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If you think about the consequences that we've all been living with, it's such a unique story, isn't it. You've got on the one hand, it's about a company in distress, so far, so normal, but it's also about you know, we use its water. You've got the boat race the other day where the rowers were all some of them were real. They were told not to go in the water, which is very, very unusual. When I send my kids into the sea, I do wonder if they'll get sick.
And I remember being in government and saying to someone speed now two years ago, you know, would you swim and they said, I'd be very careful.
This is the thing.
You've kind of got the public side of it, which is sewage and leaks and people literally having sewage spills in their kitchens and being told it's because they put nappies in the toilet and they don't even have children.
And then you've got this.
Very very complicated financial structures and extremely complicated regulation because these are privatized monopolies.
From Bloomberg Studios in the heart of the square mile.
This is in the city.
Our weekly look at the conversations motivating powerbrokers, policymakers and financiers the world over. I'm alegra Stratton. Francine and Dave are both away on holiday this week. I'm not bitter, so I've instead asked my fellow associate editor and Readout author Alva Ray to make her podcast debut this morning. Alva, you were writing yesterday, what did you do in the read app?
I did?
Rachel Reeves in Lightintinhart. She's going to fund some of her manifesto pledges after Jeremy Hunt nicked there.
In Nondo holicy.
What's the answer.
I Cracking down on tax dodgers is the plan. Whether that will actually work is less certain, but they're hoping that they can squeeze an extra five billion by doing that.
But both of us have written about Thames Water. I think I did it last week. I can't remember all.
Me sinto one your pieces too.
So we're joined by Jess Shankleman, who is Pillenberg's guru on all things Thames Water. Jess, you were given the beat about six months ago when he came back from Matt leave, won't you Yes?
I came back from Matt leave and was told yeah, you know you're going to be covering Thames water now. But prior to that, I was doing a lot on climate, which I still do when I have a second And it was kind of a weird moment because I came back around August September and the crisis from last year.
There's Thames water crisis last year where they almost went into special administration was subsiding and I just thought it was really quiet, and Rachel Morrison, my boss, was saying, no, it's going to blow up again.
It's going to blowup again.
You didn't think it was a big assignment.
I was kind of like, Oh, I'm writing about rest what's going on with these reservoirs in Oxfordshire?
And they kept talking about debt and gearing and I was like, oh God, I don't know all this stuffed too.
And then I so sort of spent the last six months going to conferences and trying to embed myself in the water industry, which is very small and.
There's a lot of revolving doors.
Everyone's worked everywhere and just trying to work out what is going to happen with Thames. At the end of November, my colleague Phil Oldrich wrote story saying Kemball, which is a parent company of Thames, might run out of.
Run out of money, not run out of water and loan.
Behold they have So that was the key moment November four months ago.
Well it was there.
It was the end of their annual report which came late, and the auditors warned that there was a possibility they might run out of money in April, which is where we are.
So yes, give us, give us the sort of most relevant aspects of the story.
Yeah, so, I mean I just to go back a couple of days. That is what happened.
At the end of last week. Kemball effectively defaulted on its loans. So Kemball is the parent company of Thames Water. That doesn't mean that Thames is defaulted on its loans. Thames is still operating. We reported that Kemble's owners, that nine different shareholders of this company, which is basically an investment vehicle, begged Steve Barkley, the Environment Secretary, please step in and help with this process with the regulator. They're
not giving us what we want. And he came back and said nope, this is not for me to deal with.
So we.
Yeah, well, the government do not want to step in and have this on their hands. It's a massive depth pole that they have to deal with, if so.
And that's what our government team has really been reporting for the past few weeks that Richie Sunak just you know, wants to wash his hands off this. But until you reported that, you know, Steve Barkley formally rejected this plea for help. I suppose it was just vibes that we were reporting.
Yes, so the government has updated it's special administration legislation for water companies, so they did that at the beginning of this year, and basically having done that, they hope to be able to sit back and just let this
play out. If terms was brought into special administration, it kind of creates like a repackage off the shelf model that you can then break them up and sell them if you need to, whereas prior to that, it was all this kind of old nineteen nineties legislation that made everything very complicated.
So they've just got their ducks in a row.
But just let's just look at that for a second.
You said the government sort wants to let this play out, but what does that actually mean.
At the moment, we are in the middle of a crucial point in the regulation process.
Off what is the regulator.
