March 22, 2023

Thames Water business model under scrutiny after sewage fine

By: Gill Plimmer and Javier Espinoza From Financial Times

Former regulator blames investor boards for putting profits above customers

Thames Water’s ownership structure came under scrutiny on Thursday after it received a record £20m fine for dumping 1.4bn litres of raw sewage into the river Thames.

Ian Byatt, who was head of regulator Ofwat for the first 11 years after the water industry was privatised in 1989, said one of the big problems is water companies’ “complicated corporate structures”.

“The boards are largely composed of investors, so the prime issue is how much money are we getting, not how can we best provide a service for customers”, he said.

Since December 2006, Thames Water has been owned by Kemble Water Holdings. Investors include pension funds and sovereign wealth funds, such as the Abu Dhabi Investment Authority and the China Investment Corporation, and since last week — when Australian infrastructure bank Macquarie sold its final stake in Thames Water for £1.35bn — the Canadian pension fund Omers, and the Kuwait Investment Authority.

There is also another subsidiary called Thames Water Utilities Cayman Finance, registered in the Cayman Islands, which was set up in 2007.

Dividends investors have taken out Thames Water since 2006
Between Thames Water and Kemble, there are up to ten intermediary companies “whose rationale and roles are hard to determine,” according to Martin Blaiklock, a former director of power and energy utilities at the European Bank for Reconstruction and Development and a persistent critic of Thames Water.

This is an “unsuitable structure” for a UK utility delivering a monopoly service to customers, he said.

Thames Water said it was an “entirely appropriate structure for a business like ours and not uncommon amongst utilities”.

Sir Ian wants tougher corporate governance by Ofwat, which has been criticised by the National Audit Office and MPs for allowing water companies to make excessive profits at the expense of consumers.

Matt Prescott, from the Environmental Rating Agency consultancy, said: “Investors, regulators and customers should be extremely concerned that despite receiving such a predictable income from bill payers Thames Water has caused such serious pollution to our rivers.”

Thames Water has been owned by Kemble since 2006, when it was sold off by German utility group RWE.

Macquarie led the Kemble consortium in a £5.1bn deal — £2.3bn of cash with the rest in third party debt. Kemble then issued new Thames Water bonds via their Cayman Islands subsidiary to repay the third party debt they had used to buy Thames.

Water watchdog taken to task over sector’s excessive profits
Ofwat heavily criticised by MPs for failing to protect consumers’ interests

Since the 2006 takeover, investors have taken out at least £1.16bn in dividends, while net debt has risen from £3.2bn to £10.3bn. In 2015-16, Thames Water made an operating profit of £742m and paid £82m in dividends.

Thames Water says it has been investing about £1bn a year in the past decade, fixing leaks and repairing tunnels. This has also generated tax breaks, reducing its corporation tax bill during the period.

When the company was pressed in 2012 by the EU and the UK government to build a new £4.1bn sewer under the Thames, it said it had too much debt and was forced to turn to the government for help.

New legislation was agreed in 2013 to finance the project without putting it on either the government or Thames Water’s balance sheet. About one-third of the cost of construction will be funded by Thames Water. The rest will be met by a team of investors called the Bazalgette consortium, which includes the German insurer Allianz, Swiss Life Capital and Dalmore Capital.

They will own, manage and finance the project during construction, and supply sewerage services to Thames Water on a 125-year concession.

Unusually for a construction project, the investors will receive an income from the first day, paid for by Thames Water’s 15m customers.

Meanwhile, the construction risks, including cost overruns, accidents or any other incidents at the project’s 42 sites, as well as any financial risks — such as another global collapse in credit — will be borne by taxpayers because the government is acting as a guarantor on the scheme.

Copyright The Financial Times Limited 2017. All rights reserved.

IMAGE: Sewage foam collects around boats at Bourne End, Buckinghamshire, after the spill © PA

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