Helm: Split Thames sewage and water activities

Economist Sir Dieter Helm has called for Thames Water to separate the company’s water and sewage activities into separate entities.

Helm – a vocal critic of the water sector – said a “separation of the two functions would increase focus” at the embattled water company.

He said the split was needed as Thames is currently “too big to be effectively managed” both in terms of scale and number of functions.

“There is no compelling evidence that the integrated model is better than separated services, and the synergies are not that large,” Helm writes in a self-published essay. “More importantly in the Thames Water case is that it already has a massive agenda for its board and its balance sheet, and a separation of the two functions would increase focus.”

Helm also wants Thames Water broken up into two catchment areas; one for London – which he proposes calling London Water – and one for the wider Thames catchment area – which he proposes calling Greater Thames Water.

Under Helm’s full break-up model, the sewage and water functions would be separated at both new companies through special purpose vehicles. Both would be stand-alone, with no holding company above them.

Helm adds that the only credible way to achieve his vision is through special administration.

He said that breaking up Thames could be achieved by the existing owners but “would be at best a long and protracted process”.

The better option, according to Helm is to bring in the special administrator.

“In placing Thames Water into administration, and with the ‘special’ dimension being guided by the overall public interest, rather than narrowly those of the existing owners and creditors, the special administrator could start with a blanker piece of paper,” Helm said.

Concerns about Thames Water’s financial footing have been growing since former chief executive Sarah Bentley’s sudden departure last June.

In December, Thames Water’s senior team said that the business had insufficient funds to pay £1.35 billion of debts due to mature between this year and 2028.

Thames’ two majority shareholders also both devalued their holding in Thames’ parent company Kemble Water.

Helm said that the “reluctance to press the special administration button in the Thames Water case comes from a fear of upsetting foreign investors”.

“This is a very serious concern not just for Thames Water and the wider water sector, but for investment across the infrastructures and in net zero,” Helm stated.

“The UK has got itself into a position of relying on the kindness of strangers to allow its citizens to live beyond their means, and for almost all financing of investment across the economy.”

He added: “The question is: would putting Thames Water into special administration and splitting it up lead to less and more expensive investment by foreigners in the UK generally, and the infrastructures in particular?”

In answering this, Helm said that ultimately “the rules that have been established for failing utilities should be followed”.

He concluded: “These “rules of the game” are known to all investors, and these rules include those for utility failures. The only uncertainty has been about whether they will ever be applied. […]

“If Thames Water is not now put into special administration, it would be reasonable for all investors [at other water companies] to assume none will ever be placed into this.

“The end result is more and more conduct regulation. It is not clear how this could possibly be in the interests of the investors, unless they assume that they can capture the regulators.”