Thames Water | Private water company on the verge of collapse

Britain's largest water company is teetering on the brink. Shareholders and creditors are wrangling over a rescue plan after private equity fund KKR withdrew from its purchase of Thames Water last week. The likelihood that Thames Water could be nationalized—temporarily or permanently—is growing.

The private company, which supplies water and operates wastewater treatment for around 16 million people in London and the surrounding areas, has been struggling with growing problems for many years. At its core, these are blatant mismanagement at the expense of customers and the environment.

A look back. The English water system was privatized in 1989, and individual companies were granted monopolies in certain areas. In the decades that followed, they piled on billions of pounds in debt, paid generous dividends, but neglected the infrastructure.

High dividends, leaky pipelines

Thames Water is a particularly glaring case. Under the ownership of the Australian investment fund Macquarie from 2006 to 2017, the company paid out £2.8 billion in dividends. Debt tripled to £10.8 billion during this period. Far too little money was invested in maintaining the infrastructure, with foreseeable consequences: The pipes became leaky, causing more and more water to seep away, and due to a lack of investment in wastewater treatment plants, the company pumped increasing amounts of dirty water into rivers and lakes. When Sarah Bentley took over as chairman of Thames Water in 2020, she said the company had been "hollowed out by a combination of poor management decisions, aggressive cost-cutting, and decades of underinvestment."

Since then, Thames Water has sunk deeper and deeper into trouble. Given rising interest rates, its debt has become almost unsustainable over the past three years. Its current debt mountain stands at almost 20 billion pounds. Meanwhile, the company continues to pump tons of wastewater into the environment. At the end of May, Thames Water was fined almost 123 million pounds by the regulator Ofwat, the majority of which was for environmental pollution. Several dozen other investigations into Thames Water are ongoing. Despite such violations, Thames Water is demanding more money from its customers: In April, the company increased the price of water by 31 percent.

Brazen demand from creditors

At the same time, the company is trying to raise the necessary cash to avert insolvency. Recently, it had pinned its hopes on KKR: The US investment fund spent two months scrutinizing the company, and the owners expected it to buy Thames Water. But last week, KKR said: "No thanks." The fund is apparently afraid of political interference, and the situation is too complex, as the Financial Times reports.

So the current creditors have stepped in. On Tuesday, they proposed a cash injection of five billion pounds and a major debt restructuring. In return, however, they made a rather bold demand: Thames Water must be immune from criminal prosecution for environmental pollution. An industry insider told the Guardian that this was nothing less than a "blackmail note."

The possibility that Thames Water will collapse and require emergency nationalization is becoming increasingly likely, according to analysts. The technical term is Special Administration Regime. It is a type of insolvency administration in which the state temporarily assumes control of the company's operations. Thames Water could be restructured and sold to a new owner—or the company could be permanently transferred into state ownership. However, the government is resisting this. "Nationalization is not the answer," said Environment Minister Steve Reed last week.

Majority of the population in favor of state water supply

The government's primary concern is the cost. It says it would cost nearly 100 billion pounds if all ten English water companies were renationalized. However, this figure comes from a calculation that is disputed by many experts; Dieter Helm, a professor at the University of Oxford and a leading expert on infrastructure economics, calls the analysis "economic illiteracy." The rating agency Moody's also estimates the cost to be significantly lower, at 14.5 billion pounds.

Last week, the think tank Common Wealth published a study predicting even lower costs : practically nothing. The government must calculate the true value of companies, writes Ewan McGaughey, a law professor at King's College London. This means, for example, that the returns already paid to shareholders must be deducted from the market value. The environmental damage caused over the years must also be taken into account. Neither shareholders nor creditors need to be compensated by the state, McGaughey says. Accordingly, the government could take over a company like Thames Water practically for free.

Nationalizing the entire water system would meet with overwhelming public support. According to a survey last summer, 82 percent of the population would welcome a state-run water supply.

The creditors have promised a financial injection and in return have made a brazen demand.

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