Thames edges towards SAR with Burnham victory

(by Verity Mitchell)

Andy Burnham's victory in the Makerfield by-election has re-ignited the debate on water ownership. However, what he has conspicuously not said is that the entire water sector should be taken into public ownership. He has stated: “Public ownership is absolutely an option… I would say for Thames Water that is what should be done.”

During the by-election he said: “If you look at water as an industry as a whole, it’s run predominantly in the private interest rather than the public interest, or in other words, it’s an industry where the shareholders can never lose and the bill payers never win.” He has also mooted cancelling the dividends of companies that raise bills over a certain level, saying that by “running the industry differently… you prevent the excessive profiteering out of water, which we’ve now seen over many years.”

Burnham says he has consulted Feargal Sharkey and is being advised by members of several left wing think tanks. Compass, the Labour Growth Group and Common Wealth have all made the case for democratising water, whether by increased worker and bill-payer governance; creating an Essential Services Accountability Regime; or urging government to explore the different models of ownership and governance outside of privatisation. Common Wealth, in its paper, How to clean up our water: why public ownership in law costs zero, suggests four steps for water public ownership:

1. Minister applies to court to remove company’s licence for serious poor performance. 

2. Water company, on confirmation by High Court, enters “special administration”.

3. Administrator sells water company assets to new publicly owned entity for £0. 

4. Ex-water company shareholders and bondholders receive £0 as “appropriate value”. 

There are significant hurdles to the first step. Poor performance is a subjective judgement that has not been triggered against current regulatory standards. The idealistic notion that bond holders of solvent water companies, UK pension funds holding the equity of the listed companies, or international infrastructure investors would not be remunerated in any industry-wide re-nationalisation, is untenable.

Nevertheless, for the London & Valley Water consortium, it appears that Burnham’s victory lessens the likelihood that its restructuring proposals for Thames Water will be accepted. The environment secretary rejected London and Valley Water’s proposed terms last week (see below). This may have had more to do with political expediency than economics. But either way, her approval of the creditors’ financing proposals during a leadership vacuum looks unlikely. Auditors may be unable to sign off Thames as a going concern in time for the publication deadline for its report and accounts of 16 July. Thames will run out of cash in October.

Burnham and his policy advisors agree: “If Thames Water cannot stand on its own obligations, it should enter special administration. Creditors take losses. The balance sheet is reset.” The creditors are asking for leniency on performance and fines that appear inequitable both to its water peers and Ofwat. The Special Administration Regime (SAR), in contrast, would remunerate the creditors for an “appropriate value” in line with public interest.

Despite creditor scaremongering on the costs and complexity of the SAR, there is now a precedent with British Steel. A written statement from industry minister Chris McDonald on 18 June said: "The Government is strongly minded to use the powers in the Steel Industry (Nationalisation) Bill to bring British Steel into public ownership in the future, subject to the public interest being ‌satisfied." 

A new prime minister faces competing demands for expenditure. There is no money for re-nationalising water. Putting Thames into special administration with cash buyers waiting in the wings may be an easy political win for Burnham if he makes it to 10 Downing Street.

• Trade union GMB has called for Thames to be re-nationalised, to end the long-drawn-out uncertainty for company workers and customers. Cliff Roney, GMB activist, said: “Temporary nationalisation is not enough to end uncertainty for water workers, and it won’t fix the deep-seated problems with Thames Water. Re-nationalisation is the only way to end this farce and protect consumers, water workers, and our precious waterways.”

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Environment secretary: Thames deal expects too much from customers

(by Karma Loveday)

Perhaps with an eye to the likely Makerfield result, environment secretary Emma Reynolds wrote to Ofwat chair Iain Coucher last week to flag her concerns with the ‘best and final’ offer from London and Valley Water Consortium. This was submitted long ago in March, and is awaiting an Ofwat board decision, with whom the final call rests.

Reynolds wrote: “The proposal expects consumers to fund an unprecedented level of regulatory adjustments. These measures include, but are not limited to, prioritising asset health over capital improvements, switching off parts of the penalty regime, and amending risk-sharing mechanisms. I am not yet convinced that the Proposal demonstrates sufficient protection for consumers’ interests. I understand that there will be some bill impacts in this price review period and further rises in the next period as a direct result of these regulatory adjustments. I am concerned that consumers will ultimately bear an undue cost for these adjustments. The Proposal also requests reduced performance standards, impacting both the environment and consumers.

“The proposal suggests that a significant number of investments would be deferred, in some cases by up to a decade. This would mean delays to environmental improvements, particularly those related to wastewater treatments linked to statutory requirements and to projects important to drinking water safety and supply. I am concerned that the long-term resilience of water and wastewater systems may not be adequately protected.”

Reynolds made a statement to the House to similar effect, triggering extensive discussions in both the Commons and the Lords.