There is a principle in economics known as “moral hazard“. This where a business is encouraged to take on extra risk because it knows it will be rescued and not have to suffer the consequences of its actions. This is generally seen as a bad thing.
Thames Water is going bust. This is a handy explainer.
If a company goes bust it is usually put into administration. Someone, generally an accountancy firm, steps in to administer the assets. The banks foolish enough to lend, and the investors who own it, take a hit.
The assets are sold by the administrators for whatever they can raise, and banks and investors may get some money back, with investors at the back of the queue usually.
Thames is a monopoly provider of an essential service. The obvious buyer is the state, to maintain that service. Paying a reasonable price for those assets, pipelines, reservoirs, etc, and they are easy enough to value, involves no risk or added expense to the taxpayer.
Government bail-out?
A bail-out – and as you see here this is apparently a possibility – would involve the taxpayer stepping in and possibly guaranteeing those debts. Foolhardy banks and investors unwise enough to have bought Thames from its earlier owner, the Australian bank Macquarie, would have their losses limited by public money.
I am not entirely sure why this is even being considered. It makes no sense, given the above and the concept of moral hazard.
If those Thames assets were to be taken over at a fair price, the state would have the option, further down the line, of possibly floating the company on the stock exchange again, so getting its money back. Meanwhile customers continue to get the water and services they need.
Several of the UK banks had to be rescued during the last financial crisis, 15 years ago. The state took a holding in Lloyds Banking Group, for example, in return for a cash injection, and the shares were sold back onto the stock market over the next few years.
The banks were rescued, despite the above moral hazard this would seem to involve, because customers’ deposits could have been in danger and because the collapse of several of them could lead to systemic risk to the whole banking sector because of the complicated web of interlocking loans between them.
This is not true of the water industry, or of Thames Water.
Anglian Water risk lower
What of Anglian? There is a well-sourced piece in The Guardian suggesting Anglian is at the lower end of risk, in terms of its debts as against the value of the assets contained in the business. Thames is at the top end.
I contacted Anglia, which sounded suitably reassuring. A spokesperson told me: “Anglian Water has a robust financial platform in place which was recognised as part of Ofwat’s financial resilience report last year.
“This enables the delivery of our largest ever capital investment programme – which is centred on building a resilient business, delivering environmental improvements across our region, and supporting our customers.”
And to be fair, the regulator’s report indeed bears that out. “The company’s financial restructuring completed in 2021-22 with £1.2 billion of new equity injected in the year,” it says. “As a consequence, net debt and leverage has reduced significantly.”
This should be reassuring enough. But there are still questions across the water industry over how such huge debt could be raised, much of it going to investors as dividends, putting the financial survival of the biggest player, Thames, at risk.
Banks are subject to rigorous capital requirement rules that ensure they have sufficient funds to survive hard times, a consequence of the financial crash when several didn’t. So are other financial companies such as insurers.
I would argue that similar financial constraints should be put in place for monopoly providers such as water companies. And elsewhere. The surge in energy prices last year saw several small suppliers go bust. The taxpayer had to pay for some of that too.
