summer in the property market.”

Here is a company schematic (courtesy of JPMorgan, via the FT), which shows the complex structure of Thames Water:

The FT’s Bryce Elder explained it thus:

RWE sold Thames Water in October 2006 to Kemble Water Holdings Ltd, a consortium led by Macquarie. Almost immediately the buyers formed a Whole Business Securitisation (WBS) that allowed the group to be loaded with more debt, boosting shareholder returns while insulating the structurally senior bits of the company.

There are three main ring-fenced debt entities — Thames Water Utilities Holdings Ltd, opco Thames Water Utilities Ltd and Thames Water Utilities Finance PLC. The debt they issue is secured by all the assets in the WBS and there are cross-guarantees in place, as well as covenant protections to prevent cash leaking upwards.

But holding companies outside the WBS ringfence have also issued debt, most notably Thames Water Kemble Finance PLC. These holdcos don’t own any of Thames Water’s operating assets so are completely reliant on dividends from the WBS.

Labour MP Thangam Debbonaire, shadow leader of the House of Commons, says there has been a regulatory failure, and a system failure, in the water industry.

Debbonaire adds that the 1989 sale of the water industry “privatised the profits, and nationalised the risk”, leaving customers paying higher bills, and sewage on the beaches.

Debbonaire also suggests that 15 million people don’t know if they’ll have clean water by Saturday.

However, I’d suggest there’s no real risk of taps running dry – if Thames Water enters temporary nationalisation, it will keep operating (and Ofwat’s statement this morning does cite Thames Water’s ‘strong liquidity’).

Tim Short, a former investment banker at Credit Suisse First Boston, has written about the “Seven common misconceptions about the Thames Water crisis” for the Financial Times’s Alphaville site.

The first misconception, he says, is that “If Thames Water is crushed by its debt pile the water will run out”.

Short writes:

It’s important to be clear about which debt we are talking about. Thames Water relies heavily on securitisation; in the jargon this is a Whole Business Securitisation. The paper is nearly all ringfenced in a security package at what’s called OpCo, short for operating company.

The OpCo has manageable debt levels of around 0.75 of Regulated Capital Value at investment grade. The RCV can be thought of as the critical assets the company needs to provide safe clean water.

That means you could sell the assets and pay off all the debt in OpCo. Whatever happens, there’s no obvious risk to supply.

Away from the water crisis, UK mortgage rates are continuing to rise, adding to the pressure on borrowers.

Data firm Moneyfacts reports that:

  • The average 2-year fixed residential mortgage rate today is 6.37%, up from 6.30% on Wednesday

  • The average 5-year fixed residential mortgage rate today is 5.94%, up from 5.91% on Wednesday

There are currently 4,430 residential mortgage products available, a small increase on the 4,407 on offer yesterday.

Ofwat: Thames Water has significant issues to address

Just in: Britain’s water regulator Ofwat has said Thames Water needs to improve its financial resilience, but it insists the company still has strong liquidity.

In a statement issued a day after the government held emergency talks about the future of country’s biggest supplier, an Ofwat spokesperson said:

“Over the last day or so, there has been a lot of commentary about financial resilience in the water sector with considerable focus on Thames Water in particular.

“We have been clear that Thames Water has significant issues to address – their environmental record and leakage performance, for example, are poor. Alongside the turnaround of their operational performance, they need to improve their financial resilience too.

“But that is all in the context of a company that has strong liquidity – it recently received an additional £500 million from shareholders and has £4.4bn of cash and committed funding.

“Overall, the sector is continuing to attract international capital and is especially attractive to long term investors such as pension funds. Indeed, there has been an additional equity injection of around £2bn since 2020, with companies acting to strengthen their financial position.

Ofwat adds that it will continue to keep companies’ financial resilience under “close scrutiny” and ensure companies take action to ensure that they have the financial backing to deliver for customers and the environment.

Ministers must take some accountability for the quality of the UK’s regulators, says Labour MP Darren Jones.

Jones told BBC Breakfast that we wouldn’t be in the current situation if Thames Water hadn’t indebted itself so much, taken out so much wealth from the business for its shareholders, and paid its executives high salaries rather than investing in its infrastructure.

Feargal Sharkey has also told GMB that the water companies have been “effectively ramraided by their owners for cash”.

Those shareholders have made off with £72bn, Sharkey says – which could have been spent fixing leaking pipes and addressing the sewage problems.

Feargal Sharkey: water industry could be teetering on the brink of insolvency.

Environmental campaigner Feargal Sharkey says Thames Water’s financial woes have exposed that the industry is “very financially fragile”.

Sharkey told Radio 4’s Today Programme that failures in the regulatory system and political oversight had led to the current crisis.

There have been warnings over recent years that problems were building, Sharkey points out, so the regulatots have “clearly known the situation is developing”.

Sharkey says:

We’ve seen the symptoms of it, in terms of the sewage crisis, in terms of London’s water supply running out, in terms of leaking pipes not being repaired.

And it’s now exposed this deeper underlying structural issue that the industry is clearly very financially fragile, if not teetering on the brink of insolvency.

Sharkey argues that the government could issue enforcement orders this afternoon, to take control of the management, so ministers would determine what the company spends on investment, dividends, executive pay and debt payments.

But Philip Dunne MP, chair of the Environmental Audit Committee (EAC), argues that this would not fix the “fundamental issue” for those water companies which are over-geared (borrowed too much).

Taking control of the companies wouldn’t address the problem of their outstanding debt, or the debt that will have to be raised to fund infrastructure investment, Dunne tells Today.

Accountancy professor Prem Sikki argues that the government should pass emergency legislation to take control of Thames Water, for £1, rather than bailing out the company’s shareholders:

The Thames Water crisis is covered on the front page of many national newspapers today:

Updated

Thames Water’s financial plight is an “extraordinary state of affairs”, says Mathew Lawrence, the director of the Common Wealth think tank.

