Thames, debt and water sector finance


Author: David Black, Chief Executive

There has been a huge focus on the finances of water companies over recent weeks. This was prompted by reports, following the departure of its CEO, that Thames Water was in financial difficulty and that the government and regulators were developing plans to handle the fall out.

Anyone following the sector will know Thames Water is a company with deep-rooted problems of persistent poor performance and too much debt. Ofwat has been using its regulatory powers to get the company to focus on fixing those issues – deploying both carrot and stick.

We have, for example, taken enforcement action over their failure to reduce leakage, and imposed penalties for not cutting pollution or improving customer service. We set requirements on Thames to develop investment plans to replace water mains and improve the resilience of their water treatment works. We have introduced new powers so Thames, and all other companies, must link dividends to performance and raised our requirements for financial resilience.

The company’s owners and executive are responsible for sorting out the business’ problems and they need to do so with urgency. Thames has reserves of around £4.4bn, so it is a liquid business (excuse the pun), but it needs to develop and execute a turnaround plan.

While Thames has been the centre of attention, the broader issue of financial resilience in the industry has been questioned, too.

Has there been too little investment? Is debt a signal of failure? Where has the money gone? There are some big questions for some companies, but let’s look at the facts.

At privatisation, it was always intended that the investment required to upgrade water networks would be, at least in part, financed by debt. Just as you borrow to buy a house or a car: so companies borrow to invest in pipes or treatment plants. And there has been huge investment totalling around £190bn of capital expenditure by 2022: about double that of the period before. Just to bring that to life, the current investment programme runs at the equivalent of £27m every single day.

And looking at the value of the companies shows that investment has gone into the system and the water network. The value of the assets– which by their nature depreciate over time – has increased from £9bn to £85bn; while the debt raised over the same period is about £57bn, and the equity is a touch under £20bn.

Put simply, the sector has borrowed to fund new investment. For most companies, debt has been a prudent low-cost source of finance with low interest rates fixed for the long-term. However, some companies borrowed too much, most obviously Thames Water. The risk for this – and for correcting this – belongs to the company and its shareholders.

Looking ahead, the sector faces big challenges that need significant investment – to finance new reservoirs and water transfers, and to cut sewage discharges and nutrient pollution.

Companies will need to borrow to make this investment. As they do so, they need to learn the lessons of the past and consider the role of equity as well as debt, to make sure they are resilient financially. And companies might do well to consider different routes, beyond private investment, including whether funding might be raised publicly through the listed route, or by championing other models, as happened with the Thames Tideway so-called super sewer.

Major investment is needed and companies must fund it without compromising their financial resilience. We will be keeping company finances under close scrutiny and will exercise our new powers on dividends and financial resilience if companies do not act responsibly.