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THOMAS CRANMER: Thames Water on the brink of collapse sends warning of Three Waters debt risk

The English water utility uses the same highly leveraged financing structure as proposed for Three Waters. Crippled by £14 billion of debt it now faces imminent insolvency or renationalisation.

Yesterday news broke that the UK’s biggest water supplier, Thames Water, is on the brink of financial collapse under the weight of £14 billion of debt. The utility provides water to 15 million people in London and the South East.

The water company has struggled under a mountain of debt for many years which has crippled its ability to upgrade its infrastructure on time and improve water quality. The Daily Mail reported yesterday that Thames Water had spilled sewage 22 times a day last year, leaks 630 million litres of water a day and has paid more than £30 million in fines.

Last year shareholders injected £500 million of additional equity into the company in order to strengthen its balance sheet and are currently faced with the prospect of injecting another £1 billion into the stricken business or see it renationalised or placed into a special administration regime. The UK government is on standby and ministers are considering options in consultation with the water regulator Ofwat.

The FT noted that high levels of debt has meant that income from customer bills has been diverted to meet interest payments.

The FT stated, “The entire sector is now under pressure from rising inflation, including soaring energy and chemical prices and higher interest payments on its debts. S&P, the rating agency, has negative outlooks for two-thirds of the UK water companies it rates — indicating the possibility of downgrades as the result of weaker financial resilience.”

Sky News added, “The financial collapse of Britain’s biggest water company, and its implications for the model of water ownership, would inevitably become a major political debating point in the run-up to the next general election.”

Regardless of the immediate outcome, the company faces the prospect of challenging financial and operational restructurings that will take years to complete at eye-watering cost.

Although our government has taken advice from the Water Industry Commission of Scotland on some matters, we have not adopted Scotland’s approach to financing its water infrastructure, which instead relies on a combination of water rates and debt from the Scottish Treasury.

By contrast, New Zealand is proposing a highly leveraged financing described by the Department of Internal Affairs and the rating agency, Standard & Poor’s as having “an aggressive financial risk profile”. The Three Waters model of financing is the same model used by Thames Waters and a number of other English water utilities.

Last October I wrote two articles on the risky nature of the financing proposed for Three Waters, and specifically drew attention to Thames Water as an example of how these structures can go badly wrong. Those articles are available here and here.

I also asked the Department of Internal Affairs a series of questions about the debt which are set out in my earlier articles. Of note, I asked the government if it wished to make any comment on the fact that Crown support in the event of financial distress is considered, “highly likely”. A Department of Internal Affairs spokesperson responded:

WSE (Water Services Entities) financial distress is a very unlikely outcome. Their failure is even more unlikely.

This does, in my view, demonstrate a fundamental lack of understanding about how these financings work in practice. Obviously, given the ability to generate revenue via water rates, it is highly unlikely that the WSEs will become cashflow insolvent. That is not the issue. The problem is when the debt stack becomes so big that interest payments swallow cash that should otherwise be applied towards the operational upgrade.

Debt is drawn down periodically over years to fund the infrastructure upgrade but at a certain point, when the structure becomes financially distressed, new debt will become drawstopped. In other words, the WSEs will not be able to access additional debt to continue with the upgrade. Without additional equity, the entities become balance sheet insolvent and in need of a financial restructuring.

On a large scale, that is what has happened to Thames Water today. Rates have already increased dramatically for customers over a number of years. Crippled by debt, the work has been substandard. Now that its debt problems have become critical, it can’t continue because it has no more access to its debt financing. The shareholders need to either contribute additional equity to recapitalise the structure or the company will face some sort of insolvency procedure or renationalisation. In the case of New Zealand, “the shareholders” would of course be the taxpayer.

Last October I wrote, “The proposed Three Waters financing by itself is extremely aggressive and risks following the same ill-fated path as other highly leveraged utilities elsewhere in the world such as Thames Water. However when combined with an overly complicated and unbalanced governance structure it could prove to be ruinous to the country’s finances and deleterious to its social fabric. The local government elections have sent a message. Tinkering with these reforms will not suffice.”

Thames Water, and the English water sector more generally, should be a cautionary tale for New Zealand. Highly leveraged financings in this sector have been tried and have been criticised for some time. They have not delivered improved water quality or service for customers. Instead, the UK government is now faced with the imminent collapse of its biggest water utility under a mountain of debt.

Thames Water demonstrates that the risk of highly leveraged financings is not theoretical, it is very real. We simply cannot afford to make the same mistake in New Zealand. There are a number of lower risk financing options available to the government which should be considered. The current financing proposal is untenable.

Thomas Cranmer is a pseudonym. He is a lawyer with over 25 years experience in some of the world's biggest law firms. He divides his time between the UK and NZ. You can read and support Cranmer's Substack here

2,116 views19 comments


Jun 30, 2023

WSE (Water Services Entities) financial distress is a very unlikely outcome. Their failure is even more unlikely.

i am not at all surprised by that response. the quality of financial education in this country is well below any standard. and, in the event the entire 3/5 waters collapses in a heap there always is someone else to blame. most likely it will be the dreadful pakeha colonizers . . . . .


Here’s the link to S&P’s letter to Dept of Internal Affairs, April 2021:$file/rating-evaluation-service-res-letter-three-waters-reform-programme.pdf


It’s important that the financial risks associated with Three Waters are properly debated. Standard & Poors actually considered a scenario with 13 entities (as opposed to the original 4) and concluded it would have a lower (BBB+) rating than the others. They pointed out that the rating could be lowered further if “operational efficiencies’ did not eventuate”, which - on current form - seems pretty much guaranteed by a Labour government.

Three Waters will bankrupt New Zealand. It must be stopped.


Picker N Grin
Picker N Grin
Jun 29, 2023

The rot in local bodies set in when it was decided that paying mayors and councillors was the right thing to do. What it did, in fact, with the encouragement of 'want to have everything' voters, was to elect left wing losers to take control of councils, they hade no idea of how to run towns/cities and it shows in spades. In the 'good old days', councils were usually made up of retired business men who wanted to give back to communities, and felt it was n honour to do so, they didnt want to be paid for their efforts, they knew the costs and values of everything and weren't swayed by 'wannabes'. We are now infested by councils that…

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