Thames Water CEO: We Welcome Greater Public Control, Not Nationalisation

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0:30Chris Weston:School ready at Whole Foods Market.

0:47Hello and welcome back to the Big Boss interview podcast where we chat to some of the biggest names in global business, shaping the ways we live and work. And our business editor, Simon Jack, has been chatting to our latest guests. And Simon, in a couple of weeks where the odyssey has been big at the box office, this story is a saga not unlike that, is it? And probably gone on for as long. Thames Water, the biggest water company in the country. You've been following this story throughout. Well, it does feel like I've been on this odyssey for years, definitely. And listen, there's plenty of hazards along the way.

1:22In fact, I would say that Thames Water has got some claim to be the most beleaguered company in the United Kingdom. You know, it is up to its neck in debt,£20 billion. It is running out of cash. It will run out of cash by the end of the year. The public are furious. MPs want something done. Andy Burnham's been wading in on what should happen to key utilities. There is a very wide palette of things to talk about on this one. And so I sat down with Chris Weston and started by asking him in a way sort of how do we get to this point when the company's in so much trouble? How does he see we should get out of it?

1:58Was privatization a big disaster in the first place? Spoiler alert, he doesn't agree about that. And how we can get out of it. There's a deal on the table. It's already been rejected by the government. Talks are ongoing. but there's a chorus of MPs and others and action groups who wanted to be put into special administration. And is it that chorus for why they've spoken now? Because I know you have tried endlessly to speak to them on the record, not always been, perhaps understandably, given the pressure you've talked about, been that keen to do a lot of interviews. So is that the sort of why now?

2:29I think they feel that there's a moment for them to speak up, that they basically are kind of saying, look, it's going to take 10 years to fix this company. Bear with us. We know you're angry. There's a deal on the table. And really, in a way, it's their pitching in because, in a way, they're not in control of the future of their own company at the moment. So they've got to say something, which is that we're trying very hard. We know you're angry. Bear with us. But I had some interesting warnings as well about things like, you know, obviously, we're talking when there's a drought in half the country.

3:00And a hosepipe ban. I was going to joke, there's lots of angry gardeners out there. Well, exactly. To cap it all, Thames is one of the regions of the country where there is a hosepipe ban. is about half a country officially in drought. And he talks, you know, interestingly and alarmingly in a way about this being the new normal. We need new reservoirs, we need new technology. We as consumers need to be more mindful about how we're doing it, particularly if we're going to need things like more houses, data centres, increasing population, climate change. All that kind of stuff puts amazing stress on a company, which is not in the best of health.

3:33Yeah, and all costs money. So a fascinating chat. This is Simon then with Chris Weston, the boss of Thames Water.

3:43Chris Weston, thank you for joining us on Big Boss Interview. I would say that you are the boss of one of the most challenged companies in Britain. £20 billion in debt, running out of cash, more cash going out of the business than coming into it, and a lot of question marks about what the future looks like, whether it can survive. Even your own directors said there are material risks to the company as a going concern, which has a pretty big red flag in corporate terms. Can you start by laying out how did we get to where we are today? Was it incompetent management, greedy shareholders, poor regulation, climate change?

4:25Lay out how we got to where we are. Certainly. Well, good morning, Simon. Good morning. Thank you very much for inviting me along. I'm very excited about being able to give my perspective on all of this. And it certainly is a challenging situation. It's challenging and extremely complex. So there's no straightforward answer to that. You can't point out one individual or one entity. And I think, I mean, I've been there two and a half years, so I have a pretty good appreciation of how we got to where we are now. And I think, in reality, the best place to start is to look at what Sir John Cunliffe found in his report in the Independent Water Commission.

5:06And he pointed to a number of factors that I agree with. First of all, first off, there was a point that he made about the lack of long-term strategic direction from the government and prioritization. Is it lower bills or do we invest in our infrastructure? And it's difficult to do both of those things. The second is around the regulator and the increasing fragmentation of regulation, where you've got a number of different regulatory organisations, and they all have their own responsibilities, which is quite understandable. But there's no overarching entity who is accountable for the whole sector, and that creates all sorts of problems.

5:50You have an aged infrastructure. Our infrastructure started to be built over 150 years ago. And so the health of it, the resilience of it, particularly when you are facing a situation with climate change, I mean, you can see that outside today, and also the demands from population growth and economic growth, all of that creates stress on that infrastructure and incidents and a requirement for more investment. and we have to respond to that. And then I think you do have to look at the companies themselves, their financial resilience and the governance within those companies, all of those things he pointed to in his report.

