An Explanation of the Crisis That Befell Thames Water, the Largest Water Supplier in the United Kingdom

Soaring debts and chronic underinvestment have devastated the UK’s biggest water provider, Thames Water, since privatization. The company is now in the midst of a severe financial crisis, prompting rescue rumors.
Thames Water serves over 15 million people in London and the surrounding regions; how did it get into such a precarious financial situation?

To make matters worse for Britons already struggling to make ends meet, the group has suggested a huge increase in water costs, which is sure to divide voters in the run-up to the general election.

Disinvestment and financial obligations
In 1989, Prime Minister Margaret Thatcher’s Conservative administration privatized Britain’s publicly-owned water and sewerage industries. There was zero debt in the industry at that time.

Prior to its 2001 acquisition by RWE, a German power behemoth, Thames Water was listed on the London stock market.

In 2006, the Australian financial firm Macquarie spearheaded a holding company called Kemble Water, which acquired it.

Kemble is one of many holding companies that make up today’s Thames Water; the company’s debts amount to about £15.7 billion ($18.7 billion), which has led some to speculate that it may be nationalized. Kemble is now independent of Macquarie.

“Debt levels… ballooned during Macquarie’s time,” said Katie Meehan, co-director of King’s Water Centre at King’s College London.

As she explained it to AFP, it “operates under a ‘debt-driven’ model”.

Many people believe that the main shareholders have been utilizing their debt to pay themselves large dividends, which is a criticism of dividends.

Kemble Water, the parent company of Thames Water, was sold off by Macquarie in 2017. The Universities Superannuation Scheme in the United Kingdom and the Ontario Municipal Employees Retirement System in Canada are the two largest pension funds currently holding shares in the utility.

“It might be tempting to label Macquarie as the ‘bad guy’ in this scenario, but in fact all of these utility transformations and its infrastructure-finance model were approved and regulated by the UK government,” Meehan said.

Investing too little
Macquarie said last year that it had “supported the company to invest more than £11 billion in its network” in response to claims of under-investment in the past. It added that the value of Thames Water’s assets had doubled, offsetting the effects of increasing debt.

Nevertheless, the failure of UK water corporations to decrease leaks and cut raw sewage discharges into rivers and beaches has caused criticism.

They point the finger at the Victorian era’s sewage system, which was intended to divert overflow into the ocean in the event of severe rains so as to prevent floods and clogs.

“Research has shown that the Victorian sewers are not to blame for our toxic water conditions; it’s due to a lack of investment,” Meehan pointed out.

Doomsday scenario
When Kemble failed to make a crucial interest payment on a £400 million debt in early April, the media began to speculate that Thames Water was about to collapse and be renationalized, adding fuel to the fire.

In March, Thames stated that it had been unsuccessful in raising a £500 million capital infusion from shareholders; the company’s financial requirements are in the billions of pounds.

According to King’s College London law expert Ewan McGaughey, “Thames Water is going to collapse” due to the dire situation, which demonstrates the complete failure of water privatization under Thatcher’s leadership and the lack of effective control.

Either this year’s general election, which Conservative Prime Minister Rishi Sunak is largely expected to lose to the main opposition Labour Party, or thereafter, such a collapse would be a big political difficulty.

Rise in water bills?
In a letter sent on Monday, Thames Water asked industry regulator Ofwat for a 44% increase in water rates over the next five years in exchange for more funding for infrastructure and environmental initiatives.

Still, this week, Sunak’s minister of finance, Jeremy Hunt, said that making consumers “pick up the tab for poor management” would be “utterly outrageous and totally unfair.”.

If Thames Water were to declare bankruptcy, the UK government might put it into “special administration” and reclaim it for public use, eliminating shareholders and shifting the financial burden to taxpayers.