The river Pang is a chalk stream that winds through the Berkshire countryside. It is known for its water voles – also known as water rats – which is why Kenneth Grahame, who lived at the river’s end, in Pangbourne, made Ratty a protagonist of The Wind in the Willows. The Pang was likely the river that Grahame’s Mole saw for the first time as a “sleek, sinuous, full-bodied animal, chasing and chuckling”, and which “chattered on to him, a babbling procession of the best stories in the world, sent from the heart of the earth to be told at last to the insatiable sea”. That was more than a century ago. The Pang today is part of the Wild World, a river sickened by greed.
The pollution of Britain’s waterways is well known, but the full extent of the carelessness and vandalism of Britain’s biggest water company, Thames Water, has not been revealed until now. New research shared exclusively with the New Statesman reveals the previously unreported extent of Thames Water’s environmental problems, and shows that five years of new regulations and responsibilities have done nothing to address its pollution of bathing waters and delicate ecosystems. The research, based on the biggest study ever conducted of Thames Water’s own data, gathered from more than 200 sewage treatment works, finds the company’s illegal pollution of waterways with raw sewage has not declined at all since Boris Johnson’s government promised to “restore precious water bodies to their natural state by cracking down on harmful pollution from sewers” with the 2021 Environment Act. Instead the environment has been degraded on an industrial scale: 39,404 spills of untreated sewage, at least 8,499 of which were illegal, between 2021 and 2025.
The Pang suffered most of all, having been illegally polluted with raw sewage 383 times during the analysis period. In all, the analysis – available in full here – found untreated human waste was dumped into 163 different watercourses across 66 Westminster constituencies. Almost all (at least 89.7 per cent) of the 224 sewage treatment works were found to have spilled sewage illegally.
Professor Peter Hammond, who conducted the analysis, found not only evidence that illegal spills have not reduced, but that some sewage treatment works seem also to be treating sewage at a higher rate than their maximum capacity, pushing effluent through the works too fast for it to be properly treated. This could mean that an even higher level of illegal pollution is going undetected.
Subscribe to the New Statesman today for only £1 a week.
Thames Water told us that “the health of our rivers remains a key focus” and that it is “delivering the most significant upgrade to our wastewater network in 150 years”, and that these investments are showing “early signs of progress”. River health, it said, could also be impacted by other factors, including: “Farming, industry, road runoff” and, perhaps surprisingly, “wildlife”.
As the company’s chair admitted to MPs last year, however, huge sums allocated for improvement works are being spent instead on keeping the company afloat. The timid steps recommended by the Independent Water Commission will not turn Thames Water around. Its environmental record and its finances form a clear picture of a
company that is beyond fixing.
Last month, Keir Starmer said his government was “putting through legislation that says there won’t be bonuses for shareholders” in water companies. This language suggests the Prime Minister does not understand what has happened to Thames Water. The shareholders in the company have lost billions. Its biggest shareholder, a pension fund for Canadian teachers, wrote its investment in Thames Water to zero almost two years ago, wiping around £990 million from its balance sheet. Money is not really extracted by paying “bonuses” to shareholders (who are in any case paid dividends, not bonuses). The bonuses paid to its executives are trivial in terms of its wider finances. The real issue is who is lending the company money.
This is the most important fact to understand about Thames Water’s finances today, and the reason your bills, if you are a Thames Water customer, are rising so quickly. It is not the company’s executives, or its shareholders, who are wringing the company dry: it is the people who own its debt. To distressed-debt investors, Thames Water looks less like a company and more like a troubled country. These debtholders make their returns by lending Thames Water money at ever higher rates of interest.
The best example of this is the £3bn loan extended to the company in February to prevent it from becoming insolvent. BBC News described the money as a “lifeline”, but that is the wrong word: it would be more accurately described as a noose. The interest rate on the debt was 9.75 per cent. A company that has an unassailable business model, the monopoly provider of essential services to 16 million people – and which made profits after tax last year of £328 million – is being charged more than twice the average high-street mortgage rate to borrow money.