A business with a regional monopoly over an essential service has lost its financial footing due to an “extractive ownership model” that loaded the company with debt, and prioritsed returns for its investors over the needs of both people and the environment, Lawrence writes in the Guardian today.

He explains:

In real terms, bills have increased by around 40% since privatisation, yet investment by the companies has gone down by 15%. The consequences are glaringly evident: up to 2.4bn litres of water a day (equivalent to nearly 1000 Olympic swimming pools) are leaked by English water companies. Every day, raw sewage is discharged into our rivers and seas more than 1000 times on average, for a total of over 9m hours since 2016. With this scale of neglect, it’s hardly shocking that just 14% of English rivers have adequate ecological status.

Who, then, benefits from this model, if neither people nor planet? International investors, for one. Indeed, over 70% of English water companies’ value is foreign owned. Thames Water, specifically, counts among its top investors a subsidiary of the Abu Dhabi investment authority, the China Investment Corporation, and two Canadian public sector funds. The Universities Superannuation Scheme, too, has a sizeable stake, in a paradoxical relationship that sees a vital service many beneficiaries of that scheme may use, faltering under the strain of demand for high returns for a pensions system equally under pressure. Neither can we forget the perks for water executives: the outgoing CEO of United Utilities, the UK’s most polluting water company, made an impressive £1.4m this year by selling his shares before his retirement.

More here.

Professor David Hall of University of Greenwich said investors are reluctant to take on the risk of further investment due to fears it will not be repaid.

If the government is forced to step in, Professor Hall told the BBC, shareholders rather than the public were likely to lose money.

Dieter Helm, professor of economics at Oxford University, said the business model of the water companies was “built on the era of cheap debt and low inflation”.

He told the Financial Times:

“If interest rates are negative in real terms, then the debt is ‘free’. But what happens when it is 5 per cent plus, and when there is only a slim equity buffer to absorb the inflation shocks?”

For the answer, take a look at the price of a 2026 bond sold by Thames Water’s parent company, Kemble Water Holdings.

It plunged yesterday into distressed territory, dropping by 35p to 50p (where 100p is the par value of the bond).

Bloomberg explains:

These notes are dependent on receiving dividends from the operating company, and a regulatory decision in March — which came into affect in mid-May — to curb water companies’ dividend payments made it harder for the unit to receive payouts from its subsidiary.

Labour 'cautious about nationalisation' despite 'total scandal' of water industry

Labour’s shadow climate and net zero secretary, Ed Miliband, has called the feared collapse of Thames Water “a total scandal”.

However, Miliband says Labour are ‘cautious about nationalisation of water companies.’ – pointing out that it would require buying out the current shareholders.

Miliband told Tonight with Andrew Marr on LBC last night that:

‘It is a total scandal, the dividend pay-outs, the debt taken on and customers paying the price. We are cautious about nationalisation of the water companies. And why are we cautious of it?

Because it would involve… billions of pounds of public money being given to the water companies’ shareholders who have already made a big bonanza. We have a whole plan for changing the regulatory system mandatory fines when they pollute, Ofwat will have the power to cap bills because it shouldn’t be the bill payer that is paying the price of this, the companies should be paying the price of it.’

Introduction: UK water sector faces biggest crisis since Thatcher

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Britain’s model of privatised utilities is facing its biggest crisis since Margaret Thatcher was selling off the family silver in the 1980s.

Thames Water, the UK’s latest water company, is in emergency talks with the water regulator Ofwat, ministers and government departments, amid concerns it needs a multibillion cash injection to keep operating.

The water company, which serves 15 million customers, could be put into temporary national ownership by ministers to secure a refinancing package.

Yesterday, Thames Water said it was working “constructively” with its shareholders on injecting more equity into the company, to support its “turnaround and investment plans”.

Thames Water’s shareholders injected £500m in March, and had committed to a further £1bn in funding, but it is understood discussions about further funding faltered after the board was warned billions more would be needed.

Estimates presented to ministers and regulators suggesting the company could be facing a hole of £10bn in its finances, the Guardian revealed last night.

Thames Water has accrued a £14bn debt pile – around a quarter of the privatised water industry’s collective debt burden of £60bn. Thatcher sold them off debt-free, and endowed them with a further £1.5bn of public money, known as a “green dowry”, to help with improving their networks.

Since privatisation, shareholders have been paid £72bn in dividends, while bills have risen 40% in real terms.

Green MP Caroline Lucas told parliament last night that “privatisation of water was a serious mistake and it needs to be permanently rectified.”

Environment minister Rebecca Pow, though, insisted that “The sector as a whole is financially resilient”, adding:

“Government of course is confident that Ofwat as the economic regulator of the water industry is working closely with any company that would be facing financial stress.”

A former Thames executive told the Guardian the water company faced “intractable” problems that were rooted in “over 100 years of underinvestment”.

There are estimates that the water industry needs to spend £70bn in total over the coming decades to fix the sewage discharge problem, and secure water supplies.

Thames Water’s difficulties have highlighted the key question – is it really possible to keep bills down, make profits and invest to make water clean? Or would nationalisation. removing the pressure to pay shareholders, help?

The consortium that took over ownership of Thames Water in 2017 has not taken a dividend since, but the company has paid internal dividends – including £37m in the year to March 31 2022.

The agenda

  • 8.30am BST: Sweden’s Riksbank interest rate decision

  • 9.30am BST: UK mortgage approvals figures for May

  • 10am BST: Eurozone confidence figures for June

  • 1pm BST: German inflation report for June

  • 1.30pm BST: US Q1 GDP report (final reading)

  • 1.30pm BST: US weekly jobless figures

Updated

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