Why is Thames Water in so much trouble?

Thames Water, the UK's largest water company, is currently facing a severe financial crisis. To avoid being taken over by the government, the company has secured an emergency rescue loan. However, creditors have won the right to challenge the High Court's approval of a £3 billion financing decision, with their appeal scheduled to begin on Tuesday.

Even with this rescue funding, Thames Water remains burdened by significant debt and faces immense challenges in repairing leaks, managing sewage overflows, and updating aging infrastructure. The company serves approximately a quarter of the UK's population, primarily covering London and parts of southern England, with a workforce of 8,000. Without this latest financial support, Thames Water was projected to run out of funds by the end of March.

How did Thames Water accumulate such a massive debt? Many UK water companies face debt issues, but Thames Water's situation is the most critical. The UK's water companies were privatized in 1989, with the expectation that private investment would improve the water system. However, critics argue this hasn't happened, with some companies taking on excessive debt and failing to invest in infrastructure. Thames Water had no debt at the time of its privatization in 1989. But over the years, the company borrowed heavily, and its current debt stands at approximately £19 billion.

The debt of Thames Water increased rapidly during the period it was owned by Australian infrastructure bank Macquarie Group, exceeding £10 billion by the time the company was sold in 2017. Macquarie Group stated that it invested billions of pounds in upgrading Thames Water's water and wastewater infrastructure during its ownership, but critics argue that the company extracted billions of pounds from Thames Water through loans and dividends.

Can this rescue deal avert Thames Water's crisis? Thames Water states that the £3 billion in emergency funding will provide the necessary space for it to complete its debt restructuring and attract cash injections from potential new investors. However, because a group of creditors opposed the proposal, deeming the 9.75% loan interest rate too high, the proposal must be approved by the High Court. Nevertheless, this group of creditors is currently appealing the High Court's ruling. If the financing agreement is not approved, Thames Water will face the possibility of temporary nationalization, a measure known as special administration.

What does this mean for customers? Even if Thames Water enters special administration, customers' services will not be affected in any way. Tap water will still be available, and toilets will still flush normally. However, water bills will generally increase, with the extent of the increase set by the water regulator, Ofwat. Ofwat has indicated that Thames Water can raise water bills by up to 35% (excluding inflation) over the next five years. But the company says a 53% increase is needed to fix pipes and meet demand, so it has applied for permission to charge higher fees.

Customers are unhappy about this. Consumer groups argue that people should not have to pay higher fees because of the company's mismanagement. But Thames Water Chairman Sir Adrian Montague has warned that without larger price increases, the company cannot guarantee a safe and reliable water supply to cope with climate change and population growth.

Who owns Thames Water now? Thames Water is privately owned by a consortium of pension funds and investment companies. The largest shareholders include: Ontario Municipal Employees Retirement System (Canada) - 32%; Universities Superannuation Scheme (UK) - 20%; Abu Dhabi Investment Authority - 10%; China Investment Corporation - 9%. Other investors include funds from Canada, Australia, and the Netherlands.

Why was Thames Water privatized? The entire water and sewage industry was privatized by the Conservative government led by the late Margaret Thatcher 34 years ago for £7.6 billion. At the time, Mrs. Thatcher wrote off £5 billion of the industry's debt, giving the companies a clean slate, and provided them with £1.5 billion in public funding. The government had hoped to privatize the industry in 1984, but strong public opposition to the plan led to it being shelved until after the general election three years later. At that time, Britain faced pressure from Europe to improve the purity of its water.

However, meeting European standards would require billions of pounds of investment, which it was hoped would come from the private sector and ultimately be borne by the companies' customers. "If we want environmental improvements, they have to be paid for," Mrs. Thatcher said in 1988. "Those who want better quality water will have to pay for it." Former Labour MP Ann Taylor later said of the privatization of the water industry: "The message has always been the same – maximize the cost to the consumer to ensure the greatest return for the investor. We shouldn't be surprised by that. After all, that's what private investors expect from their companies."