Every five years, every single water company has to say, this is our five year business plan of what we're going to do, the investments we're going to make. So at the moment they are all trying to work out what they're going to do from twenty twenty five to twenty thirty. They put the business plans in at the end of last year, and off What spends a year
reviewing them. So this is really crucial at the moment because they're in negotiations and that's what's been happening between Thames and off What and it's become very politicized because spalled back to COVID people started swimming in rivers, they realized that they were swimming in poo. Water companies would
which is shocking. Yeah, water companies were told you have to make massive investments in stopping sewage bills and stopping leaks, and water companies were saying, but up until now we've been told that the main focus has been to keep bills low, which is still a focus, but you also have to now fix all the sewage bills and all the leaks, and Thames is appalling for sewage bills and it has the worst leaks of all the water companies.
The other thing that was happening was there was concerns about dividends and off what started cracking down on dividends, and Thames's whole business model is basically built on paying dividends to its parent company, and off what has stopped that, which means that its parent company now has no source of income.
So if we just go back to how this is going.
To play out, all of these negotiations that have been happening between Thames and off Whats so far have been behind the scenes, and what's been announced is based on conversations that we don't really know the details of. But in June, off what has to come out with its draft determinations on all the business plans. That's going to be the next sort of big moment for Thames. They have said, we're going to go back to our parent company at this stage and ask again, please you give
us the money we need. So they need about three billion out to the end of twenty thirty. But as it stands with Kemble defaulting on its loans, that's very unlikely. So then Chris West and the CEO said, well, we might go to the market, So what does that mean an IPO?
Which will you.
Know, A lot of people have laughed at the idea of that. Terms would probably do very badly in an IPO. But listed water companies perform much much better than all the other water companies that are run by private equity. There are so much more transparency and accountability, and you have kind of easier access to to shareholders and investors if you did it that way.
So that is a possible, That's.
Exactly I think that would be a good.
I really don't know. I was talking to dta Helm on Friday.
About an energy expert.
Yeah, and he thinks he thinks it's a good idea.
But other people I spoke to they just laughed in my face when I suggested it and said no, you know, like when when was the last time I was trying to think back to it. When was the last time we had a big sort of IPO, Like was it Royal Mail Company?
And yeah, Alva, how does that play out?
But people will always need water, which is why people have sort of pension funds invest in it in the first place. So maybe in the longer terme jest. Do you think that that that could work?
Yeah, I wonder whether it could be quite bumpy to start, but as you say, that's that's the whole reason that people invested in water in the first place. And Tames Water is too big to fail at the moment, it could get.
Broken up, and I think, I think it's I think it's.
Possible, and times have said yeah, all options are on the table at the moment.
Thames wanted to put up bills by forty percent. This is sort of where the latest crisis has come from. They had a five year plan to put up bills by forty percent to pay off some of the s debt, to invest in infrastructure. Can you take us through what has happened since and quite how dramatic things are at this point.
Tames has been asking off what for leeway on a couple of things, and from my reporting speaking to people on all sides of everything, there's a couple of things that Thames want and I think it's very natural for in this like extremely complicated environment for people to focus on bills. All the water companies want to want to put up bills, and Thames is looking to put up bills by forty percent by the end of twenty thirty. I think probably what's more significant is there's something called
the whack. So over the last six months I've been doing a lot.
Of learning about the whack.
Tell us about the wack jargon wa WA double C the weighted cost of capital, and that's kind of really crucial to all these negotiations. So that says like, this is how much it's going to cost Thames Water to dig up the road outside of Bloomberg HQ to fix that leaky pipe, and Thames is saying, look, you know, it's going to cost us one hundred pounds a day.
Obviously a lot more than that.
And of what is saying, well, you know, up in you know, another part of the country, it's costing seven only seventy pounds a day, so I don't see why it should cost you anymore. So Tames are saying, you know, effectively it's London waiting, right, it costs more to do stuff in London because there's skyscrapers and a lot of people. And off, what's not bending on that off, what's argument is this company has been financially engineered over the years.
It's failing on sewage it's failing on leakage, why should we give this company any leeway and off what is fighting for its life as well of what needs to prove that it's cracking down.
So just what are the other options? We've sort of hinted at it, But yeah, how likely is it that the government steps in? And what are the other options on the table?
So yeah, So as I think we we sort of reference earlier, the government wants this to play out. So I think this government does not want to step in. I mean, we've got an election in a couple of weeks time, mayoral elections in London and obviously Terms is the supplier of London water. Then we've got a general election coming up, and they do not want to make this an election about water. Anyone who takes ownership of Thames, I mean, as far as I know, no one would
buy Thames as it stands. But if say you decide to buy it for a pound, you would then have to invest three billion pounds in fixing chronic leak, sewage spills, terrible customer service, everything. So the government does not want to spend three billion pounds on sorting this out, particularly if you think about why they got into this mess. Is it really the responsibility of the taxpayer to fund that investment that should have been happening over the last decade or so?
