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Thames Water

FT reports that water companies will need to stop paying divis to shareholders for the next 25 years and will require £13bn+ in additional cash to stand a chance of staying afloat.

Water companies in England and Wales paid £2.5bn in dividends and added £8.2bn to their net debt in the two financial years since 2021, according to research by the Financial Times.

“Thames Water is a canary in a gold mine,” said one water company investor. “You’ve got the biggest water company teetering on the brink and we are all watching. It’s all the investors are talking about.” South East Water, SES Water and Southern Water are all under close watch by regulator Ofwat over their financial stability.

Peter Hope, head of regulatory finance at Oxera Consulting, said water companies will need to change how they run their finances in the next few years, given the step change in investment that is expected. “In broad terms, the industry will have to go from a situation of not having retained any earnings since privatisation, to having to retain for the next 25 years almost all of the earnings.”

In addition they will have to inject £5bn equity by 2030, and £8bn in the five-year period following, according to his calculations based on the 55 per cent gearing ratio assumed in Ofwat’s modelling. “Even this does not take into account the need for future increases to replace aged assets and deal with resilience and climate change,” he added.

Water companies pay £2.5bn in dividends in two years as debt climbs by £8.2bn

In 32 years since privatisation £78bn has been paid out of utilities
www.ft.com www.ft.com
 
The problem was, and still is, applying capitalist thinking and motivation to a monopoly. When this failing was first aired there were still some old school thinkers who were suggesting that to help Thames Water their debt should be nationalised and the company could start again with a clean slate. So the tax payer could pay yet again .
 
Privatisation only works when it introduces completion. Water, Royal Mail and Railways were doomed to fail from day number because the consumer cannot go elsewhere. The only incentive to buy shares was pure greed, or as Ted Heath once said, - the unacceptable face of capitalism.

The answer is to make sure that investors will only shares in privatisations where it gives choice to the end user and drives prices down.

The best way to do this is to renationalise without any form of compensation or at best, return the original share price less any dividends paid.. I have no sympathy for anyone who bought into these shares.
 
What I have suggested would have been supported by many Tories. Some privatisations made sense, some were totally uncalled for.
 
Mick P said:
Privatisation only works when it introduces completion. Water, Royal Mail and Railways were doomed to fail from day number because the consumer cannot go elsewhere. The only incentive to buy shares was pure greed, or as Ted Heath once said, - the unacceptable face of capitalism.

The answer is to make sure that investors will only shares in privatisations where it gives choice to the end user and drives prices down.

The best way to do this is to renationalise without any form of compensation or at best, return the original share price less any dividends paid.. I have no sympathy for anyone who bought into these shares.
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Mick, I share your moral distaste. But, putting aside the legality of what you are arguing, the argument that share owners only deserve recompense if their investments are morally sound opens a chink of light into what many on the left see as the problems of Capitalism.

There's a good, long article in the London Review of Books that sets this out better than I will here, but the core of the argument runs like this. Most people agree that free markets are a good thing. Person A trades with Person B. Win-Win. But Capitalism is a layer that operates above free markets. Capitalism is about extracting rent. It doesn't care how - it will use law to create the conditions, or it will use power to coerce others - the only imperative is that a capitalist's money is able to make more money, preferably through monopoly where the rents are highest.

So, when you talk about 'the unacceptable face of capitalism', in this analysis you just are talking about capitalism. Free markets are a level below this.

And your defence of other privatisations can also be seen in this light. The goal in such privatisations is, via regulation and market design, to bring free market principles to things that would otherwise be monopolies. This can work to an extent, competition drives down prices, as you say. But the article says that this very attempt to instil market mechanisms also brings down the scope of rent extraction, which paradoxically makes the companies less investable. The article discusses electricity, where green investment is only happening where it is state-subsidised. Investors run a mile from uncertainty and/or low returns; they are looking to maximise returns. Hence, rather than achieving a free market, you end up with a state-supported market. Investment is always supplied or guaranteed by the state. And there is no reason why the state should remunerate capital in this way. So, depending on circumstances, perhaps even privatisations where competition is introduced are doomed to fail. Worth reading.
 
laughingboy said:
Mick, I share your moral distaste. But, putting aside the legality of what you are arguing, the argument that share owners only deserve recompense if their investments are morally sound opens a chink of light into what many on the left see as the problems of Capitalism.

There's a good, long article in the London Review of Books that sets this out better than I will here, but the core of the argument runs like this. Most people agree that free markets are a good thing. Person A trades with Person B. Win-Win. But Capitalism is a layer that operates above free markets. Capitalism is about extracting rent. It doesn't care how - it will use law to create the conditions, or it will use power to coerce others - the only imperative is that a capitalist's money is able to make more money, preferably through monopoly where the rents are highest.

So, when you talk about 'the unacceptable face of capitalism', in this analysis you just are talking about capitalism. Free markets are a level below this.

