The fate of debt-laden Thames Water will become clearer as soon as tomorrow.
The Court of Appeal is expected to decide whether the company’s plan to borrow a further £3bn to avoid collapse can proceed or whether it upholds objections from a small group of creditors and Liberal Democrat MP Charlie Maynard.
If it approves the plan, Thames Water lives on long enough to attempt a restructuring of debts and garnering of new investment. If it approves the appeal, the company is likely to fall into a government-backed administration within weeks or days.
Either outcome is guaranteed to generate strong reaction. Customer bills and supply are unlikely to be affected – either way, bills are due to go up.
The company – and the vast majority of lenders – insists that a government rescue will end up costing taxpayers billions, set back the timetable to fix this broken business and send both suppliers and would-be investors running for the hills.
Others, including Mr Maynard and academics like Professor Sir Dieter Helm, argue that the Thames plan mainly serves the narrow interests of its current lenders who stand to lose more of their money in an administration than they would if they can keep the show on the road – particularly since the extra money they want to lend them comes with a very hefty interest rate.
The public interest is best served, they say, by using the same mechanism employed when energy company Bulb went bust.
In that case, the cost was initially estimated by the Treasury to be £6bn but ended up costing close to zero as energy prices moved in the government’s favour.
The answer depends largely – but not entirely – on how much one estimates a government rescue would cost taxpayers.
Thames itself has presented an estimate of up to £4bn. While Charlie Maynard has presented a figure of £66m. Others have said it wouldn’t cost taxpayers a dime in the long run. A staggering range.
Ofwat, the regulator, seems to have sided with the company. In submissions to the courts, Ofwat presented the £4bn figure and Mr Maynard’s £66m and chose only to comment that Mr Maynard’s figure was the least evidenced.
The Secretary of State Steve Reed has said that government involvement “would cost billions and take years”.
Eminent economist and infrastructure expert Professor Sir Dieter Helm argues that it could end up costing the government zero as the proceeds of a sale back to the private sector would eventually cover the costs incurred in the short to medium term by the government.
A person close to the situation said “the idea that SAR is cost-free is fanciful and dangerous. It’s time for the reality to be recognised. SAR is not a good outcome.”
Most importantly, the BBC understands that a figure in the billions may be included in the OBR’s official forecast under the “risks to the outlook” section.
The correct answer is that no one can be quite sure.
What is uncontested is that in a so called Special Administration Regime (SAR), the financial and operational risks of the company transfer from the private to the public sector.
In the short to medium term, the taxpayer will bear financial risks that are substantial. Thames has a plan to invest nearly £20bn over the next five years while it only has revenue of £2.3bn a year.
The extra money comes from upfront borrowing that the company pays back through customer bills over many years. In a SAR, that upfront cost would be borne by the taxpayer.
Longer term, when the company is sold back to the private sector, that money could be recouped – plus interest – from the sale proceeds.
It’s very hard to estimate what Thames would sell for. Well-performing water companies sell for around 50% of the value of their assets. Thames assets are worth around £18bn on paper – which would give a figure of £9bn.
Given the age of those assets, the high operational costs of working around high population density and its miserable track record, it’s very unlikely that Thames would sell for anywhere near that.
Whenever the government rescues something with the intention of selling back to the private sector – it is always possible, likely even, they may get less money back than they put in. There are many examples of this – including British Steel and the RBS.
As far as the government is concerned, rescuing Thames comes with a cost that would affect the public finances negatively over the course of this parliament.
Given the well-publicised but self-imposed constraints on the Chancellor, it’s not hard to see why the government would like to avoid it if possible.
The other argument advanced by Mr Maynard in his appeal against the £3bn private lifeline – is that it will well end up being paid for by customers. Ofwat again decided to intervene on this, writing to the court that the company would be barred from recouping financing costs from customers.
Thames itself argues there are other reasons a SAR would not be in the public interest. New administrators parachuted in to caretake a vast sprawling business would be ill-equipped to take on the task of turning around a company whose new management insists had formulated a clear plan.
Thames would be a company in limbo with little momentum to get on with the mammoth task. People close to that plan fear suppliers could also be wary of extended payment terms under government-backed supervision.
Those arguments may be nonsense.
Attempts to prolong the life in its current form of a company laid low by years of under-investment, overgenerous pay and dividends, poor regulation and changing climate may be doomed.
But what many, including government officials and ministers, ask themselves is – what is there to lose by letting the company have a go at restructuring and potentially redeeming itself over the next few years?
If it fails, it fails and Special Administration is a mechanism that’s been built into the system since privatisation and will still be there in six months, a year – by which time we will know whether they can do it or not.
