How Labour attacks and a record fine drove Thames Water to the brink

Telegraph

2 days ago

'Bonuses for failure? We won't stand for it.'
With eight words on social media, Sir Keir Starmer sent an unambiguous signal to Thames Water and its creditors: Do not expect special treatment.
The Prime Minister's comment came at a critical moment for Britain's biggest water supplier, as it attempted to steer itself towards a sale to private equity giant KKR.
As part of that deal, both Thames and its suitor were pleading for leniency as the troubled company struggled under huge debts and the threat of fines for pollution incidents.
But Sir Keir's intervention on May 20, which came amid a backlash over 'retention bonuses' handed to executives, foreshadowed the Government's resolve to brook no compromise with the badly-behaved company.
A week later, Ofwat, the industry regulator, announced it was hitting Thames with a record £123m in fines for sewage spills and dividend payments.
Steve Reed, the Environment Secretary, said it was part of 'the toughest crackdown on water companies in history', adding: 'The era of profiting from failure is over.'
It followed an announcement in April that water company bosses could face two years in prison for covering up or hiding illegal sewage spills.
Now, it is this inflexibility – and some may say outright hostility – that is being blamed for the collapse of KKR's takeover bid, after the investor walked away from the deal.
KKR put in a courtesy call to Downing Street over the weekend to inform Sir Keir of the decision.
It has yet to comment publicly on its reasons. But behind the scenes, the finger has been pointed at the Government's refusal to back down over fines and the perceived reputational risks of getting involved in such a toxic industry.
In recent weeks, both Thames and its former suitor had made clear that securing relief from regulatory punishments was vital to getting the deal over the line.
This in turn would have unlocked a £4bn investment from KKR to sort out the company's finances.
Without protection from further fines, the company's bondholders were facing an even bigger haircut. And executives had warned that continuing to punish Thames would only make its eventual turnaround more difficult.
'There is no point in continually penalising someone if it is going to exacerbate the situation,' Chris Weston, the chief executive, told MPs at a hearing in May.
'We have to be in a situation where we can attract that investment from international investors ... They are not going to do that if they think that there will be penalties that detract from it.'
It was a controversial argument, to say the least. Particularly as the water industry still faces mass public anger for allowing sewers to overflow regularly into the nation's rivers and seas.
'Are we going to just roll over backwards and allow Thames Water and KKR to pick and choose which of our laws they want to comply with?' asks Feargal Sharkey, the former Undertones singer who has become a leading campaigner for clean rivers.
'If you break the law, you should be penalised – those are the rules that apply to the rest of us.'
This is the sentiment that also appears to have prevailed in Whitehall, where officials are understood to regard Thames' pleas as politically tone-deaf.
But on Tuesday, the Prime Minister's spokesman rejected suggestions that ministers were culpable for the company's latest crisis.
'The Government makes no apology for tackling the poor behaviour that we've seen in the water sector,' the spokesman told journalists, blaming a lack of investment by Thames and other companies for the malaise.
'Too many people have been rewarded for failure in the past.'
Whoever is to blame, the Government may soon find that Thames becomes its problem regardless.
Should the company collapse, it will have to be placed into so-called special administration – the equivalent of nationalisation.
Taxpayers would then be on the hook for the costs of bringing the company back to an investable state, including by unpicking its convoluted ownership structure.
The Government says it is monitoring the situation but insists it has 'no intention to nationalise the water industry.'
Ofwat says it is 'liaising with the company on its next steps', including a potential fundraising.
Meanwhile, KKR's plans for the company have been shared with Thames and it is thought that they could still form a basis for its turnaround.
Another option is that CKI, a rival infrastructure investor that was initially spurned by Thames, could re-enter the fray.
'Whilst today's news is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal,' says Sir Adrian Montague, the chairman of Thames Water.
Last month, Sir Adrian described the 'hair-raising' weeks in March when Thames nearly ran out of money.
'We were running along the edge of the precipice,' he told MPs.
It is a situation the company is headed for again soon if a solution isn't found.
But this time, it is taxpayers who could be left clutching the bill.