Taking Our Ball and Going Home

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0:42Join Odoo today at odoo.com. That's O-D-O-O dot com. Wake Up To Money from BBC Five Live. Hello, morning. Welcome to Wake Up To Money. The boss of Thames Water has claimed targets the company has been set over things like leakages are not realistic. You're going to hear more from the boss of arguably one of our most under fire companies shortly here on the programme. Also today, after a wild week for shares in technology companies, two more of the world's biggest commit hundreds of billions more in AI spending. We'll tell you what reaction there's been to that. And BrewDog's owner says the craft beer company is not for sale, despite those attempts by the company's co-founder, James Watt, to buy it back.

1:25Wake Up To Money with Will Bain.

1:56if the governing body does go ahead and try selling that 20 % stake in those competitions. So tons for you to get your teeth into this morning if you want to join the conversation. 85058 is the text number to do so. 08085 909693 is the WhatsApp if you want to get in touch with us that way. And plenty too for our panel to work through this morning. Harriet Kelsall is part of the panel this morning. Harriet back with us, founder and chair of Harriet Kelsall Bespoke Jewelry. It's got showrooms and studios in Hertfordshire, St Albans, London and Cambridge. Harriet, morning. Great to have you back on the programme.

2:30Morning. Good to be here. How's business going at the moment? It's actually going pretty well. I think people are still spending on the life's big moments like engagements and weddings and anniversaries and birthdays. But I suppose I think they're being a bit more cautious about how they spend their money. they're definitely researching more carefully thinking for a bit longer before they make decisions I'd say the retail part of what we do the sort of town centre studios the footfall gets a bit quieter when it's been really hot but people are still bringing us lots of their jewellery to rework using golden gemstones that they already own maybe you know in antique jewellery or something that they have in new pieces to save a bit of money but importantly for us they're still wanting to invest in jewellery that tells their story.

3:20Yeah, really interesting. Interesting trends, those as well. And we'll try and pull some of those out, particularly perhaps when we talk about what's going on in the UK economy on the back of that interest rate decision from the Bank of England yesterday. I like as well how this new number 10 north and spreading more around the UK from Andy Burnham has spread to our team in Media City in Salford already as well, deciding that St Albans is apparently outside of Hertfordshire for the first time as well. So that's good news too, that Mr Burnham's having an impact already. Alongside Harriet for the next hour is Shanti Kellerman, co-chief investment officer at Seven Investment Management.

3:56Morning, great to have you back as well. Good morning, thanks. Have you been lying in a darkened room somewhere for most of this week? No, not stressing it too much. It's been a pretty wild old ride. The thing is, on the way up, it was quite sharp and steep and everyone loves that, but then they don't love it on the way down. So I think it was to be expected a little bit. Earnings growth is still really strong, but we've just taken a little bit of the FOMO and leverage out. And that's, I think, what's brought it back down to earth a little bit. Are you a person who likes roller coasters? I do like roller coasters, actually.

4:32I knew you were going to say yes to that. I knew you were going to say yes to that. So there we go. So Shanti with us to walk through. As we say, those tech stocks have been all over the place, really, as Sean was telling you about earlier in the week. But we've also had Microsoft and Amazon overnight with their results committing billions and billions, hundreds of billions more to data centers, chips, spending on things like that as well. So we'll chat to Shanti about that through the morning as well. And the final member of our panel this morning, Douglas McNeil, back with us as well. Douglas, the former chief economic advisor to Rishi Sunak when he was prime minister.

5:02Morning. You well as well? Good morning. Very well indeed. Thanks. Yeah, what have you made? We'll come to perhaps the UK economy in more detail in a bit, but any sort of top line takeaway, I guess, from the interest rate decision that the guys were teeing up on the programme yesterday came in? No real surprise, I'm guessing. But did you take anything away from the comments afterwards and the sort of the voting pattern? Well, the voting pattern shows that there were three members of the committee who wanted to raise interest rates this time around. That's up from two last time. So you do get a sense of the committee moving gradually in a hawkish direction, a direction that might result in an interest rate hike next time around or perhaps the time after that.

