The Thames Water deal is a sticking plaster disaster
19 February 2025, 08:41
Sir Keir Starmer’s disdain for short-term fixes to chronic problems has been a leitmotif throughout almost every major speech he has delivered, both in opposition and government.
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In fact, dispensing of what he calls “sticking plaster politics” is one of the prime minister’s most enduring objectives.
It is an admirable sentiment. It is set to be tested to destruction, though, by one of the UK’s most strategically important companies - Thames Water.
On Tuesday, the High Court approved a £3bn emergency package for the beleaguered water company, a recapitalisation plan loaded with crippling interest rates and consultancy costs which are likely to hit £800m.
Such punishing terms could, perhaps, be tolerated if it amounted to a permanent settlement of Thames Water’s financial woes. The reality is, though, it doesn’t touch the sides.
At best, the deal provides Thames Water with liquidity until May 2026. The company’s top brass argue the loan provides the temporary cash flow to attract the magnitude of investment needed to sort out its mountainous pile of debt, which now stands at £19bn.
But, as someone with knowledge of their financial position put it to me recently, who in their right mind would look at this company as an attractive investment?
In January, one of the most influential credit rating agencies - Moody’s - downgraded the status of Thames Water’s debt to “Caa3”. This, to many, is impenetrable financial jargon. Put simply, it means this: Thames Water’s debt is junk debt.
Dizzying debt levels are far from Thames Water’s only issue.
The company’s environmental record, along with the rest of the water industry, has been pilloried in recent years.
Having already been rapped by the Mayor of London for allowing a five-fold rise in pollution incidents in the capital’s rivers in 2023, in December it was revealed that Thames Water’s sewage spills had soared by a further 40%.
In fact, arguably, the only thing leakier than the company’s coffers has been its infrastructure. Over 570bn litres of water were lost a day as a result of their pipe leaks; no wonder London is number nine on the list of global cities most likely to run out of drinking water.
Public sentiment has also soured. Though Thames Water has submitted a request to the Competition and Markets Authority to allow it to inflate prices beyond the 35% permitted by the regulator, Ofwat, a decision in their favour will likely be met with public fury.
The government is therefore likely to be put in an extraordinarily difficult position in the coming months. With the prospect of extra financial recourse from investors questionable at best, it is going to have a choice to make: permit even more dramatic increases in customer bills or take the step to bring the company into special administration.
The Treasury has, quite understandably, baulked at this suggestion so far. Yet the idea of taking Thames Water into temporary nationalisation is gaining traction by the day. The publication of a review of the water industry’s financial health and structure, carried out by the Bank of England’s Sir Jon Cunliffe is likely to be critical to determining its future.
What is certain, however, is that without additional financing, this £3bn bailout could prove to be nothing more than a sticking plaster that has lost all its adhesive.
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