Renationalising Thames Water is the wrong solution

To every problem there is a solution that is quick, simple – and wrong. Here’s the simple one for Thames Water – renationalise it. In the circumstances, there would be no need to pay the shareholders more than a dribble, since their holdings are worth no more than option value.

Simple? Of course, but the reason why the shares in the operating company are worthless is the mighty £18bn of debt they support, through a corporate structure which might have been designed to be almost opaque (surely not). Drain that down, and Thames looks like a business with guaranteed cash flows strong enough to finance the investment everybody knows is necessary.

Leave the lenders intact, and £18bn comes onto the national balance sheet, wrecking the public finances just in time for the arrival of the next government. That is neither helpful nor necessary, if the lenders can be forced to take a big write-down on their investment. The government and regulator Ofwat have some high cards to play here, to encourage the lenders to take their medicine.

It will not be quick or simple. The boffins at JP Morgan have been drawing charts. Outcomes range from green (essentially, the consumer is forced to pay massively more for water, the company escapes significant fines, shareholders inject £750m, and the bondholders laugh all the way to their yachts) to a suitably-sludgy brown (shareholders wiped out, bondholders of top company wiped out, 55 per cent haircut for the rest and “possible nationalisation.”)

The government is in such disarray that it might even give in to the green, more optimistic outcome, with the customers paying again to rebuild the business we have paid for once. Far better to force the lenders and bondholders to take their lumps, as a suitable punishment for over-lending to the Thames group in the first place. It might even encourage better behaviour from other companies, like Southern Water, which have also treated the rules on sewage discharges with contempt. In return for inflicting multi-billion pound losses, Ofwat might offer time for amendment of life, with short-term concessions for future rule breaches.

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