Enough is enough. Let Thames Water go bust

Telegraph

2 days ago

There comes a point in every corporate disaster when enough is enough and the plug has to be pulled.
One such is Thames Water, which has sailed rudderless from one mishap to the next for over a decade now, with still no resolution in sight.
Surprise, the latest hope of salvation – £4bn of new equity from the US private equity outfit KKR – has failed as comprehensively as all previous attempts to give Thames a viable future.
After months of due diligence, KKR has concluded what must have been obvious all along – that the political and regulatory risks around Thames Water are just too big to be worth the candle.
Water companies have in recent times managed the near-impossible feat of usurping the position once occupied by banks as the most hated corporate sector in the land.
Campaigners such as the former Undertones singer Feargal Sharkey have raised the profile of the industry to the point where there is nowhere left to hide.
Rising bills in combination with deteriorating water standards have made Thames and its nine, fellow privatised water companies into symbols of wider national failure.
If KKR needed any further persuading of the folly of involvement with this nightmare of a company, the lambasting Thames recently received in the House of Commons for sewage spills and retention bonuses must surely have been the final straw.
There's a price for everything, it is sometimes said, but maybe not with this industry, where to be an investor or lender is to be seen as the unacceptable face of capitalism in modern form.
Good luck to the other bidders said to be circling Thames now that KKR is out of the way. They will no doubt eventually come to the same conclusion. In its current incarnation, Thames is holed below the water line. It's hard to see why anyone would want to take the tiller.
The clamour for retribution is now so great as to render almost any form of investment completely unviable.
I was an enthusiastic supporter of water privatisation when it was first mooted in the late 1980s. Back then, water standards were even worse than they are today. You couldn't even trust the drinking water, which would regularly fail European standards, let alone Britain's beaches or rivers.
As publicly owned utilities, water companies had to take their place in the pecking order of public spending priorities, and it was inevitably a lowly one.
Political pressure to keep bills low further starved the industry of the resources needed to meet increasingly demanding standards.
For ministers, privatisation served a double purpose; not only did it promise much needed private capital for infrastructure renewal, it also meant that they would finally be shot of a seemingly constant source of political complaint.
So desperate was the Treasury to get the water companies off the books that they were flogged off pretty much debt free, and in some cases with overflowing 'green dowries' to make them more attractive to investors.
Sadly, it has not worked out well. The few water companies that have remained publicly listed enterprises haven't fared too badly, but the ones subsequently bought by private equity – including Thames Water – have been pillaged to destruction. Stripped down to the last lightbulb by rapacious financiers, they increasingly cut corners and are today in all kinds of trouble.
What goes around comes around, and the private ownership that was once seen as the solution is now condemned as a major part of the problem.
Attempts to find a future for Thames Water within the current framework of debt and equity ownership have gone about as far as they reasonably can.
Any further machinations merely prolong the agony, and are really only about salvaging at least something from the wreckage for current senior creditors, as well as lining the pockets of a veritable army of advisers and lawyers.
Most of them deserve little sympathy, even if the original sin at Thames was committed by a generation of owners who have long since disappeared with their bags of swag.
Many will take positive pleasure in the likes of Elliott Management, a vulture capital fund that specialises in buying up distress debt and squeezing it dry, losing their shirts. Their only motivation is value extraction. They cannot be allowed to dictate the future course of bills and regulatory obligations.
I no longer buy the argument that putting Thames into 'special administration' – a form of insolvency procedure intended to ensure protection for public services – would send a bad message at a time when the Government is looking to raise hundreds of billions of pounds from private investors for Britain's energy transition.
Rather the reverse; actually, it would say yes, we want private investment, but on fair terms that don't seek to rip the heart out of essential public services.
Since I cannot put it any better myself, let me just repeat what a reader said on a rival news site: being open for business does not mean being open to exploitation.
The bottom line is that in order to properly meet its social and environmental obligations, Thames needs to be made largely loan-free, wiping out the near £20bn of debt that it is currently struggling to service.
The arguments in favour of this approach are now so overwhelming that it is hard to see why ministers are still hesitating. From a political perspective, it would be extremely popular, which is why Nigel Farage's Reform UK has latched onto it as gainful, populist fodder.
That doesn't necessarily mean it is the right thing to do; often, the easy, popular course turns out to be the wrong one. But what are the alternatives? The 30pc haircut to more junior debt holders currently under discussion is very unlikely to be sufficient.
Despite initial fears that it would cost the taxpayer an arm and a leg, the most recent example of special administration – Bulb Energy – has worked out reasonably well.
Bulb was one of a number of fly-by-night retail energy suppliers that found its relatively generous fixed rate deals rendered hopelessly uneconomic by soaring wholesale prices.
When first put into special administration, the Office for Budget Responsibility estimated that based on energy prices at the time, the bailout could cost the taxpayer an eye-watering £6.5bn.
But that tally has steadily eroded, and with further recoveries from Octopus Energy – which acquired Bulb's customer base – the ultimate cost to the taxpayer is expected to be negligible.
Nationalisation without compensation is always a process fraught with legal difficulties. Historically, it has tied presiding governments up in knots for years afterwards.
But how else is the never-ending saga of Thames Water ever to be resolved?
Once freed from the ball and chain of excessive debt, Thames Water could easily be sold back to investors, and with requisite reform to regulation, could then perfectly adequately serve all three interest groups: investors, customers and environmentalists. Time to bite the bullet.