6:31And I would subscribe to them. There's not an individual thing. It's a systemic failure of the whole regulatory sector and the way it's been set up. And, I mean, for me, I mean, the government has accepted that and I would love to see what he recommended implemented. I think that is absolutely fundamental. And that, I mean, part of that would support the turnaround that I am focused on. And that is both the recapitalization of the balance sheet, which I'm sure we'll get to, but also the operational turnaround and the amount that we are having to invest in our infrastructure to make it more resilient for the future, for our customers and the environment.

7:11Okay. Let's unpack a few of those. You say tension between regulators and you said the government couldn't decide whether it wanted more investment or lower bills. So are you saying that bills were too low for too long to fund the investment that we needed? And that was a mistake. And whose mistake was that? So I think that is absolutely the case. Bills were too long, too low for too long. I mean, I look at our infrastructure. I have 440 treatment works of various kinds, and I have network that goes about four times around the circumference of the earth. It is massive. And keeping bills low mean that we can't invest enough in that infrastructure.

7:55And I'm not sure that anyone particularly is to blame. I think that no one appreciated the extent of that network and the amount of investment it required. And that investment had to come from the capital markets to enable it. That means borrowed money, debt. Yeah, but that is how the water sector, the water industry works. It was set up to do that because we spend a lot of money every year investing in our infrastructure. And the money we get from our customers does not cover that cost. And we recover the cost of it over decades. It is the best way to keep bills low. So you borrow the money up front, spend it and recoup it many years down the line from bills.

8:39Yeah. And the cheapest way to do that is to have appropriate gearing. Appropriate levels of debt. Appropriate levels of debt. I agree. And your investment grade so you can borrow that debt as cheap as you possibly can. OK. And that is how the water industry was set up to work. But you have inappropriate levels of debt at the moment, do you not? We do. Yes, we do. OK. And how did that... I mean, one thing you haven't mentioned is what some people would say greedy shareholders in the past. We don't have any shareholders at the moment, really. They've walked away. But in the 10 years that the investment bank Macquarie was the controlling shareholder, five of those 10 years, they took out more money in dividends than the company actually made and at the same time put in no money of their own.

9:24And debt went from around$2.5 billion to around$12 billion during that period. That seems to be extraction on a massive scale. So, I mean, you point to a very valid issue. And I think the whole issue around governance is incredibly important. I'm not going to express an opinion on what Macquarie did. It was way before my time. I mean, when I look at Thames in particular and why we have so much debt, I would say that at the end of the day, the targets that the company is expected to make are not realistic. And if we don't hit those targets, we get penalized for it. And an example would be something like leakage.

10:10We have to hit a certain level of leakage, but it is so far in excess of what we are capable of doing. I think anyone would be capable of doing, however much money you invested, that it is not going to be achievable. It's just not realistic. And I think we have to recognize that as we think about how we turn around the company. And if you don't do that, you don't address a fundamental flaw in the way that regulation works. And so John Cunliffe recognized that. And he said that the regulation needs to be more company specific. specific and he said that regulation needs to have a turnaround regime in it so we can break this so-called cycle of doom so you get to break the cycle of where you're getting fined which is taking money away from you to be able to fix the things you got fined for in the first place yes quite okay yeah but you say the unrealistic target is keeping human excrement out of our waterways a target that you cannot realistically hit is that surely not unrealistic it's a basic requirement, isn't it?

11:11I mean, you know, we want to do better when it comes to pollutions, except we're not doing well enough. We treat a quite incredible 4.3 billion litres of waste every single day. And the vast majority of the time, 99.5 % of the time, on average, that gets treated through our sewage treatment works. Sometimes something goes wrong. Sometimes you get a weather event that makes it very difficult to treat it as well as we normally would, and it goes into a river. We do not want that. And we're investing a huge amount to try and ensure that we eliminate that. I do think we have to be a little bit realistic about it.

11:56The chance of getting to zero pollutions, I think, is very, very slim. We can invest a lot. We work very hard to try and stop pollutions happening. But people do abuse our network. There are people that misconnect into our network, some deliberate, some not deliberate. And those kind of factors are outside of our control. The weather is outside of our control. It's not an excuse. It is a reason. And we are working very hard to try and combat that. But I do think there needs to be a degree of realism brought to the argument. And I mean, I look at something like the River Thames. That is cleaner than it has been for 100 years now.

12:36That's not me saying that. That has come from ZSL, London Zoo. They recognise the improvement in the quality of the water in the River Thames. And there are many other factors that go into the river that make it less clean as well. Do you ever swim in the River Thames? I haven't for a while. Okay. Count Binface, that well-known politician, says that he wants to get water bosses to go and have a dip in their local rivers. Will you take up that challenge? I am sure at some point I will be in the Thames. Okay, fine. Let's me go. The thing that people think is that water, it's one of life's essentials.