5:44But, of course, so much remains dependent on the data and in particular on the oil price and developments in the Gulf. and who'd be a central banker? I think over the past month, the oil price has gyrated between about$70 and between about$100 and where it is in that range has a lot of implications for the future path of inflation. So that is very difficult for them to judge at the moment. Douglas might have just hit on what might well be a good theme for our programme this morning. Bosses with headaches and who would want to have them? We'll talk FIFA, we'll talk central bank governors. We'll hear from the company that have taken over BrewDog and now we're going to chat about perhaps arguably I would say one of our most beleaguered companies certainly in the time that I've been doing this program the last five years or so Thames Water of course been mired in mountains of debt facing fines from the regulators threats to be nationalized well the chief exec's been speaking to Simon Jack our business editor and he's told him he agrees with Andy Burnham that there should be greater public control of the company but he said public administration so effectively that nationalization plan for the business would be harmful as it could put investment at risk uh he's been speaking to simon for the latest episode of the big boss interview podcast so this is chris weston starting off talking about customers bills and uh arguing that they've been 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.

7:20It is massive. And keeping bills low mean that we can't invest enough in that infrastructure. And 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.

8:04It is the best way to keep bills low. So you borrow the money upfront, spend it and recoup it many years down the line from bills. Yeah. 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. Andy Burnham's talked about greater public control. We're not quite sure what that means. It 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.

8:44At that, you cut the debt quite significantly. You can stabilise the company, have government-appointed administrators go on, 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, you know, 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. I 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.

9:28So 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 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. I 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.

10:16If 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. By the taxpayer. By the taxpayer. I mean, if you don't nationalize 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.

10:56We 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. Of the failings of the company that people get angry about, which is the one that irks you the most? Is it the human waste in the water?

11:29Is it the spills? Is it the public image of the company? What's the one that bothers you the most? I don't think any of it particularly irks me. I do wish there was greater understanding of the magnitude of what we're dealing with. And this is not something that is going to get fixed overnight. I mean, I've been here two and a half years. I'm proud of the improvements in performance that we have seen, but it's going to take 10 years and 10 years of increased investment in our infrastructure to fix a lot of these problems. So I know people are angry and I have every sympathy for that, but I think people also have to be patient and recognize that this is something that is going to take a decade to fix.

12:14It's not going to happen overnight that's chris weston the boss of thames water they're speaking to simon jack and of course that episode of big boss interview will be up already so if you want to hear more of it after wake up to money do download it for your commute later shanti what did you make of particularly what he was talking about there at the end about what it might do to investment perhaps not just in thames but also actually what it would do for kind of investor appetite to get involved with anything that's kind of big public infrastructure yeah i think the worry is if they were to force some of the creditors to, you know, not receive some of their money back, it could make people more reluctant to lend to other utilities in the UK.

12:52And, you know, you don't want the government to be spending billions and billions on this infrastructure. It's one of those areas where you really want private money to come in, do those investments, you know, and then get paid back over the very long term. So I think that is a real risk. I think I was, I wrote down a note as I was listening, this is the thing we cannot fix with AI. But I think he is right about the amount of investment we'll need. And you think about the droughts we're having right now. When you have less water flow, it means the water isn't as good, so you need more chemical treatment.

13:26If the soils shift, it damages water mains more, you've got more leaks to repair. You need more reservoirs because you need to storm here because you don't get as much rain. So I think a lot of the stuff is quite real about the need to invest in that infrastructure. someone is going to pay for it. And we need to figure out a good mix of private investors, customers paying bills, potentially the government as well. Douglas, from a sort of policy perspective, I wonder if these were kind of conversations that you guys were perhaps having when you were in government as well. A lot of people want to know how it got to that state.

14:01The industry, not just Thames, but, you know, the water infrastructure, full stop, when Chris Weston, exactly to Shanti's point, when Chris Weston's talking about some of this stuff taking 10 years, it does suggest that it's not been monitored terribly well, doesn't it? The levels of investment, what they were investing in, how they were investing in, those kind of issues. Yes, I mean, I think a big part of the issue here was changes that were brought in at the start of this decade, which required water companies, Thames included, to monitor their levels of pollution performance much more closely, much greater requirements to monitor these things accurately and to report them to a much greater extent than before.

14:42And from that, it became clear that environmental performance around the sector, but particularly at Thames, was really lacking. And so that pointed out the need for a much greater level of capital expenditure of investment than had previously been realised. And then the other big thing that has changed over the past few years is that interest rates have gone up again. We had you know, a decade or more of very low interest rates. And that was great for a capital intensive sector like the water sector. But now we're back in a world of, you know, interest rates that, you know, closer to 5 % than 0%.

