Why is the Thames water in such trouble?

The government may have to take over Thames water if the money runs out.

But why is the UK’s largest water company in crisis – and are others facing similar problems?

When the company was privatized in 1989, it had no debts. But it has borrowed heavily over the years and is now £14 billion in debt.

A large proportion of that was added when Macquarie, an Australian infrastructure bank, owned Thames Water, and it was valued at more than £10bn when the company was sold in 2017.

Analysts say Thames Water’s current debt amounts to 80% of the company’s value, making it the most indebted to water companies in England and Wales.

And interest payments on more than half of Thames’ debt are rising along with inflation, which has been stubbornly high, helping to push the company over the brink.

Macquarie said it had invested billions of pounds in developing the Thames water and sewage infrastructure while it owned the company.

But critics argue that he has taken billions of pounds out of the company in loans and dividends – a share of the company’s profits paid to shareholders.

Thames Water said it had not paid a dividend to outside shareholders for the past five years.

However, dividends can also be used to move money between businesses that are ultimately owned by a single parent company.

Thames Water has paid out more than £200m of dividends to other companies within the group in the last five years.

Most of this money was then paid as interest to the outside investors who lent the group money.

Critics argue that the dividends were paid with money that could have been spent on improving Thames Water’s infrastructure and services. However, Thames Water is legally obligated to make debt interest payments.

The Thames Water troubles have certainly put the spotlight on an industry laden with debt. According to regulator Ofwat, the sector’s debt totaled £60.6 billion by March last year.

Of the 11 companies providing water and wastewater services in England and Wales, six are owned or controlled by foreign investors from countries such as Hong Kong, Canada and Malaysia. Like Thames Water, critics allege that overseas owners have loaded the water companies in debt and paid themselves handsome dividends at the expense of investment.

While the sector – like other industries – has been hurt by the rising costs of things like chemicals and energy, the main problem for water companies is that the interest they pay on their debt is linked to the Retail Price Index (RPI) to measure inflation. This is usually higher than the Consumer Price Index (CPI) measure of inflation. For example, CPI inflation in May was 11.3% compared to CPI inflation of 8.7%.

Ofwat estimates that half of water companies’ debt is related to inflation and the vast majority of that is related to RPI.

Meanwhile, Ofwat last December raised concerns about the financial resilience of five companies: Thames Water, Southern Water, Yorkshire Water, SES and Portsmouth.

Yorkshire, Southern, Portsmouth and SES all say they have taken steps to address Offatt’s concerns.

Thames Water is owned by a group of investors from four continents. The largest is the Canadian Pension Fund OMERS with 31.8%.

The second largest university pension scheme, at 19.7%, is a pension fund for UK academics.

Other investors include sovereign wealth funds from China and Abu Dhabi, which invest those countries’ assets on behalf of their respective governments.

The remainder is made up of three pension funds and two investment companies.

The entire water and waste sector was privatized 34 years ago under the late Margaret Thatcher’s Conservative government for £7.6 billion. At the time, Thatcher canceled the industry’s £5 billion debt, leaving companies with a clean slate and gave them £1.5 billion in public funds.

The government had wanted to privatize the industry in 1984, but public backlash against the plan led to it being shelved until after the general election three years later. At the time, the UK was under pressure from Europe to improve the purity of its water.

However, meeting European standards would cost billions of pounds in investment which it was hoped would come from the private sector, and therefore corporate clients.

“If we want to improve the environment, it will be expensive,” said Mrs. Thatcher in 1988. “It will be the people who want these improvements in the water who pay.”

Former Labor MP Ann Taylor later said of the privatization of the water industry: “The message is always the same – maximizing cost to the consumer to ensure maximum return for the investor. We shouldn’t be surprised by that. After all, that’s what private investors expect from their companies.”