13:11Yeah. the risk the risks should be low in this business and the rewards should be low and that every drop of money should go back into sustaining the provision of that life essential and therefore things like dividends to shareholders which we saw in the past in this company high pay you're paid over a million pounds a year all of that extracts money from that endeavor and that privatization a privatisation where there's no competition. Usually CEOs are paid a lot to outsmart the competition. You haven't got any. And that's why people think that this is an industry that doesn't suit private capital and privatisation.

13:49Do you see why people say that? I completely see why people say that. I mean, as you say, life, it's life's essential service. I understand why people have that view. It's not a view that I share. The industry was privatised in 1989. Prior to that point, water companies were owned by municipalities, and it was chronically under-invested in. Since privatisation, as best I can calculate, there's been an investment of about£240 billion into our water infrastructure. And I would argue our infrastructure is in better state than it would have been if it had been owned by the government, where you would be competing with, quite understandably, defence, the health service, education, social security, all of those types of things.

14:43And I do question whether we would have attracted the same investment. And if you accept, and I know people have a different view, but if you accept that you are going to privatise and operate within the capital markets, then things like interest on borrowings and equity has to feature as part of that model. And you have to think about how you make that model as efficient as possible. And ultimately, it should be low risk and low reward. I agree with you. But unfortunately, because of the circumstances that we talked about at the beginning of this discussion, it has meant we have got into a much more risky situation with regard to Thames, and I'm sure other companies as well.

15:25Okay, so what is the best way forward? There's a proposal on the table by a consortium of the lenders who lent you all this money or most of the money that has been lent and they want to basically write off a bit of that debt, put some new debt in, put some new equity in and go forward with a new plan. Do you think that a bunch of hedge funds, vulture funds, some people call them, who snapped up debt on the cheap, there's quite a lot of new debt holders who bought it when it was distressed. Do you think they're the suitable owner for something as pivotal as this? I mean, I think there is a misunderstanding in that.

16:06We have over 100 different creditors. They are all sorts of different institutions. Yes, there are hedge funds in there, but there are banks, there are pension funds, there are infrastructure funds. There are a whole suite of different providers of that debt. And they are proposing a market-led solution. and they're not trivial sums that are being involved in this. I mean, first of all, the current shareholders who no longer exist have had their equity wiped out, roughly£4 or£5 billion. The providers of our debt at the moment, who are proposing a debt-for-equity swap, will write off around£9 billion of the debt that they lent to Thames.

16:52They will inject further equity. I mean, these are not small numbers, and it would lead to a fundamental restructuring of Thames, a strengthened balance sheet with some of the lowest gearing in the industry. And most importantly, we mustn't lose sight of what that enables. That then allows us to carry on investing in the way we are, which is so necessary for the resilience of our infrastructure, given some of the demands on it that we're faced. And that is the best thing, I think, for customers and for the environment. Andy Burnham's talked about greater public control. We're not quite sure what that means.

17:29It could mean public ownership. It could mean what they did in the buses. There is quite a chorus of MPs and others who think that this company should be put into a special administration. At that, you cut the debt quite significantly. you can stabilise the company, have government-appointed administrators go in there, and then you look to stabilise it, and then maybe one day sell it to somebody else who aren't a bunch of distressed debt holders. Why not put it in special administration, or indeed permanent nationalisation? What's the argument against it? Well, the first thing I'd like to say is that I completely agree with the Prime Minister.

18:09I think the only way out of the narrative that surrounds Thames at the moment is if there is greater public control and an ability to hold us to account more than has been the case in the past. So I think that is a very valid idea that we need to explore and work out how best to achieve that. So that's the first point. Second point I'd make is that special administration, importantly, if Thames goes into special administration, we will carry on providing the service we do today. That's very important. We'll carry on providing water and taking waste away and dealing with it. So that will continue as normal.

18:51I don't personally believe that that is the best route forward for Thames. So first of all, we have a proposal on the table from our creditors, and I think it is a pretty robust proposal. They have written recently to the Secretary of State about how they're going to enhance it, and so I'm supportive of that direction of travel. If you go into special administration, I think there are a number of issues with that. First of all, you are funded by the government and there is a risk that the taxpayer will have to bear that fund. It's not clear how long you would be in special administration for. And the longer you are, the more the risk is around the cost of financing the company during that special administration.