15:14And so that is a big challenge for financing these programs of investment. So that goes to the sort of start of the interview there, where Chris Weston's talking about that model of borrowing to invest in some of that stuff. They basically got caught out kind of holding the hot potato or whatever when the music stopped. Pick your cliche in terms of that interest rate basically being caught out by the interest rate going up. Yeah, that's right. And I think what he brought out quite well was that a special administrative regime is not a final solution here by any stretch. That's not that's not an end point.

15:47If the government goes down that route and when I was in government, we did something similar with a company called Bulb. Yeah, that is just a kind of interim solution, a holding pattern. You've still got to decide what happens to the company ultimately. And in the case of Bulb, you know, that was a special administrative set up which lasted for... And they were an energy startup, just if people can't remember, and eventually got bought by Octopus, right, at the end of it all. That's exactly right. That's exactly right. So the government was in control or the administrator was in control for just over a year.

16:19And the cost to government was a couple of billion pounds. Now, that was a smaller company than Thames is. So you can easily imagine that if Thames goes into administration, it would be there for longer. It would cost the government more because the government is going to have to foot the bill for the company's cash requirements whilst it is in administration. No private sector lender is going to lend to a company that's in administration. And during that period, the administrator is in control. It's not the case that the government is in control. The government has influence, of course, but it's the administrator who is running the company.

16:51And by the way, administrators don't come cheap. These are specialized professionals. The fees would run well into the tens of millions of pounds. Harriet, the idea that bills are too low. I'm not sure that, yes, I'm not sure that bills are really too low. That's not my experience at the moment, both personally and for work. I think one of the things that's very difficult about bills coming in at the moment is you just never know quite what to expect. Things just seem to be shooting up in all directions. and what we all really need both personally and in business is some stability and some understanding of what's going to come next and it just seems as soon as we get past one hurdle of oh this has gone up and that's gone up and now you know there's there's even more water problems and that's gone up for me it has personally my water bills have gone up a great deal in the last few months yeah so yeah it's difficult it's difficult to afford it all not alone um i i'm I'm sure among those 15, 16 million plus of Thames' customers who will have seen most of them see big rises in their bills.

17:54Chanti, I guess that's the bit that sticks in people's throats a little bit is they say, OK, we've heard this from the company. We've seen our bills go up and yet we still see the same problems. And I'm seeing it to the left of me on text. So I'll mix all your text together because there's a few of you making the same point. that this company's still been paying out massive dividends to shareholders through this period, despite and bonuses to staff within the company when the performance hasn't been up to scratch? Yeah, and I think that's, well, first of all, you do still have to pay staff of the company.

18:27You know, the level of bonus, I think I'm probably not specialised enough to comment on it. I think the difficulty you have with a lot of these costs in terms of water is for an average person, how do I know what is a fair bill? And so the answer to that is, well, how much does it cost to pay all the staff of Thames Water to fix their 400 water mains or whatever it is to do the infrastructure? And it's not really a problem any of us can know. I think it's maybe easier if you go to a restaurant because you have an idea of the quality of food. You know that wages might have gone up. You interact directly with the server.

19:05So it's much more tangible. Whereas, sure, probably sometimes water staff have had their wages go up in the past five years. It's probably reasonable if they were on low wages and minimum wages increased. But it's hard for us to get our heads around that. And to that point, Douglas, doesn't that suggest then that actually in the conversation that Chris Weston was having with Simon there, that actually water is sort of potentially a sensible thing that the governments should run? Well, government can certainly step in here and government can get control and perhaps it can use that control better than the private sector, potentially, but I think that's far from clear.

19:49And if you end up with public control, you also end up with public funding, inevitably, one way or the other, I think. Now, if the government does that with Thames, I think that creates a bit of a problem vis-a-vis the rest of the country, because if the government is contributing towards the funding of Thames, then that doesn't seem very fair to bill payers in other parts of the country who are having to shoulder the burden of financing their water companies wholly on their own without government funding. On the other hand, if you create a system of public control and ownership and investment for Thames, then you will face pressure.

20:24We're going to have to send them all back in. Yeah, exactly, exactly. And that will place a lot of pressure on the public finances at a time where I think it's probably not wise to be heaping more pressure onto the public finances. Harriet, do you have a view on that? I don't think most businesses really mind who owns utilities when it comes down to it. But what we really care about is reliability, value for money, long-term investment, those sorts of things. And I think if you're manufacturing or running retail premises, you just need affordable energy and the infrastructure that works. And part of the thing that's really stood out to me in that interview when we were just listening to it then was this thing about, you know, we need patience.

