Thames Water is first key test of Burnhamomics
BREAKINGVIEWS-Thames Water is first key test of Burnhamomics The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, June 26 (Reuters Breakingviews) - Andy Burnham’s rise to power will be a pivotal moment for Thames Water, and the sector more widely. The former mayor of Manchester, and likely next UK prime minister, has supported nationalisation. That would be tricky, but it might make sense for his government to take a stake, potentially offering a model for other utilities.
Thames is currently struggling to pull off a restructuring of its vast debt load, equivalent in September to 86% of its £22 billion ($29 billion) “regulatory capital value”, a valuation yardstick used in utilities. If it can’t agree to a deal with lenders including Elliott Investment Management, a government-led special administration looks certain. Burnham has even called for this regime, which is designed to keep vital public services running during a rescue or sale process.
Many within the government’s left-leaning Labour Party see a Thames administration as a short cut to nationalisation, and a blueprint for the wider sector. The arguments are clear. England’s water companies, privatised by then-PM Margaret Thatcher in the 1980s, are allowed to earn a return on their debt and equity, currently around 6%. Funding them with government debt, which yields 4.7% over 10 years, would be cheaper, allowing lower customer bills or more investment. Privatised companies’ track record of dumping sewage has fuelled public anger. Critics also argue that the firms have an incentive to game regulators, for example by overstating investment costs to boost revenue.
Still, nationalisation isn’t easy, and a special administration is no fast-track solution. An administrator would be appointed to stabilise and sell the group, with the government approving any big decisions. It’s a messy and expensive process, during which Thames would require funding. An analysis by consultancy Teneo pegged the required state lending during a hypothetical 18-month administration at around £4 billion.
A full nationalisation would then require the government to buy Thames out of administration. If the debt is slashed to 50% of regulatory capital value, the equity would be worth just over £11 billion. The government could pay less, however, given the massive investment programme required, and the fact it would be buying a challenged business. The current creditors’ plan, for example, implies an investment of just £3 billion for Thames’ equity.
Still, Burnham wouldn’t be the only bidder. Thames’ creditors might make a proposal to protect their own investment. Hong Kong’s CK Infrastructure in the past proposed investing £7 billion after an administration. There may be even more bidders for separate parts in a breakup scenario, which would pry the water service from the waste business. And there’s a limit to how cheaply the administrator could sell Thames to the government without triggering litigation from creditors or other water companies, or spooking lenders to other utilities. Nationalisation would also bring political risks, since Burnham would effectively own any future sewage problems. All of this means that his path of least resistance may be to reduce Thames’ debt and sell the business on.
The challenges of nationalisation would be even greater for other water companies, such as listed Severn Trent SVT.L, or the privately held Southern. Most are now solvent and profitable, and the listed groups even trade in line with or at a premium to their regulatory capital value, and so can’t easily be tipped into administration or have their assets expropriated on the cheap. Consolidating the whole water sector’s balance sheets onto taxpayers’ books could add a chunky 3% to government debt levels, the Office for Budget Responsibility reckons. Nor is it obvious that the state would run the utilities much better: private ownership probably has made the sector more efficient.
The upshot is that neither the status quo nor nationalisation are easy options, which suggests that some creative thinking is in order. One solution could be for the government to take a partial stake, which it could build up over time. The state could, for example, offer to part-fund specific large projects like reservoirs in return for equity. Or it could take shares in lieu of sewage-dumping fines. Partial ownership could reduce funding costs, while allowing taxpayers to keep a share of utilities’ profits, all without adding much to government debt, as current fiscal rules allow minority stakes to be netted off against borrowing. Thatcher’s decision to privatise the water sector cannot be easily undone, but it can be improved on.
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CONTEXT NEWS
Andy Burnham, the former mayor of Manchester, was elected to parliament in a by-election on June 18, paving his way to replace current Prime Minister Keir Starmer.
Burnham recently said that Thames Water should be nationalised.
(Editing by Liam Proud; Production by Oliver Taslic)
((For previous columns by the author, Reuters customers can click on UNMACK/neil.unmack@thomsonreuters.com))