Thames Water rescue plan attacked by excluded bidders

A rescue proposal by lenders to Thames Water has been criticised by other potential bidders, frustrated to have been frozen out of talks on the future of the UK’s biggest water utility.

Thames Water is running out of money and is living on an emergency lifeline from the group of lenders that are collectively owed more than £13bn.

Hong Kong-based CKI Holdings and UK-based Castle Water have both complained their competing offers have been shut out by the existing lenders’ group who they say are keen to minimise their losses.

Without a rescue, the UK’s largest water utility will collapse into a government supervised administration process by early next year.

The future of Thames Water hangs in the balance. The water and waste utility that serves 16 million people is nearly £20bn in debt and living off an emergency loan granted by its existing lenders keen to stave off collapse.

Those lenders – now known as London and Valley Water – are locked in exclusive talks with regulators and the government over a rescue proposal.

This plan would see 25% of their debts written off and more than £4bn of new cash injected, but will require years of leniency on fines for pollution incidents. If Thames Water collapses into administration, those debts could be written off by a greater amount.

But other potential bidders have expressed frustration that this group of lenders has effective control of the company and has used that position to shut out rival – and, they argue, better – proposals.

CKI Holdings is already an owner of Northumbrian Water and UK Power Networks. An analysis by Barclays says that Thames’ customer bills could be nearly 20% higher in five years’ time if a rescue plan proposed by lenders to the stricken utility is approved.

Barclays’ research calculates that the lenders’ proposal requires customers to bear some of the future operational and financial risks to the company, adding £116 to bills when they are revised in 2030, and require additional leniency from the regulator from fines over sewage and spills.

The Barclays research note is aimed at potential investors in CKI. The lender consortium told the BBC it rejected both the basis and the conclusion of what sources described as “a note designed to curry favour with an existing or potential clients”, and insisted that CKI had been given every chance to make a compelling bid earlier in the process.

A spokesperson for the bondholders told the BBC: “We reject these misleading statements and do not recognise the assumptions they are based on.

“We have always said that customer bills will remain in line with those contemplated in the Final Determination (pricing plan laid out by Ofwat earlier this year) for the next five years.

“Having been given multiple opportunities throughout a 12-month competitive equity process, CKI did not put forward a viable proposal to fix Thames Water’s complex problems.”

Even if CKI was offered a fresh chance to bid, Barclays concedes that the sale of critical infrastructure to a China-linked owner would raise questions of national security.

The report references concerns raised by Sir Simon Gass, former head of the Joint Intelligence Committee, that a sale to CKI would potentially give Beijing access to sensitive consumer data.

Separately, independent water retailer Castle Water has said it is prepared to inject an extra £1bn into Thames than the proposal by London and Valley Water.

A spokesperson for Castle Water told the BBC: “Our approach is based on increased upfront investment that will overhaul the assets and infrastructure that is currently undermining Thames’ performance and deliver the sort of step change in service delivery that customers deserve.

“It will also address head on the issue of pollution. When it comes to pollution, you simply cannot compromise.”

However, Castle Water concedes that its proposal is not a formal bid at this stage and sources close to London and Valley and Thames Water itself have questioned the bid’s credibility.

It is not just would-be bidders who are critical of the current process.

Economist and infrastructure expert Prof Dieter Helm has also argued that the current debt holders’ primary concern is to limit the extent to which their existing loans are written off and not the long-term interests of the company and its customers.

“What the plan represents is a way to salvage as much money as possible for these key bondholders,” he says.

He adds the bondholders’ plan does not contemplate a return to normal performance standards on sewage spills and leaks for another 10-15 years.

Prof Helm argues the best way to get a fresh start for Thames is through a government-supervised administration – a so-called Special Administration Regime (SAR) – that would see a much bigger debt write-off than the 25% the current lenders are proposing.

The government is keen to avoid an SAR as, although the public purse would eventually be reimbursed through a sale, it could cost billions in the short to medium term for a chancellor struggling to find enough money to stick to her own tax and spending rules.

The consortium of bondholders are hopeful that discussions with Ofwat and the Treasury will result in an outline agreement in December.