21:06And I don't think we're very good at that at the moment. I mean, look at how many times we've changed prime minister in the last five minutes. You know, I just I think we do need patience to wait for that infrastructure to be worked on. And whether that means government stepping in or not, I'm probably not qualified to say. But I think that what we need is that reliability and to understand what's coming. As I was saying, you know, what we need is a stable environment so businesses can plan and invest. Plenty of you yet to be convinced by that interview by Chris Wesson. As I mentioned, lots of you getting in touch with that point around payouts to shareholders and bonuses to the top bosses there.

21:47Perhaps Andrea in Hackney best sums up everybody's views where Andrea says, I think we're aware of the lack of infrastructure. It's why I'm apoplectic that dividends were paid to shareholders instead of investing it. Thameswater have, in Andrea's mind, taken money from customers and the CEO calling for us to understand the time it will take to fix things is condescending. 85058 is the text number. 08085909693 is the WhatsApp. app. Douglas's theme, we'll pick up on it again, people with headaches. Douglas, I included the governor of the Bank of England this week. You gave us a kind of sketch out of what you thought the voting pattern told you.

22:30If you were in the room, I'll give you an even more unpleasant job. If you were in the room having to make some of the decisions, which side of that argument do you think you would have been on, hold or raise, given everything that's going on in Iran? on? Well, I think I would place a lot of weight on the fact that inflation has been above target for quite some time now. It's not miles above target. It was 2.6 % at the last print. But nevertheless, that's above target. And it's been closer to three than two, two being the target for about 18 months now. And it hasn't been at or below target for about five years, believe it or lot.

23:09And that would concern me if I was in the room, if I were a central banker. It's very important that the bank is seen to be an agency that can control inflation, that can manage the rate down to target. And I think for so long as inflation runs above target, that is an uncomfortable place to be. So I think I would probably have signed the three hawks, the three committee members who wanted to hike rates. Shanti, where do you think you would have been and what did the market make of it all? I think it's reasonable what they're doing. You know, the energy, raising interest rates doesn't change energy costs.

23:44So that's not going to have an impact. And I think there is evidence that you're starting to see a bit lower wage growth and a bit less hiring and, you know, in staff costs, that's the biggest driver of inflation. So I think it makes sense to wait a little bit rather than raising rates and, you know, making things a little bit harder for the economy. Harriet, your best place of all of us to see what's going on, what is still kind of inflationary, what's coming in, what's putting kind of pressure on what you're having to do with your prices? Yeah, we're getting affected by inflation in sort of both directions.

24:17So we've got our raw material costs, because obviously we work in gold, and the gold prices have risen a lot over the last few years. They had a little bit of a drop recently, but now they're they're back up again and it's still a lot more than it was say a year ago so where our raw materials are going up but also obviously our customers like us all have been feeling the squeeze on household budgets so they feel more worried about what they have to spend and I think that's why I was mentioning before a lot of people are wanting to use their own gold to help save save money but but but happily still trying to celebrate these important life moments because they also feel very important at the moment when things are difficult I think.

24:59So still seeing that kind of cautiousness in confidence if you like. Yeah exactly that and so people are being cautious but still wanting to do something to celebrate these moments but yeah it is quite a juggle for us as designers because we're trying to you know give them what they want at a price that feels right for them as well. And Douglas, that's the other side of it, isn't it? That actually lots of the other signals, hiring, jobs, consumer confidence that Harriet is talking about, would actually suggest an economy that might need a rate cut more than anything else. Well, that's certainly true.

25:40We don't want to nip things in the bud, nip economic growth in the bud. I think, however, that you could argue that the economy is actually withstanding the pressures from the higher oil price a bit better than we expected earlier in the year. It looks as though we'll manage GDP growth for the year of about 1%, which is nothing special, but it's not bad by the kind of mediocre standards of recent years. And we saw yesterday the US announcing GDP data for the second quarter. That was down a little bit in that quarter, but quarterly data can deceive, it can be volatile. Over the first half of the year, the US economy, which is a very important locomotive for the rest of the world, grew by about two and a half percent.

26:25So I think economic growth is holding up a little bit better than we thought just a few months ago. Yeah, and we've actually had a question to that. And Douglas or Shanti, you might be best placed to field this one. But Gordon in Stirling has been in touch on 85058. Can you ask your guests why higher oil prices could lead to higher interest rates? Surely this would not be a demand-driven price-wise, which I understand is the classic need to raise rates. The oil price rise is supply-side and surely naturally dampens down spending and thus not a need for a rate rise. You were sort of half answering that there, Douglas, anyway.