As we await a decision from Thames Water’s group of international investors on whether they will inject more capital into the struggling company, it’s evident that if Thames Water were listed on the stock market, a recapitalisation would have likely already occurred. What Thames needs, if its owners want to save it, is either a substantial rights issue or a debt-for-equity swap, both of which the stock market is adept at facilitating.
To draw a parallel, let’s consider the crisis in the outsourcing sector a decade ago, which involved similar scandals and government loss of confidence. The stock market was quick to respond by drastically reducing share prices for companies like Serco, forcing changes in management and paving the way for fundraising. However, the non-quoted water companies operate at a much slower pace.
Thames Water’s current saga began in June of last year when the company announced that its owners, led by Canadian pension fund Omers and the UK’s Universities Superannuation Scheme (USS), intended to inject an additional £1.5bn of capital. However, only £500m arrived in March of this year, leaving the remaining £1bn conditional on undisclosed circumstances. This process continues to crawl forward as the figures involved grow larger. The consortium remains divided, with USS supporting a turnaround plan contingent on an “appropriate regulatory environment,” while others remain silent.
This fragmented ownership structure by multiple globally dispersed investment committees with varying risk appetites is ineffective. The blame largely falls on Macquarie, the previous financial engineers who depleted Thames Water and exited in 2017. Yet, it is the indecisiveness of infrastructure investors, who committed to rescuing Thames but appear to lack the commitment to follow through, that exacerbates the situation.
The regulatory power of Ofwat in forcing change seems to be significantly limited. Regulating non-quoted water companies is equivalent to navigating through molasses. Rescuing these companies from excessive debt, a product of the ill-conceived buyout boom of 2006-2008, has been a decade-long mission for regulators.
The recent case of Southern Water highlights this regulatory inertia. Threatened with “virtual special administration,” its disengaged financial owners, led by funds advised by JP Morgan and UBS, were finally compelled to accept losses and sell to new owners equipped with fresh capital in 2021.
Similarly, Yorkshire Water was found in breach of its licence obligations last October but was given until 2027 to rectify the situation gradually. It took until last week for the first £400m of the £940m inter-company loans shuffle to be unwound.
In conclusion, ensuring the survival of the current privatised water system would be more successful if companies were required to have a stock market listing. This would enhance accountability, transparency, and compliance with regulatory norms. It is no coincidence that the companies that have faced the heaviest fines for environmental offenses, Thames and Southern, were also the most financially over-leveraged. Severn Trent and United Utilities, as members of the FTSE 100 index, have excelled in environmental performance due to stricter oversight and restrictions on debt manipulation. South West Water serves as a partial exception to this correlation as it has recently struggled with pollution despite being a quoted company.
To support this argument, former chairman of Ofwat, Sir Ian Byatt, advocated in 1996 for licensed water companies to retain a listing on the stock exchange to prevent dividend leakage into non-regulated activities. Last year, former Ofwat chairman Jonson Cox expressed regret at the lack of publicly listed water companies, emphasizing the benefits of greater visibility and the negative effects of investment banks treating water companies as mere financial assets.
While these historical failures in regulation cannot be excused, they should offer the Labour Party, which has ruled out renationalisation, a policy direction. One idea could be to mandate private owners to list at least 25% of their water companies’ shares on the London Stock Exchange, as suggested by experts such as Jonathan Ford and Will Hutton. While not a panacea, this step would contribute to more sensible financial models and increased accountability, which is essential if customers are expected to bear higher costs. Furthermore, it would provide the Labour Party with a stance on water, addressing the current policy silence that is undoubtedly embarrassing.
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