Committee Inquiry into Thames Water’s Financial Crisis
Sir Adrian Montague, chair of Thames Water, is scheduled for a rare public appearance on Tuesday at the Environment Selection Committee. This forum previously indicated about 18 months ago that the company’s financial situation was even more pressing than anticipated.
Shareholders expressed concerns about whether the company was “investable” in their regulatory dealings, Montague noted. Just three months later, those investors decided against further investments, which led to a refinancing process that ultimately favored U.S. private equity firm KKR as the lead bidder by the end of March.
Lawmakers are expected to question Montague on a few key issues. For starters, why was KKR chosen? The firm is well-known for investing in infrastructure globally, which gives it some reliability in that area, even though a significant portion of Thames’ challenges stems from previous fiscal mismanagement.
The bigger question remains, however: can KKR actually navigate the complexities of running Europe’s largest and most troubled utility? Surprisingly, neither Thames nor KKR has provided clear insights into their management strategies or timelines for improvements in service, particularly regarding pollution levels in the river. In April, regulator OFWAT labeled Thames’ 2025-30 business plan as “inadequate.” When is KKR expected to address these concerns? In March, they shared minimal financial details, including already known adjustments for senior bondholders.
There’s also a pertinent customer-related inquiry: why did Thames move into the final phase with only one stakeholder? OFWAT had hoped to see two bidders to foster competitive visions. The likely additional bidder could have been CK Infrastructure, which holds a significant share in Northumbrian Water, a comparatively effective water company.
Several explanations could account for this situation. Perhaps having two bidders would have prolonged an already lengthy situation or added to costs, which are already significant for financial advisors. It’s also possible that one or both of the potential bidders declined to proceed on a non-exclusive basis.
Ultimately, it’s the Thames Committee that governs this process. They could have established rules to ensure competition from the start. Other quiet observers, including the government, could advocate for better practices to avert potential lawsuits.
Without clarifications, some, like economist Dieter Helm, have pointed out that bondholders are primarily concerned with profit and may prioritize their interests over customer-focused solutions, which could lead to substantial losses for them.
Lastly, there’s a third inquiry that has been largely overlooked since KKR’s selection. Most bidders had voiced claims at the start. The prevailing assumption is that there are some negotiations involving Thames’ potential penalties.
From the perspective of bidders, it’s rational to identify such liabilities. But shouldn’t there be transparency regarding the regulatory compromises being discussed that might aim to keep Thames from going into special control? Is this “regulated accommodation” merely a call for special treatment?
It’s crucial to recognize that managing a regulated company with assets amounting to £200 billion and serving 16 million customers is likely to attract significant external scrutiny. OFWAT’s preference for two bidders has seemingly been disregarded. Reports suggest that the Treasury has intensified pressure to finalize the transaction, emphasizing the need to meet upfront costs. Meanwhile, Thames’ official communications appear crafted to minimize disclosure.
The committee’s engagement with Montague may represent a final opportunity to attain some much-needed transparency. It’s vital that they challenge the evasive answers given.