And your defence of other privatisations can also be seen in this light. The goal in such privatisations is, via regulation and market design, to bring free market principles to things that would otherwise be monopolies. This can work to an extent, competition drives down prices, as you say. But the article says that this very attempt to instil market mechanisms also brings down the scope of rent extraction, which paradoxically makes the companies less investable. The article discusses electricity, where green investment is only happening where it is state-subsidised. Investors run a mile from uncertainty and/or low returns; they are looking to maximise returns. Hence, rather than achieving a free market, you end up with a state-supported market. Investment is always supplied or guaranteed by the state. And there is no reason why the state should remunerate capital in this way. So, depending on circumstances, perhaps even privatisations where competition is introduced are doomed to fail. Worth reading.
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It's relatively simple, Thatcher stated that privatisation's serve two main purposes, free up the market to competition and get money into HMG coffers.

Privatising Water simply replaced a state owned monopoly with a private one. The same applied to Royal Mail and Rail companies.
 
Mick P said:
It's relatively simple, Thatcher stated that privatisation's serve two main purposes, free up the market to competition and get money into HMG coffers.

Privatising Water simply replaced a state owned monopoly with a private one.
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Yes, Thatcher privatised water in 1989, having previously proposed it in 1984 and 1986. I think we agree that Thatcher was wrong on water.

I wonder if you are open to considering that she was wrong on Electricity too? She introduced the privatising Electricity Act 1989, which included provisions about renewable energy (in a section headed 'Protection of public interest'). These arrangements changed in 2000 (wiki) and again in 2013 (wiki), introducing the Contracts for Difference (CfD) scheme. The 2013 Energy Act also proposed new nuclear (none yet delivered) and delayed the implementation of the Climate Change Act 2008 (wiki). Can we agree that, in this light, privatisation, or the form that it took, has played a role in the fact that we have no new nuclear since Sizewell B, whose construction started in 1988?

Or can we agree that the speed of our transition to renewables (given no new nuclear) would have been quicker if privatisation had not taken place?

Or can we agree that, when the government has to make ongoing investments/subsidies in renewables such as
electricity privatisation, as Thatcher envisaged it, has failed?
 
laughingboy said:
Yes, Thatcher privatised water in 1989, having previously proposed it in 1984 and 1986. I think we agree that Thatcher was wrong on water.

I wonder if you are open to considering that she was wrong on Electricity too? She introduced the privatising Electricity Act 1989, which included provisions about renewable energy (in a section headed 'Protection of public interest'). These arrangements changed in 2000 (wiki) and again in 2013 (wiki), introducing the Contracts for Difference (CfD) scheme. The 2013 Energy Act also proposed new nuclear (none yet delivered) and delayed the implementation of the Climate Change Act 2008 (wiki). Can we agree that, in this light, privatisation, or the form that it took, has played a role in the fact that we have no new nuclear since Sizewell B, whose construction started in 1988?

Or can we agree that the speed of our transition to renewables (given no new nuclear) would have been quicker if privatisation had not taken place?

Or can we agree that, when the government has to make ongoing investments/subsidies in renewables such as
electricity privatisation, as Thatcher envisaged it, has failed?
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When electricity supply was privatised, the customer could chose their supplier and electricity prices fell sharply as a result. So yes that was a good privatisation.

The decision on nuclear froze progress and renewable energy was the only solution to proceed.
 
Mick P said:
When electricity supply was privatised, the customer could chose their supplier and electricity prices fell sharply as a result. So yes that was a good privatisation.

The decision on nuclear froze progress and renewable energy was the only solution to proceed.
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I'l try one last time. In the UK electricity market, the state is currently paying companies, in the form of subsidies, in order to guarantee shareholders' returns. The 1989 Act's 'protection of the public interest' seems to have morphed into welfare for the rich. Is there any justification for the state to use its money like this?
 
laughingboy said:
I'l try one last time. In the UK electricity market, the state is currently paying companies, in the form of subsidies, in order to guarantee shareholders' returns. The 1989 Act's 'protection of the public interest' seems to have morphed into welfare for the rich. Is there any justification for the state to use its money like this?
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I retired from energy procurement in 2010 and have lost touch. I will not comment on government procurement issues because I am not 100% up on the details which in the case of renewables can be complex and at that time had to be approved by EU law and directives.
 
Mick P said:
When electricity supply was privatised, the customer could chose their supplier and electricity prices fell sharply as a result. So yes that was a good privatisation.
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Electricity prices may have fallen, but if taxes rise to cover increased government subsidies/ expenditure, or if austerity is prolonged to pay down government borrowing that in part went to that, then I suspect customers have ended up no better off. You can’t apply a simplistic measure like the cost of bills, when measuring success or failure. You also have to take a longer view. That’s government’s job.
 