It’s worse than that: the debt came with added fees that took the bill for borrowing £3bn up to more than £800m, and the lenders – led by a group of American hedge funds – were able to sell the debt on at higher prices, further raising their returns; one investor immediately booked a profit of 17 per cent from this “rescue”.
Ewan McGaughey, professor of law at King’s College London, says it is indefensible that the UK’s biggest water company should be charged “payday loan rates” on its debt. “The only way that this can continue,” McGaughey told me, “is if the interest rate [on Thames Water’s debt] keeps on going up and up, and bills keep on going up and up.”
The notion of Thames Water as a functioning company is dispelled by the reality of where the money from sharply rising bills is going – not into the more than 100 maintenance projects that had been planned to reduce sewage spills, but into keeping the company running as it struggles under its debt servicing costs. “Essentially, what we’re doing is bailing out banks,” McGaughey explained. “The economic equation is: money goes from billpayers to Wall Street banks.”
Thames Water has been run, for a long time, in the gap between two principles. The first principle, inherent to any functioning market economy, is that it must be possible for a private company to fail. The other principle is that you can’t shut off the water supply to 16 million people. And yet both must be observed. “There has to be a failure regime,” said Dieter Helm, professor of economic policy at Oxford University. “You cannot live in a world where there are no failures.”
Intone the words “special administration” within a mile of the Palace of Westminster and a lobbyist for the water industry will appear at your elbow to warn about the very high cost of running a water company, not to mention its vast debts. But these sums are not what they seem. A special administration regime, or SAR, is not the same as nationalisation. It is a way for the government to allow the ownership of a company to fail, while the services the company provides keep going.
If Thames Water was placed into an SAR, the government would have to underwrite the cost of running the company, which one water industry analyst put at £25m a week. In government spending terms, that’s not nothing, but it’s also not disastrous; it is an increase of about 3p on every £10 of current spending. Helm said even this is not a risk. “The company is completely viable,” he told me. “It has a lot more [money] coming in than its day-to-day operating costs going out.” He also pointed out that the state would get any money it did spend on the SAR back, when the company was sold. “The government has first claim on the money that’s raised from a sale,” Helm explained. “All its costs, the cost of insurance, everything.” The final bill for a special administration would be zero.
In fact, the one previous example of a special administration regime being used on a utility provider – the 2021 collapse of Bulb energy – ended with the government making a profit estimated at around £1.5bn. The same would not be true of Thames Water, but Treasury officials should not assume that the process would be anything other than fiscally neutral.
The government has so far sought to avoid an SAR, but it has contracted a large US-headquartered consultancy firm, FTI Consulting, to advise on how the process would work. FTI is the world’s biggest consultancy on restructuring, and among its former clients is Water UK, the lobbying group for Britain’s private water companies. There is no suggestion of impropriety on FTI’s part, but it is worth noting that it has sometimes worked both sides of this issue: in 2021-22, for example, both Water UK and Ofwat, which regulates Water UK’s members, were FTI clients, at the same time.
For Dieter Helm, an SAR is not something to be feared; the bigger risk is the moral hazard that is introduced if it is never used. “If you don’t have a failure regime, and you don’t have a way to deal with the likes of Thames… then all the industry will know that they’re never going to be put into administration. And then, however many supervisors you invent … you’re always going to have to cave in to the companies.”
Photo by Dan Kitwood/Getty Images
For a sense of who the government would be up against in the fight over Thames Water, we should make a brief visit to the port of Tema, on the Atlantic coast of Ghana, in October 2012. The 100-metre-long Libertad, one of the world’s largest tall ships and a frigate of the Argentinian navy, arrived in the harbour only to be detained by the Ghanaian government. NML Capital, a financial company based in the Cayman Islands, was involved in a dispute with the Argentinian government over the value of its government bonds; the company had secured a court order to arrest the Libertad and hold it until it was paid. A tense, armed standoff ensued that lasted more than two months and was only resolved after the intervention of the United Nations.
