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Ministers and industry figures have voiced concern that the crisis at Thames Water could deter overseas investment into the UK, as the utility seeks to raise at least £1bn to shore up its finances.
Conservative ministers maintain that concerns about the financial resilience of water companies — and “intemperate” talk of possible temporary nationalisation — could create a “risk premium” for investing in UK infrastructure.
Criticism of Ofwat, the industry watchdog, has also been mounting as Thames Water prepares for talks this week with investors and regulators to secure the £1bn equity injection.
One minister told the FT: “The people who have questions to answer are Ofwat. There are serious questions about the regulation of the sector.
“When politicians start to talk about nationalisation or a windfall tax or a sudden jerk on the wheel of regulation, that pushes up the risk premium for the UK.”
Thames Water, England’s largest privatised water utility, is wrestling with £14bn of debt and has yet to receive a full commitment from investors that they will invest more equity to stave off a cash crisis.
The group insists there is no immediate cash crunch and had £4.4bn liquidity at the end of March. But ministers were forced last week to dust down plans to place failing water companies into a “special administration regime”.
John Reynolds, chief executive of Castle Water, which provides water and sewage services to business customers in London and the south-east, warned that Thames Water’s troubles were likely to deter overseas investors.
“The impact of a special administration would impact the availability of financing and the cost of financing for all UK infrastructure,” he said.
Reynolds highlighted the billions of dollars in subsidies for infrastructure investors provided by US president Joe Biden’s Inflation Reduction Act. “Making a decision to invest in Thames is getting harder anyway because returns on infra in the US are significantly higher in the US than in the UK,” he added.
Thames had asked shareholders for £1.5bn in June last year but received just £500mn in March. The timing of the second £1bn has still to be agreed but sources close to the company said as much as £2.5bn to £3bn could be needed over the next few years to plug holes in the balance sheet and improve sewage and leakage performance.
Investors are understood to be divided over putting money into the company in a tougher regulatory environment.
New rules enable Ofwat to curb dividend payments if a business is under financial stress or fails to meet environmental commitments.
“There is a willingness to commit more capital but right now there is a feeling that the regulator, the government, and the shareholders are not in agreement,” said one industry investor.
The regulator has also been criticised for presiding over a regime that allowed investors to borrow against groups’ assets and extract dividends while failing to sufficiently invest in infrastructure. The water companies have jointly wracked up £60bn in debt and paid out more than £72bn in dividends since privatisation in 1989.
Ofwat said its new rules allowed it “to better hold companies to account and take enforcement action when they get it wrong” so it could “stand up for customers”.
Two people close to Thames Water added that Sarah Bentley abruptly quit as chief executive last week after differences with the board over the pace of change. “The turnround plan needs shareholders to put money in and Sarah was a casualty of that process,” one person close to the company said.
Thames Water declined to comment.
Lord Andrew Tyrie, Tory peer and former chair of the Competition and Markets Authority, called for a thorough review of regulation in the UK, saying some regulators had been “captured by vested interests”.
“The regulators are letting the public down,” Tyrie told the BBC’s Week in Westminster. “The poor quality of regulation is stifling growth. It is now a serious problem.”
Two-thirds of England’s biggest water companies employ executives who had previously worked at the watchdog tasked with regulating them, the Observer reported on Sunday.
Cathryn Ross, the former CEO of Ofwat and a director of regulation at Thames Water, was appointed as interim chief executive at the group last week.
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