The water sector appears to be reaching an impasse, as the difficulties of some of the biggest companies and how they might be resolved could have lasting impacts on how business water is handled, how much it costs and the sector as a whole.
Whilst the issues surrounding Thames Water are well-documented and the government have stated they have “stepped up” their preparations to intervene, the parallel issues surrounding Southern Water have raised concerns about the overall health of the water sector.
Unless a major bid to invest in Thames Water appears or the impasse surrounding a rescue plan between existing creditors and Ofwat as reported by the Guardian is cleared before the existing emergency funding runs out, then the only alternative is a special administration regime.
This process, which has been seen in the energy sector but never the water industry, is seen as the absolute last resort, as the ramifications of the deal could potentially cause what UtilityWeek describe as a ‘domino effect’.
Here is the case for and the case against a special administration regime.
What Does Administration Involve In The Water Sector?
Following the privatisation of the water sector in 1989, one of the biggest concerns concerning the water companies is what would happen in the event of a financial collapse, insolvency or administration.
Unlike other companies which could sell off assets, restructure debt or simply liquidate, it could potentially threaten lives if water companies simply shut down, and ceased their operations in distributing clean water and treating sewage.
The answer to this was the special administration regime (SAR), an application made by the Secretary of State for Environment, Food and Rural Affairs (Defra), currently Steve Reed, which would lead to the appointment of an administrator to restructure the company on the government’s behalf.
This can only be done if at least one of these four conditions is met:
- The company asks for it directly, although exactly why a company would do so is somewhat unclear.
- The company is likely to fail or has already failed its statutory obligations, something that both Thames and Southern have fallen foul of.
- The company is unlikely to pay its debts or is already insolvent, something that Thames has narrowly avoided.
- It is in the public interest.
It was originally off the table, but the tone and language have changed significantly as the magnitude of Thames’ issues becomes clear. Here are some reasons why the government has avoided the SAR for so long.
The Case Against Special Administration
The two major reasons why it has been avoided up until now involve matters of principle and matters of contagion and a potential fear of the wider consequences of an SAR.
The former concern is based partly on the stated aim of the SAR, as well as the more general principle of the claimed virtues of privatisation, particularly given the sheer scale of the issues surrounding Thames Water.
The SAR of Bulb Energy was typically explained as the result of a particularly unfortunate set of circumstances that caused wholesale energy prices to spike across the board, but an SAR of the much bigger Thames Water would magnify the issues with the industry as a whole.
The other concern is contagion, or the potential spread of the Thames Water crisis throughout the water sector that could potentially force other companies into troubled financial waters.
Whilst an SAR is not strictly nationalisation, it would make investors wary about investing in the water sector again if the risk is that their investment will end up worthless and their control of a natural monopoly ends up seized if there are major issues.
This could cause investors to avoid investing in other water companies and potentially turn a single SAR caused by rather unprecedented circumstances into multiple, magnifying the potential costs.
The Case For Special Administration
The case of the Bulb Energy SAR demonstrates that the overall cost to the government and by extension the taxpayer is minimal, as a significant amount of the money will be made back once the SAR is completed.
It could help to clear a significant amount of the debt that was restricting Thames’ ability to take action and improve the infrastructure that was creating a doom spiral where emergency loans and finance were being used to service existing debt.
As well as this, the appeal of being a natural monopoly means that an SAR that removes many of the problems and debt obligations would potentially make it more appealing to a future investor, and the existence of bids for Thames despite its current condition suggests there is still a market for companies to invest in British water companies.
It also resists potential pressure from investors to increase costs, lower fines and reduce statutory obligations.
