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Thames Water's business is simple even if its financial structure is very complex. Remember, this is the first half of a fair solution for the future of struggling utilities. The second involves more difficult and political issues. If both halves are played skillfully, the company's current problems represent an opportunity to demonstrate that the British authorities are playing by the rules, enhancing the safety and attractiveness of investment in the UK.
Despite all the talk of complexity, the business structures of private water companies are straightforward. The private owners of these facilities are entitled to stable income streams from customers, with rates set periodically by regulators. In return, they must meet the conditions of their licences, provide safe drinking water and ensure that wastewater is treated according to standards agreed with regulators.
Higher profits come from effective management, avoidance of pollution fines, efficient collection of invoices, diligent management of installed capital and efficient investment in new assets. Every five years the regulator sets prices to ensure that a well-managed company will achieve a reasonable return on equity.
If owners want to burden their companies with debt (and they do), equity and debt holders should know that they are getting higher potential returns at the expense of greater risk. These are decisions that the private sector is well placed to make.
In the current regulatory period, which ends next April, risks have dominated. The huge debt burden on the Thames combined with high interest rates, high inflation, mismanagement and fines for breaching licensing conditions seemed to be pushing the company to the brink. Its parent company, Kimball Water Finance, defaulted this month on its debts.
These issues are simple in capitalism. The owners and managers have gotten things wrong. They deserve to pay for these all-too-known risks that Teams agreed to take when it accepted the latest license terms in 2019.
Owners must now have a choice offered to them by regulators: provide enough money to repair the financial damage to their company and create a viable entity, or accept that it is bankrupt and must be placed in a special management system designed for these circumstances. . Equity holders will likely be eliminated, with debt holders discounted as well. And then there will still be a viable company. The assets, especially the right to enforce and enforce water bills, are of great value.
Veiled threats that the administration's regime will set a terrible precedent that will kill the entire industry and destroy the UK's reputation are completely misplaced. Using it would demonstrate that the UK was adhering to the rules, and foreign investors could be sure that if they accurately assessed the value of the company and managed it well, they could make a decent return. If they don't, they will bear the risk.
This way investors can evaluate projects with the certainty that they also do not have to invest in capabilities such as concluding arcane deals with regulators and pliable ministers. These principles must be applied to deal with the past sins of Thames Water.
The future is more complex. Negotiations on price controls over the next five years are underway between the water industry and regulators. It is clear what the general mood is: we want our rivers to be cleaner in the future. What is less clear is whether we realize that we will need to pay greater costs for water investment with higher bills.
It is a myth that private water companies do not want to invest. If regulators allow them to do so, this is one way to increase their financial returns, as long as they do not wreak havoc on capital spending. In recent years, private water companies have required more investment than regulators allow. It happened in 2019 and it's happening again now.
The real reason for public concern is that the regulator or ministers may try to sweep the sins of the past under a huge rug called the “new regulatory period”, which in effect leads to clients offering a bailout to private companies for their mistakes in 2020 to 2020. 2025 period. It seems The Times wants such a solution. Catering to the demands of the company would be the worst form of crony capitalism.
It is therefore important for organizers to demonstrate a strict separation between the past and the future. Private water companies have to accept losses for the risks they have knowingly taken. If they did, regulators could then make justifications for raising bills to reduce pollution in rivers.
This is a major test for British capitalism. Get Thames Water right and the case for private ownership of public utilities will be strengthened. Any attempt to bail out private investors for their mistakes with clients' money would create an even greater stench than already exists.
Chris. giles@ft.com
