Thames Water could benefit from a spell of public ownership

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A swift demise is better than a slow one. That would certainly be true for Thames Water. 

A period of temporary public stewardship is generally framed as a worst-case scenario in discussions about the future of Britain’s biggest privatised water utility. But putting Thames Water into a special administration regime — and quickly — would have its benefits.

To be clear, a scenario where Thames is run temporarily by a special administrator on behalf of the UK government remains, at present, hypothetical. 

Its parent company, Kemble, has defaulted on its debt. Thames’s plan remains to pursue “all options” to secure new equity investment so it can keep operating its assets and deliver much-needed upgrades. It is also reportedly hoping to raise further debt.

Thames’s ability to raise much-needed new equity, though, will depend on a draft determination in June from England’s water regulator. This will set out the returns investors can hope to make during the five years from April 2025.

The risk is that if new equity is not forthcoming — and it is far from clear that it will be — Thames will have to turn its attention to slashing costs.

At the end of February the utility had £2.4bn of cash and committed debt facilities. On current spending, that would only take it up to about May or June next year. Already-poor service levels would deteriorate further. In the meantime, there is a risk of Thames’s toxicity starting to pollute other water companies. 

True, a SAR would not be popular with bondholders, assuming they were forced to take a haircut. But some investors in other water companies would welcome the move — and soon — to limit fallout for the wider sector. Contagion risks include greater regulatory scrutiny for other firms, debt becoming more expensive and short sellers zoning in on the shares of publicly traded water groups. 

Special administration would also mean a chance to hack back Thames’s unwieldy structure. Dieter Helm of Oxford university has long argued it is too large for any one management team and should be broken up. Thames could pursue asset sales now. However, the example of the German conglomerate Bayer shows that creditors can be an obstacle to carve-ups.

The comparison often made with Bulb, the energy retailer that required taxpayer backing when forced into a SAR in 2021, is a false one. Thames’s operating unit remains an asset-rich company with a steady income stream. As with Bulb, any taxpayer funding required during a SAR process could be largely recovered.

It will take time for Thames’s fate to become clear. But a period of national stewardship no longer looks the worst outcome.

nathalie.thomas@ft.com