The reason this anecdote is relevant is that NML Capital was an offshore unit of Elliott Investment Management – which is, with other funds, part of the consortium of bondholders that are currently proposing to “rescue” Thames Water by lending it billions more. The consortium says this plan will “recapitalise and stabilise” the company with the aim of “fixing Thames Water for good”. Distressed-debt buyers such as Elliott and Silver Point Capital – another US hedge fund in the 15-member consortium – do not act illegally or immorally, but they are not used to making boring investments, either. They are specialist funds with an appetite for high risk and high returns. “They go into extremely risky ventures, they hammer governments with legal threats,” said McGaughey. “And when you’ve got a gullible government that is too weak to stand up, they walk away with lots of money.”
These bondholders appear already to have made good returns by buying Thames Water’s debt. However, McGaughey says the government would not need to repay the face value of that debt in an SAR. It is a question, in legal terms, of “appropriate value”: if you stop paying your mortgage, your bank can compel the sale of your house and use the price it sells for (its market value) to pay off the debt, but lending money to a public utility is not like this. If you own the debt of a public utility you cannot, by law, demand market value. Even the British government isn’t careless enough to create a situation where any creditor can buy up debt and start taking possession of railway lines, reservoirs, or electricity cables.
The question, then, is what constitutes the “appropriate value” Thames Water’s creditors can ask for. “The repair costs at Thames Water are so big that they exceed the debt that is owed”, in McGaughey’s view, and the bondholders have “already received more than the fair value of their claims in interest payments”. This makes it easy to calculate the appropriate value to which the debtholders are entitled: they are entitled to nothing.
Clearly, Thames Water’s creditors would disagree. But McGaughey says it would be “next to impossible” for them to win a court case arguing against the government’s decision. “They’re going to lose”, he said – just as shareholders in other nationalised companies, Northern Rock and Railtrack, lost similar compensation cases against the state.
Special administration would therefore be a chance to reset the company’s finances in relation to its responsibilities: a new buyer would look at the difference between the company’s regulated asset base, or RAB (all the pipes, sewers and other infrastructure that the give company its monopoly) and the real cost of maintaining services in a way that doesn’t break the law. “The difference is how much you think it’s going to cost to put right what the company has currently failed to do,” Helm explains. The debtholders might complain, but Helm’s answer to them would be: “Tough. You didn’t carry out the functions of the company. You failed, and you should not be rewarded for failure.”
Let’s entertain for a moment the idea that all of the above is wrong, the water industry lobbyists are right, that taking Thames Water into administration would be a disaster that ended with all of the company’s debts (about £17bn) being added to the government’s balance sheet. The threat dangled by lobbyists is that given the UK’s already enormous debts the bond market would not accept another £17bn, and this government would, like Liz Truss, be deposed by rising gilt yields. However, I asked bankers and hedge fund managers who invest in gilts how their trading of British government debt would change in the extreme scenario that Thames Water’s debts were nationalised and transferred to the public balance sheet in full. The consensus, summed up by one investor, was that even an extra £17bn would be “trivial” in comparison to the UK’s wider debts. “I doubt we would see any significant rise in gilt yields,” the person told me.
At the moment, Thames Water’s bondholders enjoy the privilege of running the company without being held responsible for doing so. The chair of Thames Water, Sir Adrian Montague, admitted this when he told MPs in July last year: “we are kept alive by the creditors drip-feeding liquidity into the company. They have a great deal of contractual control over what happens at the company… The board takes the decisions, but they do have a great deal of control.”
The proposals of the recent Independent Water Commission review would not resolve this situation. Helm called the plans “a gift for the industry… They are an administrative nightmare, and they are a major expansion of regulation.” Helm said the only sensible option for Thames Water is not only to take the company into special administration and sell it to a more responsible owner, but to break it up into four new companies. To have a single private company controlling the water supply to one in four people in Britain is “too big a risk to society… It’s too big to run.”
[Further reading: The Great Stink: Britain’s pollution crisis]
Content from our partners