An aerial view shows Thames Water's Crossness Sewage Treatment Works, including the sludge incinerator used to generate electricity, on the banks of the River Thames in south east London on July 3, 2023. The British government last week expressed serious concern about the financial plight of the country's biggest privatized water company.BEN STANSALL/AFP/Getty Images
Raw sewage leaks, crippling debt and outraged consumers have turned an investment in one of Britain’s largest utilities into a reputational nightmare for two of Canada’s largest pension plans, with the water company becoming a test case for the pitfalls of the private ownership of essential infrastructure.
Next Wednesday, a British parliamentary committee is scheduled to grill management and regulators on problems plaguing Thames Water, a company that supplies 15 million people with drinking water and sewage services. The committee will probe why chief executive officer Sarah Bentley resigned two weeks ago, two years into an eight-year turnaround plan, and why the utility recently paid a £3.3-million fine (about $5.1-million) for discharging undiluted sewage and killing at least 1,400 fish – the latest in a series of penalties.
What plays out before Parliament will have an impact on the Ontario Municipal Employees Retirement System, Thames Water’s largest shareholder with a 32-per-cent stake, and British Columbia Investment Management Corporation, which owns 9 per cent – along with all other Canadian pension plans with global investment ambitions.
Thames Water, a flagship 1980s privatization under former prime minister Margaret Thatcher, owes lenders £14-billion, and Britain’s Conservative government is openly discussing taking control the company. In a worst-case scenario, nationalization could wipe out OMERS and BCI’s multibillion dollar investment in the utility, including their share of £500-million in new funding this spring. The alternative is pouring more cash into the water works: British regulators are pushing the owners for at least another £1-billion commitment.
Along with money, industry experts say the fate of Thames Water will determine whether Canadian pension plans can continue to enjoy the social licence needed to acquire infrastructure. The issue strikes at the heart of the funds’ investment strategy, as these stable, long-life assets are well suited to the pension plans’ promise to provide retirement income to plan members.
“The collapse of Thames Water could potentially lead to reputational risk for OMERS and BCI,” said credit rating agency DBRS Morningstar in a report released Wednesday. The funds are committed to expanding their already significant global infrastructure portfolios: OMERS has $29.7-billion dedicated to the sector, while BCI has invested $22.3-billion.
Thames Water investors reluctant to stump up cash, regulator says
“An aspect of the ongoing debate on the viability of the private ownership model for natural monopolies is whether this type of investor is responsive enough and ready to inject capital when needed.”
In a 2020 study, the University of Greenwich found that the privatization of Britain’s water industry led to a 40 per cent increase in fees for customers and created “a failed system that only benefits shareholders.” Rather than investing in aging pipes and sewage treatment facilities, the report said, institutional owners of Britain’s 11 regional water companies paid themselves £50-billion in dividends, and spent another £47-billion servicing debt.
Spokespersons for OMERS and BCI declined to comment on their investment in Thames Water. However, both fund managers pointed to a June 28 release from the utility saying it has £4.4-billion of cash and committed funding and is “continuing to work constructively with its shareholders in relation to the further equity funding expected to be required to support Thames Water’s turnaround and investment plans.”
This week, David Black, the CEO at Ofwat, Britain’s water regulator, told a parliamentary committee that his organization has pushed utilities to pay down debt and “faced huge resistance from investors to do so, and from companies.”
Thames Water’s owners also include the Universities Superannuation Schemes, the largest British pension plan, and China Investment Corp., the East Asian country’s sovereign wealth fund.
Problems at Thames Water date back to “mismanagement” by the utility’s previous ownership consortium, led by Australia’s Macquarie Group, according to DBRS. OMERS acquired stakes held by Macquarie and other shareholders in a series of transactions beginning in 2017. A spokesperson for the fund manager, Neil Hrab, said it has never taken a dividend from Thames Water. BCI invested in the company in 2006.