- By Dearbail Jordan and Ben King
- BBC News
Jun 29, 2023 1:22 PM BST
Updated 11 minutes ago
Thames Water may have to be taken over by the government if it runs out of money.
But why is Britain’s largest water company in crisis – and are other companies facing similar problems?
How did Thames Water come to be in so much debt?
When the company was privatized in 1989, it had no debt. But over the years it has racked up significant debt and is currently £14 billion in debt.
Much of this came when Macquarie, an Australian infrastructure bank, owned Thames Water and totaled over £10bn when the company was sold in 2017.
According to analysts, Thames Water’s current debt is 80% of company value, making it the most heavily indebted water company in England and Wales.
Also, interest payments on more than half of Thames’ debt are rising due to stubbornly high inflation, helping to bring the company to the brink.
Macquarie said it has invested billions of pounds in upgrading Thames’ water and sewage infrastructure while still owning the company.
However, critics argue that this has deprived the company of billions of dollars in credit and dividends – a share of a company’s profits that are paid out to shareholders.
Thames Water said it has not paid any dividends to outside shareholders for the past five years.
However, dividends can also be used to move money between companies that are ultimately owned by a parent company.
Thames Water has paid over £200m in dividends to other companies within the group over the last five years.
Most of that money was then paid out as interest to outside investors who lent money to the group.
Critics argue that the dividends were paid with monies that could have been spent on improving Thames Water’s infrastructure and services. However, Thames Water is legally obliged to make these debt interest payments.
Are all water utilities in trouble?
Thames Water’s troubles have certainly put a spotlight on the indebted industry. According to regulator Ofwat, the sector’s total debt stood at £60.6 billion in March last year.
Of the 11 companies providing water and wastewater services in England and Wales, six are owned or controlled by foreign investors from countries such as Hong Kong, Canada and Malaysia. Like Thames Water, critics claim foreign owners have saddled water companies with debt and paid handsome dividends at the expense of investment.
While the sector — like other industries — has been hit by higher costs for things like chemicals and energy, the main problem for water companies is that the interest they pay on their debt is tied to the retail price index (RPI) measure of inflation. This is typically higher than the Consumer Price Index (CPI), which measures inflation. For example, RPI inflation was 11.3% in May compared to CPI inflation of 8.7%.
Ofwat estimates that half of water company debt is linked to inflation and the vast majority of it to the RPI metric.
Meanwhile, last December Ofwat raised concerns about the financial resilience of five companies: Thames Water, Southern Water, Yorkshire Water, SES and Portsmouth.
Yorkshire, Southern, Portsmouth and SES all say they have taken steps to address Ofwat’s concerns.
Thames Water is owned by a group of investors on four continents. The largest is the Canadian pension fund OMERS with 31.8%.
The second largest, with 19.7%, is the Universities Superannuation Scheme, a pension fund for British academics.
Other investors include sovereign wealth funds from China and Abu Dhabi, which invest in these countries’ assets on behalf of their governments.
The rest are made up of three other pension funds and two investment companies.
Why was Thames Water privatised?
The entire water and waste sector was privatized for £7.6 billion 34 years ago under the late Margaret Thatcher’s Conservative government. At the time, Ms Thatcher wrote off the industry’s £5bn debt, giving the companies a clean slate and gave them £1.5bn in public money.
The government wanted to privatize the industry in 1984, but public backlash against the plan resulted in it being shelved until after the general election three years later. At the time, Britain was under pressure from Europe to improve the purity of its water.
However, complying with European standards would cost billions of dollars in investment, which it was hoped would come from the private sector and, by extension, the companies’ customers.
“If we want an improvement in the environment, it’s going to cost money,” Mrs Thatcher said in 1988. “It’s going to be the people who want these improvements in the water that will have to pay.”
Former Labor MP Ann Taylor later said of the privatization of the water industry: “The message is always the same: maximize costs for the consumer to ensure maximum returns for the investor. We shouldn’t be surprised at that. After all, this is the private sector.” Investors expect from their companies.”