| On average, water bills in England and Wales will be going up by £94 over the next five years. It’s a “bitter pill” caused by “14 years of failure” by the Conservatives according to the new chancellor, Rachel Reeves. Customers are being encouraged to look into their specific supplier as the range is quite large, with the highest rise for South East Water customers at £183. But the rises are not as high as the proposals Thames Water put to Ofwat. While this is a draft determination – there is still some haggling over the numbers to be done – it is an indication of what the final decision will be later this year. While concerns about Thames collapsing mount, there’s an important caveat, Anna says. This is the special administration regime (SAR) – not to be confused with the new move into special measures. This SAR acts as a backstop, effectively renationalising the company if it fails. This exists to make sure that people can still get basicutilities. “The water sector is regarded as an essential service, so there will be something in place to make sure that people by and large are able to get the water they need,” she says. Decades in the making Thames Water’s financial “slow burn crisis” has been decades in the making. To understand the background, Nils Pratley has helpfully gone back in time to the 1980s and mapped out why the water industry ended up in private hands in the first place and how it transformed the sector. Thames Water has been left with some of the most severe challenges facing the industry. The former owners of Thames, a consortium led by an Australian investment bank called Macquarie, carved the company up through complex corporate finance structures that included offshore entities. “They were able to extract a lot of money from the operating company because they were able to operate beyond the regulatory ringfence that was meant to keep the money in,” Anna says. Crucially, they did all of this within rules. “So, we should also be asking whether or not the rules were flawed,” she adds. During that period the company was saddled with debt, despite chronic underinvestment in infrastructure, to pay huge sums in dividends. In just over a decade debt rose from £3.4bn to £10.8bn. Earlier this year, Thames reported that it has £19bn of assets that are in “poor” or “failed condition” or are “no longer capable of reliably performing their function”. The cost cutting has come at the expense of the environment and consumers’ pockets. Here’s a particularly nauseating figure for Londoners: between 2020 and 2023 Thames Water pumped at least 72bn litres of sewage into the River Thames. In just six days last December sewage was dumped across the Thames Water network for more than 128 hours, which is equivalent to 18 hours every day. The company has been hit with £35.7m in fines between 2017 and 2023 by the Environment Agency. In June, Ofwat warned that it faced a fine of over £40m for allowing a £37.5m dividend to be paid to its owners last year. What are special measures? The heavily indebted water supplier has been placed in special measures, on a turnaround oversight regime. Under this scheme, Thames is going to face increased scrutiny from Ofwat over its finances and the way the company is run. It has been told that it needs to reduce sewage spills by 64%, supply interruptions by two-thirds and leaks by 19%. The purpose of this intervention goes beyond the financial situation, Anna says. “The regulator is also scrutinising how Thames’s operations are working on a day to day level, so it’s a turnaround plan, as well as an investment plan.” The measures will remain in place until Thames can prove that it is in an acceptable financial position. There could be conditions to exiting the regime: the amount of debt it can take on could be limited; it may have to restructure and separate the business; it could face some form of nationalisation; or it could be listed on the stock exchange to secure extra equity. Nothing changes immediately because of this intervention. Thames has enough money to run until the middle of next year and the special measures are meant to help get it back on track, “but ultimately, it’s about whether or not private investors want to put money in the medium term and that reality has not changed”. Are other water companies in trouble? Thames is in a unique situation as the depth of its financial hole is extreme, even when compared with other water companies. While others like Southern Water are not in the best financial positions either, the problems they face are not as severe nor would the fallout be as bad if they were to be in trouble because they are smaller than Thames. “And now that Ofwat has said they can raise bills by quite a large amount in some cases, it makes them relatively attractive for some investors,” Anna says. What will it take for Thames to get better? Anna says there is a “holy trinity” that Thames Water needs to eventually get back on track: confidence, time and money. “Outsiders’ confidence in its management, as well as the time and money needed to upgrade its infrastructure.” There is no quick fix for the company’s dire financial straits. It requires a long-term effort and the right combination of investments, management change, and a turnaround business plan. “The sheer scale of the infrastructure that Thames oversees can’t be upgraded in the short term,” she says. “It takes decades to meaningfully change infrastructure of the scale we’re talking about here.” | 