Thames Water on road to state rescue amid investor standoff with Ofwat

Thames Water appears to be on the road to nationalisation after its investors signalled they were unwilling to pump more money into the debt-laden utilities company, amid a standoff with the regulator and the government over raising customers’ bills.

Britain’s biggest water supplier said on Thursday its shareholders had refused to provide £500m of emergency funding due this week to secure the company’s short-term cashflow.

Thames, which has £18bn of debts, could be plunged into a government-handled administration that would see the company temporarily renationalised if it cannot secure fresh funding from new or existing sources.

It has been lobbying the industry regulator Ofwat to increase bills by 40%, pay lower fines for breaches including sewage dumping and to be allowed to pay out dividends. The watchdog has been examining the supplier’s business plan for 2025-2030, and Thames said Ofwat’s initial assessments made the company “uninvestible” for shareholders.

However, in words understood to reflect the view in Downing Street, the communities secretary, Michael Gove, described the leadership of Thames as a “disgrace” and said they should not pass on the cost to households in the form of higher bills.

Gove said the company had acted in an “arrogant way towards the consumers who pay their bills”, adding: “I think for years now we have seen customers of Thames Water taken advantage of by successive management teams that have been taking out profits and not investing as they should have been.”

The government has assembled a team, under the banner of Project Timber, to draw up contingency plans to rescue Thames. However, industry opinion is split on how grave the utility company’s financial situation is. The GMB union, which represents many Thames workers, accused the company’s shareholders of “essentially blackmailing” customers and Ofwat to accept its demands.

A senior industry source said Thames’s announcement was “a deliberate attempt to get Ofwat to buckle”.

Chris Weston, the chief executive of Thames Water, said on Thursday that a potential administration was a “long way off” but did not rule out the possibility. Weston said the company had £2.4bn of funds it could draw on, which would last until May or June next year. “There is a chance that somewhere down the stream you might get to a specific special administration outcome but there’s a lot of water to go under the bridge,” he said.

Weston said there were various methods of raising funds. “So there’s a huge amount that has to happen before you can even begin to conclude that [administration] is the case,” he said, adding that the company would continue to serve its 16 million customers across London and the Thames valley as usual.

Ofwat is due to give its first public view on private water firms’ business plans in June, at which point Thames is expected to attempt to secure extra equity from new and existing shareholders. A final decision will be made in December, but Weston indicated the company may challenge it through the competition regulator.

The funding crisis for Thames comes after data revealed on Wednesday that raw sewage was discharged for more than 3.6m hours into rivers and seas across England last year. Thames oversaw a 163% increase in the duration of sewage dumping into rivers as its creaking infrastructure failed to cope with rainfall levels.

The company is also at the centre of a major investigation by Ofwat into sewage dumping from its treatment works, which could lead to large financial penalties.

Thames had agreed £750m of funding in July last year, with the first payment of £500m expected to be made this Sunday, contingent on Ofwat’s decisions. Investors believe the watchdog has so far been too stringent.

Weston said Ofwat was examining Thames’s five-year plan “line by line” to decide how efficient the plan was and the extent to which the company could increase bills to cover the cost of repairs, investment and running costs.

Sources close to shareholders said they were willing to write off as much as their entire £5bn investment in Thames rather than pump in more funds. “It would be putting good money after bad,” said one. “It’s been a very poor investment.”

A statement on behalf of investors said: “After more than a year of negotiations with the regulator, Ofwat has not been prepared to provide the necessary regulatory support for a business plan which ultimately addresses the issues that Thames Water faces.

“As a result, shareholders are not in a position to provide further funding to Thames Water. Shareholders will work constructively with Thames Water, Ofwat and government on how to address the consequences of Ofwat’s decision.”

An Ofwat spokesperson said: “Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water. Today’s update from Thames Water means the company must now pursue all options to seek further equity for the business to turn around the performance of the company for customers.”

Thames customers’ annual bills will go up by £15 to £471 from next week and the company hopes to hike them a further 40% by 2030, or 56% when the forecast level of inflation is factored in.

Gary Carter, a GMB national officer, said: “Assets and infrastructure are falling apart. Instead of putting the money in to fix it, shareholders are refusing to pay a penny unless bills are allowed to rocket. Holding bill payers to ransom for costs after years of underinvestment is completely unacceptable.”

Separately on Thursday, Thames’s parent company, Kemble Water Finance, said it would be unable to repay a £190m debt that is due at the end of April.

Thames’s financial woes are likely to draw further attention to the stewardship of the company by Macquarie, the Australian bank that previously owned it and which has been criticised for building huge debts at the utility firm to pay dividends to shareholders.

The current backers of Thames Water include the large Canadian pensions firm Omers; the UK university staff pension scheme; China’s sovereign wealth fund and a subsidiary of the Abu Dhabi sovereign wealth fund.

Thames’s future could head in several directions, including a cash injection by investors; an administration caused by a cash crunch or enforced by regulators; a government-managed sale of the company, or a break-up into smaller companies.

Margaret Thatcher wrote off £5bn of the water industry’s debts when she privatised the sector in 1989. Since then, shareholders have received £56bn while the companies have been loaded with a collective £60.3bn debt pile, leaving customers paying almost 20p in every pound to service debts.

The shadow environment secretary, Steve Reed, said: “The Tories let Thames Water build up massive debts by borrowing to pay shareholders and bonuses. Consumers should not be left to foot the bill for Tory failure.”

The Liberal Democrat leader, Ed Davey, told the BBC: “It’s alright Michael Gove being cross, well where are the Conservatives in this? The Conservatives have failed to tackle this over all their time, and we really need now to get a grip of this.” The Lib Dems want Thames to be put into special administration immediately and reformed into a public benefit company.

A source at the Department for Environment, Food and Rural Affairs said that while the environment secretary, Steve Barclay, had noted Thames’s historical failings, he also recognised that the company’s new leadership was “trying to change things” and his department was engaging closely with them.

Additional reporting: Helena Horton and Jack Simpson