Ministers and industry leaders have warned that the crisis at Thames Water may deter foreign investment in the UK. The utility is seeking to raise at least PS1bn for its financial stability.
Conservative ministers claim that talk about a possible temporary nationalisation and concerns over the financial stability of water companies could lead to a “risk-premium” when investing in UK infrastructure.
As Thames Water prepares to meet with investors and regulators this week in order to secure the PS1bn investment,the industry’s watchdog has been criticized more.
One minister stated: “The people with questions are Ofwat.” There are serious concerns about the regulatory framework for the sector.
When politicians talk about nationalisation, a windfall-tax or a sudden jerk in the wheel of regulations, this pushes the risk premium up for the UK.
Thames Water, England’s largest privatised utility, struggles with £14bn in debt. It has not yet received a commitment from investors to invest more equity.
The group insists that there is no cash crunch right now and it had £4.4bn in liquid assets at the end March. Last week, ministers were forced to scrap plans to put failing water companies under a “special management regime”.
John Reynolds, CEO of Castle Water which provides water and sewer services to businesses in London and south-east warned that Thames Water’s problems would likely deter foreign investors.
He said that a special administration could have a negative impact on the cost and availability of finance for UK infrastructure.
Reynolds emphasized the billions in subsidies provided to infrastructure investors by US President Joe Biden’s Inflation Reduction Act. He said that it was becoming harder to decide whether or not to invest in Thames because the returns on infrastructure in the US were higher than those in the UK.
Thames asked its shareholders for £1.5bn last June but only received £500mn. Although the timing of the second PS1bn is yet to be determined, sources close to Thames say that up to £2.5bn or £3bn may be required over the next few year to fill in holes on the balance sheet as well as improve the sewage and leakage performances.
Investors have a divided opinion about investing in the company under a more strict regulatory environment.
Ofwat can now reduce dividends if a company is in financial distress or does not meet its environmental commitments.
Investors in the industry said that there was a desire to invest more capital, but at the moment, they felt the regulator, government and shareholders were not on the same page.
The regulator was also criticised for overseeing a system that allowed investors borrow against the assets of groups and extract dividends, while failing to invest enough in infrastructure. Since privatisation, the water companies have collectively accumulated £60bn of debt and paid out £72bn in dividends .
Ofwat stated that its new rules allow it to “better hold companies accountable and take enforcement actions when they make mistakes” in order to “stand up for the customers”.
Two people with ties to Thames Water confirmed that Sarah Bentley abruptly resignedas CEO last week due to disagreements with the board regarding the pace of the change. One person said that “the turnround plan requires shareholders to invest money and Sarah was a victim of this process.”
Thames Water has declined to comment.
Lord Andrew Tyrie (a Tory peer and the former chairperson of the Competition and Markets Authority) called for an extensive review of UK regulation, saying that some regulators were “captured” by vested interest.
Tyrie said on BBC’s Week in Westminster that “the regulators let the public down.” The poor quality of regulation is slowing growth. “It is a serious issue.”
The Observer published a report on Sunday that two-thirds (67%) of England’s largest water companies have executives who previously worked for the watchdog tasked to regulate them.
Cathryn Ross was appointed interim chief executive of the group, last week. She is the former CEO and director of Thames Water’s regulation.
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