There are two banks to every river and there are two sides to every story, even to that of the benighted Thames Water.
In Friday’s Reaction, my fellow columnist Neil Collins took Thames Water Chairman, Sir Adrian Montague, to task in response to Montague’s own column in The Times in which he, for all intents and purposes, begged the country in general and Thames customers in particular for a second chance. Neil, along with the vast majority of people, has no sympathy for Thames and for the financial abyss into which it has, depending on one’s view, either thrown itself or been pushed.
Thus he wrote: “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 impenetrable 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.”
I should not have great sympathy with Sir Adrian as he is now married to my ex-wife but perchance the CEO of Thames at the time of privatisation in 1989 was Mike Hoffman, my late brother in law. So, my connection to Thames is long and I have clear memories of the struggle endured by Mike and the then Chairman, the late Roy Watts’, to take a viable company out of government ownership and to put it in public hands. Amongst the Thatcher privatisation drives, the water companies were the most controversial and public sensitivities were acute. Water, it was argued, came for free. Water rates were fixed and not related to usage and sewers had had next to no game-changing investment since the end of the 19th century. It was a tall order.
Mike, a passionate engineer, had spent months simply trying to find out where the assets were and discovered that most of the knowledge was not documented but had been verbally handed down from one generation of employees to the next. Most of the pipe system, as we know, was still glazed stoneware which had never been intended to be laid below roads carrying heavy traffic with lorries of up to 40 tonnes in weight and being exposed to the concomitant vibrations. A major renewal programme, effectively bringing on a total replacement of infrastructure was needed and pronto.
But the sensitivity of water pricing post-privatisation was high. Government had through the Water Board for a century trousered the profits, put next to nothing back and now the water companies, especially Thames, were tasked at providing water and sewerage services on what was effectively a shoestring. Yes, Thames was making money and paying dividends, but it was a chicken and egg situation. If it didn’t make enough, it would not be able to raise at a price it could afford in the capital markets needed to fund the updating of the creaking infrastructure. All the while, Ofwat was conscious of the political sensitivity of the price demanded from customers who, to be frank, never thought of the incredible cost of sewerage services. From the outset in 1989, the water companies have never really generated enough surplus for them to catch up on the outdated network with which governments had after decades of underinvestment left them.
That Thames, along with other water companies, should have fallen into the hands of Australian finance group Macquarie was unfortunate, having been sold to them by the German utility group RWE. RWE pulled out when it too found the challenge of leaking pipes too much trouble to be worth it. Macquarie’s business model was simple. Utilities generate steady cashflow. Thus they can borrow the billions they need to fund the transaction secured on predictable future income. They did, however, set up an arms’ length holding company which owned Thames but did not manage it. That is how they succeeded in, to coin a phrase, sucking Thames dry.
Most of the rest of the story is now common knowledge but I sympathise with Sir Adrian. He was not the one who got rich. He was called upon by the government in order to take the poisoned chalice, to catch the hospital pass and to live to tell the tale. I’m sure he’s not in it entirely out of a sense of civic or patriotic duty but it is a job not many would have been prepared to take on. He is faced with the facts, as unpleasant as they are, and is looking for a way out. He is right. Slaughter the bondholders and it’s game over. We all need water, and someone will have to finance it. If the capital markets are decapitated, they will walk away and taxpayers will be left holding the baby, the whole baby and nothing but the baby.
Thames Water as a public company was born with congenital flaws. It has taken decades for many of them to be recognised but in an industry that thinks in decades and not in quarters that is not entirely surprising. Adrian is right. Mistakes were made and they are not ones that can be rectified with a few firings. The clock can also not be turned back.
The biggest mistake, however, was Thames’ inability to charge its customers not only for its services but also the money it would have needed to completely renew the creaking and outdated infrastructure it had been handed. And that, it is sad to say, is largely due to the howling of consumers who have never known that water bills in this country have for a long time been amongst the lowest in the western world.
Write to us with your comments to be considered for publication at letters@reaction.life
