Thames Water wants to avoid having to pay billions of pounds in taxpayer bailouts. It is lobbying government officials and the industry regulator Ofwat for permission to increase its bills, pay dividends, and lower fines.
The government’s Special Administration Regime could lead to the takeover of Britain’s biggest water monopoly, leaving taxpayers on the hook. It would also undermine the confidence in the privatised industry.
The government updated its water legislation last week, which industry experts interpreted as a sign that a possible collapse was imminent.
The Department for the Environment, Food and Rural Affairs has made contingency planning for Thames Water failure. They have dubbed these plans “Project Timber”, because the collapse would have far-reaching effects.
Ofwat is expected to allow For “regulatory relief” such as reduced penalties, which could ease the financial burden on the company. One senior government official said, “The collapse Thames is the last we want.”
It has already received £500mn from investors in the form of a loan to parent company Kemble Water. Investors have already given £500mn in as a loan for Kemble Water’s parent company. Equity holders say they are willing to invest another £3.25bn if Ofwat gives them the results they desire.
The investment will be backed up by a 40% increase in the customer bill by 2030, and a leniency with regulatory fines.
A person who is close to Thames Water said that the company was “like a room that’s flooded with just an inch of air on top”. He added that “the shareholders would be irrational if they didn’t get concessions” to invest any equity.
Two people familiar with the talks between Defra and Ofwat, as well as the company, said that Thames Water chairman Sir Adrian Montague “failed” to get all he wanted in the earlier this month. This contributed to his decision 10 days ago to step down from the chair of Kemble.
The person who said this stated that “they came out of the meetings with no deal and concern that the company wouldn’t survive”
In a few weeks, Ofwat will decide whether or not to fine Thames over the £37.5mn dividend it paid to Kemble in October.
Kemble, a company set up by Thames Water to raise funds, requires the dividends in order to service its debt, but new rules implemented last year prevent water utilities with bad financial records from paying out.
Thames Water claims that it will not allow investors to withdraw any money until the company has achieved a turnaround, but Ofwat does not make a distinction between internal and external dividends.
The decision to reject the dividends may trigger an administrative process by Kemble. This could have a cascading effect on Thames Water, as the group would become more uncertain about its ability to pay back its debts. Further financing could be unaffordable, or even impossible. Experts said that this could require government involvement.
Ofwat insists Thames Water is “ringfenced”, and will not necessarily follow Kemble in administration.
Thames’ nine investors, including the Canadian pension fund Omers and the UK’s University Pension Fund Scheme USS, as well as the Abu Dhabi and Chinese sovereign funds, could face substantial losses that would trigger a number of legal claims.
A partner in a law office who was advising an investor said: “Thames Water depends on Kemble to raise additional money from investors to deliver their business plan. If Kemble defaults, it will raise serious doubts about future fundraising and its viability. Ofwat may step in to stabilize the situation.”
Lawyers said that it is “hard to imagine” a scenario where a funding line wasn’t in place.
Kemble Water and Thames Water declined comment. Ofwat stated that “it is up to the company to gain shareholder support to improve its financial stability”.
The government stated: “We are prepared for all scenarios in our regulated industries, including water. This is what any responsible government does.”