Thames Water is running out of excuses

The fundamental question at Thames Water, beyond its Byzantine ownership structure, its equity/not equity fund-raising and its performance failure on almost every measure, is: are the shares in the underlying business worth anything at all?

In other words, if Thames Water Utilities, the actual operating company, were to be sold, would there be anything left for its current owners? The short answer is that it’s impossible to say, thanks in part to the Tower of Babel that long-departed shareholder Macquarie built on top of TWU, with six layers of ownership.

The longer answer is – it’s worth only what it will be allowed to charge its captive customers in future. It is a failed privatisation, and might as well be taken over by the state. Thames abandoned its slogan “Running Water For You” perhaps because so much of the stuff was just running away, or perhaps because it was really Running Money For A Few. The few outwitted its regulator Ofwat at every turn, and sometimes followed up by recruiting executives from among those who had been charged with regulating the business.

That business is now in crisis, all right. Its own auditors have warned that it may run out of money next summer, while the executives will be obliged to perform mental gymnastics in front of a Parliamentary Committee to explain why the latest £500m emergency loan is actually equity capital. Yet the surprise is less its teetering finances than the way Thames has managed to slough off increasingly hostile criticism for both finances and performance for so many years.

The moment of truth should have arrived as long ago as 2014, when permission for London’s super-sewer was granted. The company’s balance sheet was already too weak to finance the project, necessitating a special purpose vehicle with its own levy on London residents.

It is easy to blame the regulators for the financial horrors, but the Environment Agency is a Cinderella department, lacking both clout and resources to do more than mouth platitudes, while Ofwat was effectively emasculated when it was over-ruled by the Competition and Market Authority in the last pricing round.

It is only very recently that the true state of Britain’s rivers and beaches, like the sewage itself, has floated towards the top of the political agenda. Even now, the government is scared of admitting just how much the clean-up is going to cost. Much higher bills are inevitable, but the fight to get the companies themselves to contribute has yet to come.

Thames, the biggest and baddest of the lot, is drowning under borrowings racked up in the glory years of dividends financed by the debt. Ofwat is now investigating to see whether it has breached its licence regulations; in theory, the penalty is up to 10 per cent of turnover, which would surely bankrupt the company.

Thames has said that its owners are prepared to inject the £2.5bn needed to clean up its act, but only if the regulator plays nice: much smaller fines for breaches, and water bills high enough to make an attractive return on the capital.

This is jaw-dropping stuff. The owners may not be all the same crew who filleted the finances, but they knew what they were taking on. They got the business into the mire and now they want to be rewarded for getting us out of it while creating another money machine. Today, on any credible analysis, the company’s liabilities exceed its assets, and the consumer (aka the taxpayer) is being invited to plug the gap. Thames has proved over the years that it has nothing constructive to bring to this vital utility. The government should step in and take control, if only pour encourager les autres.