If you have tears, prepare to shed them now. We should shed them for Thames Water. Who says so? Why, the chairman, Sir Adrian Montague, who is telling us that the company “deserves a fresh start” with a massive infusion of our money. Ofwat, the industry regulator, had already rejected Thames’ first pricing proposal as being too high, so the company has come back with a demand for even more.
You have to admire Montague’s chutzpah. Writing in The Times, he admits in passing that “the industry has made mistakes”, but mostly he blames Ofwat for not allowing bigger price rises in the past. After reminding us of his problems, he writes of an “ailing sector”. Right on cue, half a dozen water companies have joined the wailing chorus asking for easier terms from Ofwat. Disguised in impentrable mathematics provided by accountants KPMG, surely designed to bamboozle Ofwat, it’s notable that the list does not include Severn Trent, perhaps because it is not facing a crisis. Thames is unique among the big water companies because the previous owners failed to invest and replaced risk capital with debt, extracting dividends as they went.
The Montague moan is as full of special pleading as you would expect from a City Grandee defending the interests of the capital markets. Nowhere does he suggest that those banks and institutions who lent money to a business with debts already too high to be sustainable should pay for their folly. Instead, he prefers to explain why Thames needs fresh capital to try and fix the company’s long-standing problems.
Well, he is right about that, at least. Thames is arguing that if the debt-holders are forced to write down their investments, then it will be impossible to raise new funds. This is so much chop suey. If holders were forced to take a haircut (as the market prices of the debts are signalling) then the balance sheet would suddenly look a lot better. Very few investments offer the chance to buy into a monopoly supplier of an essential product. Writedowns, followed by a debt-for-equity swap, with a commitment to float the restructured company on the stock market, would make New Thames look an attractive proposition to both lenders and shareholders.
The alternative, a messy re-nationalisation or an eye-watering rise in bills for Thames customers, would not only be expensive mistakes, it would reward those lenders who financed the folly in the first place, with taxpayers footing the bill. The threat of nationalisation, or the removal of Thames’ licence to operate, are useful bargaining chips to concentrate the minds of negotiators for the lenders in restructuring talks, but triggering either would be capitulation by the government, at taxpayers’ expense.
Montague does not even hint at any pain for bondholders. Instead, he seems to have discovered that 40 per cent of Thames’ assets are over 100 years old, while bemoaning having to service more customers (never mind their contribution through water charges). It is, he tells us, jolly difficult running water for you (as the slogan used to have it) through this ancient system. It’s really the fault of low bills to consumers that have forced Thames to “do less than it should have done to…invest for the future.” Spouting this stuff is what the chairman of a big company is handsomely paid to do. Anyone else would be ashamed to put their name to it.
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