Sue Pertwee-Tyr said:
Electricity prices may have fallen, but if taxes rise to cover increased government subsidies/ expenditure, or if austerity is prolonged to pay down government borrowing that in part went to that, then I suspect customers have ended up no better off. You can’t apply a simplistic measure like the cost of bills, when measuring success or failure. You also have to take a longer view. That’s government’s job.
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I was involved with energy supply for nearly 20 years and prices did dramatically drop and the proof was that the UK was no longer paying the highest prices in the EU. Even today our prices are such that we export electricity to the EU. My electricity costs in Spain are way higher than the UK.

The GEBN played a lot of dirty tricks such as delaying repair to pylons and utility poles etc and the new companies had to clear years of back log which they did. The infra structure is definitely improving under the big six.
 
Mick P said:
Sit down and think about it.
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I have. Seems to me that if they collapse, then revenue isn’t covering outgoings. Which might mean that charges are too low (in which case that undermines your argument that lower prices are a good thing), or outgoings are too high. Which might be, like the water companies, high borrowings and high dividends. Or maybe a poor business model and insufficient resilience to cover market shocks.

Whatever the reason, it does undermine the premise that the private sector is better at, you know, running stuff.
 
Sue Pertwee-Tyr said:
I have. Seems to me that if they collapse, then revenue isn’t covering outgoings. Which might mean that charges are too low (in which case that undermines your argument that lower prices are a good thing), or outgoings are too high. Which might be, like the water companies, high borrowings and high dividends. Or maybe a poor business model and insufficient resilience to cover market shocks.

Whatever the reason, it does undermine the premise that the private sector is better at, you know, running stuff.
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Labour is almost certainly going to win the next election with a comfortable majority. You will no doubt be pushing for renationalising everything whether the privatisation works or not.

Yes I agree with the renationalisation of Water, Royal Mail and the Rail structure. However Telecoms, gas and electricity have, in the main worked well, so if it ain't broke, don't fix it.

Also all of these industries are accountable to their various controlling non-ministerial government departments and an independent National Regulatory Authorities such as OFGEM, so the HMG still has influence.

This discussion seems to be dogma over pragmatics.

Interesting as this is, I am going to bow out for today as I about to leave home for the day.
 
Although not without its issues, Welsh Water could provide one potential way forward for Thames Water. Is anyone a customer?
 
From The Guardian:
Two possibilities can probably be ruled out. The chances of the Kemble crew – the Thames shareholders led by Omers and USS – changing their mind about investing £3bn-plus is zero or close-to-zero. The gap with Ofwat’s expectations for a five-year business plan sounds unbridgeable. Equally, a full-blown nationalisation of Thames looks highly unlikely in the short term because there’s no appetite for it in government or at the top of the Labour party.

So, in practice, we’re probably talking about a financially reconstructed Thames in which the current shareholders are wiped out. [...]

So the endgame for Thames looks to be some form of debt-for-equity swap, either enforced through the “special administration” regime for failing water companies or undertaken voluntarily. The bond market is limbering up.
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It would seem that the important thing in any future version of Thames Water is not to disturb the right of investors to secure safe returns.
...if Ofwat (under an obligation to ensure companies can attract capital, remember) leaves a few financial carrots for future owners, new shareholders might arrive once there’s room to breathe on borrowing.
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As the sentence above shows, the current regulatory structure has to serve two masters. In theory, it should put UK citizens first, but in practice it has a duty to ensure that these companies can attract capital (i.e. produce non-risky, non-marginal returns). One way or another, in the event of failure, investors are subsidised - you end up with welfare for the rich. To illustrate how this works, see this quote in a story from Yahoo/Bloomberg, which shows that Ofwat might be tempted to protect bondholders, so as to reduce risk to investors across the market:
“If the authorities haircut bonds inside the ring-fenced structure of Thames Water, that’s going to create a lot of worries for even better performing water companies,” said Gordon Shannon, portfolio manager at Twenty Four Asset Management. “This would push up issuance costs and ultimately water bills across the nation.”
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As a regulator, you can't just wipe out shareholders/bondholders: you have to protect investors or they won't invest and bills will rise. Let's ignore the fact that nation states a) can borrow at lower rates than commercial investors and b) don't expect the same rates of return.

But protecting investor returns is the purpose of public utilities, right? I mean, it couldn't be the provision of service in the public interest. That would be ideology or dogma.
 
Kirk said:
Although not without its issues, Welsh Water could provide one potential way forward for Thames Water. Is anyone a customer?
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I'm a Dwr Cymru/Welsh Water customer.
I'm not a massive fan, but am happier it's not stuffing shareholders pockets rather than stuffing its customers, like English companies.
I had an issue some years ago that was only resolved by emailing the MD direct - the lower echelons of DC, and NRW were useless, for several years. Two days after the email there were operatives in our lane, a few weeks later they chucked over a million at a sewage works for some of the houses on our lane. Not our house...
Still, at least the field next to us was no longer awash with raw sewage.
 
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