Why is Thames Water struggling to stay afloat?

The sudden resignation of its chief executive while the company is struggling to finance a £14 billion debt has left the government nervously preparing for the potential collapse of Thames Water.

Ministers and the industry regulator Ofwat have already held “discussions about the possibility of placing Thames Water into a special administration regime (SAR)” – in essence, public ownership – such is the perilous position the company finds itself in, said Sky News. CEO Sarah Bentley abruptly stepped down on Tuesday, raising further concerns over the company’s future.

The saga has “prompted fresh calls for the water industry to be hauled back into public ownership”, said The Telegraph’s chief city commentator Ben Marlow. “It’s certainly hard to argue that privatisation has been anything other than a pretty spectacular failure,” he added.

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What did the papers say?

The largest of the UK’s water companies, Thames Water supplies over 15 million people in London and the southeast of England. But it has amassed huge debts as it attempts to “tackle leakage and reduce sewage outflows into rivers, a legacy of under-investment in infrastructure”, said the Financial Times. Bentley was in just the second year of an “eight-year turnaround plan”, but the company has so far been “struggling to make progress”, with its leakage rate the “highest in five years”.

The owners – a consortium of private investors – last year pumped “£500m into the business and pledged a further £1bn to help it turn things around”, said the BBC. But it remains burdened by £14 billion of debt, which it is “struggling to raise the remaining cash” to service, and it has not paid a dividend to its shareholders for six years.

One solution being considered by water companies, according to The Times, is to raise customer bills by up to 40%, a figure that has “alarmed ministers”. Thames Water is “proposing rises of 20 per cent”, said the paper.

The company attempted to quell anxiety by maintaining it held a “strong liquidity position” and was keeping Ofwat informed on the “progress of the company’s turnaround”.

Since the private water monopolies were created by Margaret Thatcher in 1989, they have taken on around £60 billion in debt between them. “This has triggered repeated warnings from Ofwat about the sustainability of their finances,” said The Guardian.

Regulator Ofwat said that Thames Water has “significant issues to address” and has to strengthen its “financial resilience”, said the BBC. “Interest payments on more than half of its debt are linked to the rate of inflation, which has soared over the last year,” said the broadcaster.

Thames Water has “faced fierce criticism” for the amount of money it has paid its top executives, said the Daily Mail, while it has “lurched from one disaster to the next”. It also received a total of £32.4 million in various fines for water pollution between 2017 and 2021.

But the water industry’s failings as a whole are a “perfect microcosm of Britain’s political woes of the last decade”, wrote Oliver Franklin-Wallis at UnHerd. He pointed to “austerity, failed privatisation, corporate greed, climate apathy” as leading causes of the current situation.

The water companies since privatisation have been “loading themselves with debt, deploying increasingly byzantine financial engineering to avoid corporation tax, and paying billions to shareholders and millions to their own executives” while continuing to underinvest in decaying infrastructure, he said.

What next?

The possible nationalisation and discussions on Thames Water’s future are still at a “preliminary stage”, Sky News said, but what remains is a continued “public dissatisfaction at water firms”, said the news site.

Ministers will be “scrabbling to avoid a bailout” of the company, the i news site reported, but are prepared to step in to “ensure that millions of homes do not lose access to water” in the event of a collapse.

One possible solution may be for the government to “take over the company temporarily” and restore it to a healthier position before “selling it on”. However, this approach would “potentially expose taxpayers to large financial losses”, the site said.

Health minister Neil O’Brien told Sky News that the government did have contingency plans for the company but that Thames Water customers could rest assured that “absolutely nothing is going to happen in terms of either their bills or their access to water”.

Ofwat has “always had the power to put a water company into special administration to protect services for the public”, said Sandra Laville in The Guardian, but until now has not wanted to deploy the “most powerful weapon in its toolbox”.

A report by the regulator showed that some water companies’ “credit ratings have fallen to their lowest” level, putting their debt-based models now in a perilous position. That could see the companies in a position where they are “unable to meet their obligations to provide an essential public service”, Laville said, and the “wheels could start to fall off this teetering facade”.