Thames director says firm is underfunded

Thames Water is systemically underfunded, and its challenges for investors are not unique, according to the firm's strategy and external affairs director, Cathryn Ross.

Speaking to the All Party Parliamentary Water Group (APPWG) last week, Ross said Thames has successively (for the past three control periods) spent more than it has been allowed to recover via bills, and that pattern is a “big part” of why its shareholders have said its PR24 business plan is uninvestible.

Ross said this was partly the company’s own responsibility for being inefficient, which it was trying to address via its turnaround plan. “But I would also argue – and that's why I was making the point about the age of our assets versus the average bill – I think we've also been underfunded. So I think yes, we're inefficient but I think we've also been underfunded. Those two things add up to a massive funding gap and our shareholders aren’t prepared to bear that.”

She pointed in particular to the regulatory regime’s cost allowance models (which she said are backward looking and “do not distinguish between efficiency and underspend”) and reward/penalty system. “Linked to the fact that we've got a poor asset base, our performance is not where it needs to be. Ofwat sets performance benchmarks and incentives based on, so far in the last control period, industry upper quartile. We’re a long way below industry upper quartile…. this control period, we're expecting to face something like £500m of penalties for poor service. Now, you might say, ‘but yes, customers are getting poor service and so it's right that you pay penalties’. But if you're a shareholder, that just basically adds to the downside risk.

“And then if you're not going to be able to get a return as a shareholder until the other side of 2030, you’re looking at a shedload of downside risk, not much upside, why would you put your money in?”

She said the issue went beyond Thames: “I don't think Thames is unique. I think if you look at some of the other companies who are persistent poor performers, you can imagine a similar story playing out over time.

"But we're definitely the worst. And we're definitely the biggest, and we're definitely the first, so here we are.”

Ross went on to highlight that Thames is far from the only company that needs more capital to finance its AMP8 programme. She said raising capital may be easier for the listed companies which can use stock exchange rights issues, but investability challenges are widespread. If companies want to spread upfront investment costs over time using equity and debt finance “then we have a problem with investability, because two-thirds of the sector right now is not making what Ofwat says the cost of equity is, and one of those is us.”

Ross identified a series of other problems with the regulatory regime, which included that companies have had to update their October business plans since submission, leading to process shortcuts: "In an ideal world…everybody would have agreed what we needed to do like 18 months ago. And then we would have gone away and planned it and therefore could properly scrutinise it. But when you're still changing your plan after the plan’s been submitted, it's not a great process…People need to stand back and think about the cost benefit of this stuff. I mean, we have this massive, massive investment programme over the next five years. I know for a fact that not all of it has had cost benefit analysis applied to it. That's all going to come through in customer bills.”

Members of the APPWG quizzed Ross on various issues. The strongest challenge came from Lord Sikka who argued amongst other things that Thames’ accounts understate its leverage and were full of “abusive" accounting practices. "I don’t believe your financial numbers at all,” he said, highlighting that he was a professor of accounting and had helped investigate the collapse of indebted construction giant, Carillion.

Ross could not give a full response due to the session timing out, but did refute the thrust of the comments and said Thames’ accounts were transparent.

• A full report of the APPWG session is in the May issue of THE WATER REPORT