19:40By the taxpayer. By the taxpayer. And then, I mean, if you don't nationalise it, you've got to get Thames out of special administration back into private ownership. And we would have to go through the whole process that we have been through over the last two years all over again. We would have to discuss an appropriate regulatory package. We would have to find an appropriate buyer who would back our business plan. And all of that would have to happen again. And I think you're doing it while you, although we will focus on continuing to provide service, there is more risk around our ability to do so and also our ability to continue to invest in the infrastructure, which is, as I've said a number of times, so fundamental to what we need to do over the coming years.

20:24So in a nutshell, the special administration would take your eye off the ball in a way. It would mean you have to start from scratch on a process that is already ongoing and stuff that you need to invest in might go into a bit of limbo. Suppliers would walk. I mean, what would happen? So I don't think it would take our eye off the ball in providing service day in, day out. That would happen. I worry that there would be disruption to our capital investment program, that it's going to take 10 years to improve the asset resilience of this company, to improve that asset health. And I worry that that would become disruptive.

20:55We will have to manage the supplier base who have been very supportive to date. And you're right, we would have to go through the whole corporate process around attracting a new buyer and a regulatory package to be able to get it out of special administration. Seems to me the lenders have presented a bit of a carrot and a bit of a stick. The carrot is a golden share for government, more involvement of local authorities and regional leaders. And the stick is to try, they're basically saying, try and nationalise us and we will sue to get our debts back in full. And one of the creditors is a company called Elliott Management, who pursued the government of Argentina for a decade until they got their money back.

21:41Do you recognise there's a carrot and stick approach here? And the creditors are spoiling for a fight if the government nationalises you. I mean, I don't think they're spoiling for a fight. I think their prime focus is on making this proposal work. And it's an unprecedented proposal that is in front of us at the moment. It leads to a restructuring of the company with a balance sheet that has most likely the lowest gearing in the industry that enables us to carry on investing and investing in the infrastructure that we need to do. They have made a lot of promises around that, which I think are laudable.

22:19So they're going to reinvest all the profit. They're not going to take any dividends for at least 10 years or before there's an IPO. A sale of shares back to the public, yeah. And if there is an IPO, if there is any outperformance in return, they'll share it with customers. They have said they'll stick to the bills that were agreed with Ofwat for the final determination with a slight tweak around the cost of capital. I mean, by and large, it is an unprecedented deal that is good for our customers, and it's good for the environment, and it is at no cost to the taxpayer or the government. Okay. But they are asking for a modicum of leniency against fines into the future.

23:02And people are saying, why should we let them off the hook? A private sector buyer says, just give us a little bit of breathing space until we turn the company around. And there should be no special pleading for Thames if you're selling back to private sector buyers. Well, I think there is a misunderstanding in there. So first of all, I do think the company needs a bit of breathing space. We do need to turn it around. I mean, we have been working... Which means don't fine us, please, for a couple of years. No, no, I didn't say that. But we do need to turn around. We've been working very hard on that for the last two years, and we are making progress.

23:35And I'm very proud of the progress that we're making. But to your point on leniency, the creditors are not asking for leniency. So they accept that the regulators, the EA and Ofwat, they're not asking for them to change their enforcement policy or their sanctions policy, and they understand that they have to operate within that. There is a penalty regime within the way that the Ofwap regulatory model works. It's part of the proposal paying up front those penalties. And both of those two points are important because both of those create certainty. They know what they're investing in. And that's important from a credit rating perspective.

24:21We have to get back to investment grade so we can invest as cheaply as we can. And understanding the liability associated with regulators and the penalties is an important part of that. That is a form of leniency. If I said, here's 600 quid, don't give me another parking ticket for the rest of the year. That means I could do whatever I like in the subsequent period. That is a form of leniency. Well, I disagree because we and the creditors completely understand we're subject to the law. And if we break the law, there will be penalties involved. Okay. All right. You've talked about the Cunliffe Review.

24:59What are the key findings here? I mean, he talked about you can't treat all water companies the same. We are where we are. And some will need a turnaround regime. Is that what you took comfort from? And that's why you're such an advocate of it? Well, I think the recommendations he made were very sensible, and it goes beyond the specifics of Thames. I mean, I would always argue that a regulator, in coming to a decision around a price regime, should take into account the specifics of a particular water company. I do think that's important. It's not all they will take into account. They will also look at how it's performing relative to its peers.

25:40I do think it's good that he suggested there should be a turnaround regime. But I think if you start to take a broader picture, what he said about clear prioritization and direction from government over the longer term is very important. The way that he argues that there should be more regional representation, I think that goes to the Prime Minister's point around greater public control. And I think that is an absolutely essential part of how we recover from this, a focus on the understanding of our assets. All of those things, I think, you can't, I don't think, pick and choose. It should be seen as a package, taken as a package.