Alva, what's the Labor perspective on all of this? Clearly recesting that Prime Minister and Steve Barkley are wanting the company to sort this out, but this is a central issue for a possible next government if Labor win the next election.
Yeah, I think so. I mean, especially because it looks as though the government are hoping that they will be able to wash their hands off this and ess as reported that Thames should have enough money to last until next year so they could just kick the cant on the road. Labor would have to potentially step in and bail terms out essentially, which they desperately don't want to do. I think they're not saying terribly much about it, even
off the record. I think that they are probably actually more aligned with the government on this than they would like to admit. If there are potential avenues for the government to never get involved, I think Labor would favor that, which is true.
I was talking to an investor who was saying, they're wondering the size of Labour's majority, because if they have a very large majority, Kirstama will be able to avoid special administration. But if they have a smaller majority, and you know, John McDonnell and some of the people on the hard left have been calling for nationalization, it would be harder for him to avoid that.
Jess you reported last week that OFF what has to make a decision about whether to find terms for some of this mismanagement, and my read of that was that that could be decisive and whether the government does need to step in sooner rather than later. What's happening with that fine?
Would it change things?
Yeah?
I think that has broader implications for the whole industry really, because the way that a lot of these businesses are structured is you've got the utility, which is regulated and ring fenced, paying dividends to the unregulated parent company to service the parent company's debt. And that is of what is not happy with OFF. What it's saying, particularly if you're a poorly performing company, you should not be paying dividends to service someone else's debt. All the money should
be going to fixing sewage spills and leaks. And Thames was basically just the test case because that rule was introduced around this time last year in Thames was the first one to announce that it had paid the dividends. My question is whether this could have a domino effect and when other companies start getting blocked from paying these dividends as well, their parent companies would also say that this structure is no longer sustainable.
Unless we're for all these big infrastructure upgrades that you can see across lots of different policy areas, private money will be needed. And is there a concern that the regulator may have gone too far the other way? And for private money around the world looking at the UK and thinking do I invest in its utilities?
Is that going to become too risky?
Yeah?
I mean I understand.
I've just been told from conversations with investors that the Treasury is quite worried about the signal this sends to investors globally. And I think the question is is Tames a bad apple. Is it just a very very badly run utility, or is this the UK saying we've got very complicated and difficult regulation and you shouldn't come here.
I think it's probably the former. I think Thames has just been.
A right old mess and off what is in a very very difficult situation politically. The investors have been very critical off what but if you push them they kind of admit that, like what else can they do? I think the noise around it makes this sector completely uninvestable at the moment, and that is something that really has to be tackled because there's so much negativity in the media and around the politics of it that no one in their right mind just want to go near it.
So we haven't formally heard from off what it makes of Thames's planned but we've had reporting that it doesn't support the current plans, and then shareholders have said that Thames is uninvestable they refuse to put the money in, and then last week the parent company defaulted on its debt. So it seems like this crisis has ratcheted up quite a few notches, yes, and.
Quite dramatically in the last two weeks.
Yeah, So what happens in the immediate term? What should we look for next?
Who's going to blink? I think is it a question? Is this a game of brinkmanship? And I think that's what a lot of people think. A lot of the newspapers are reporting that the parent company has said, like, we're not even waiting for off What's an official determination. We've had enough conversations with off What to know that this is not going to work. This plan is uninvestable, and therefore you deal with it.
We're done, so you know.
One option could be that one of the larger shareholders, say Omer's, which is the Canadian or USS, says Okay, we've put all this money into Thames already, we still haven't got a penny out. Why don't we just gamble again. We'll put the three billion in and we'll wipe out all the other investors and we'll take this on and eventually Thames will get turned around and we will make money.
I don't know if that is going to happen, because having had conversations with people around this, it seems quite terminal, and the fact that Kemball has defaulted on its loans suggests that they really have thrown in the towel.
Jess, thank you so much for coming in and explaining all of this to us. Is markey business, No worries anytime. I fear you'll be back quite soon.
Oh no, it's true. For the next year.
This is gonna This is a very slowly imploding company.
I think it's.
Thanks for listening to this week's In the City from Bloomberg. This episode was hosted by me alegra Stratton with Alva Ray, and it was produced by Somersadi additional editing by Blake Maple's Brendan Newnham is our executive producer. Sage Bauman is Head of Podcasts and special thanks to Jess Shankleman.
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