Thames Water in crisis talks over potential ?10bn black hole

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The government has “no true grasp on the costs” involved in preventing a collapse of Thames Water, with estimates presented to ministers and regulators suggesting the company could be facing a hole of ?10bn in its finances, the Guardian can reveal.

The water company, which serves 15 million customers, is in emergency talks with the water regulator Ofwat, ministers and government departments after the departure of its chief executive and concerns over its ability to continue operating without a multibillion cash injection.

Measures under discussion include placing Thames into temporary national ownership, in order to secure a refinancing package. That could mean public funds and higher bills for customers may be needed.

Other options involve an onward sale of the company. The existing shareholders are large Canadian and UK pension funds, and investment vehicles for state money from China and Abu Dhabi, which could now be at risk of losing at least some of their investment.

Those involved in the discussions, which began in recent weeks, have been told Thames could require as much as ?10bn more than already budgeted to get its infrastructure up to regulatory standards, although officials are still scrambling to estimate the eventual cost.

It is understood that figure does not include the cost of making interest payments on its ?14bn debt pile.

A minister, who asked not to be named, said government had “no true grasp on the costs involved”, or how much support may be ultimately needed from the taxpayer, but that Thames and other water companies were in distress, with “wounds which need to be cauterised”.

The UK business minister Kemi Badenoch told Sky News the government was looking at what it could do in order to make sure that “Thames Water as an entity” survived.

A spokesperson for Thames declined to comment on the size of the cash injection needed, but said the company maintained “a strong liquidity position”. They added that the company was working “constructively” with shareholders to secure “further equity funding expected to be required to support Thames Water’s turnaround and investment plans”.

It is almost 30 years since England’s water companies were privatised, a period during which investors in the sector have been accused of asset stripping and overloading the utilities with unsustainable debt.

Recently, mounting public outrage over beaches and rivers strewn with evidence of sewage dumping, poor preparations for drought, and water leaks have led to company bosses vow to improve performance.

On Tuesday, Thames’ chief executive, Sarah Bentley, stepped down to the surprise of many, with sources citing concerns over the company’s financial reporting and shareholder confidence as key triggers for her departure.

Bentley became a “casualty” when she presented shareholders with a “terrifying picture” of the true state of Thames Water’s problems, a source at the company said.

The largest shareholders are the Canadian pension fund, Ontario Municipal Employees Retirement System (Omers) and the Universities Superannuation Scheme (USS), which invests retirement savings for UK university lecturers, while other shareholders include China Investment Corporation and Abu Dhabi’s Infinity Investments. They injected ?500m in March, and had committed to a further ?1bn in funding, but it is understood discussions about further funding faltered after the board was warned billions more would be needed.

Any measures would have to factor in the need to maintain the confidence of foreign investors, the minister said: “We have to consider the impact on dampening investor appetite for UK plc and its infrastructure but also bill payers.”

The crisis has added to growing alarm about the broader state of infrastructure across England’s 11 regional water monopolies, and the potential risk posed to the taxpayers and customers.

In December, Ofwat flagged concerns about the finances of other companies, including Yorkshire Water, SES Water and Portsmouth Water.

Whitehall insiders compared the situation to the government investment required after the collapse of Railtrack in the early 2000s. About ?33bn was pledged to upgrade infrastructure afterwards. One source familiar with the Thames talks said the problem may “dwarf” the cost of temporarily nationalising energy supplier Bulb during last year’s energy crisis.

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One option facing Thames is being placed into special administration. Ofwat says in its guidance that this process is designed “not to keep a company in business but rather to ensure that the provision of services to customers is maintained” – meaning investors “bear an appropriate level of risk in relation to the decisions that they make” and reducing the “risk to taxpayers that they will have to bear costs relating to a failed company”.

Since privatisation, water companies have collectively taken on close to ?60bn in debt. This has triggered repeated warnings from Ofwat about the sustainability of their finances. The Australian bank Macquarie was widely criticised for its stewardship of Thames from 2006 and 2017 and faced accusations of asset stripping. The consortium that took over ownership in 2017 has not taken a dividend since.

A former Thames executive told the Guardian the water company faced “intractable” problems that were rooted in “over 100 years of underinvestment”.

They said: “We have Victorian pipework which just hasn’t been able to keep pace with massive population growth and the impacts of climate change. Thames’ debt was intended to accelerate its work correcting the infrastructure gap but no investor would want to cover the cost of the challenges it now faces without a return.

“Thames’ investors thought they would get a 3-4% return. This has been an absolute bloodbath for them. It was supposed to be a stable, long-term infrastructure investment but has become a joke of a situation.”

A spokesperson for Ofwat said: “We monitor the financial position of all the key water and wastewater companies. We have been in ongoing discussions with Thames Water on the need for a robust and credible plan to turn the business around and transform its performance for customers and the environment. We will continue to focus on protecting customers’ interests.”

A range of models for managing water companies operate within the UK. Scottish Water is owned by the taxpayer and has invested ?9bn in the decade since its formation in 2002.

Darren Jones, Labour MP who chairs the common’s business and trade committee told the BBC his party would not drive for wholesale nationalisation.

“If we end up in a situation where the private owners of these companies have completely messed it up, then there is no choice for the government other than to bring it into public ownership and to run it,” he said.

Jones suggested regulators had failed to effectively police the behaviour and board directors had failed to in their duty to the companies they control.

“For too many years, decades even, we’ve allowed these companies to be operated with high risk stakes, with high levels of debt, with wealth being extracted from the companies, with investment not being high enough,” he said.

A government spokesperson said:”This is a matter for the company [Thames] and its shareholders. We prepare for a range of scenarios across our regulated industries – including water – as any responsible government would. The sector as a whole is financially resilient. Ofwat continues to monitor the financial position of all the key water and wastewater companies.”