Debt crisis at UK’s Largest Water Company and Its Implications For Taxpayers

Thames Water is said to be teetering on the edge of failure. The foremost water company in the UK, renowned for its significant water loss, incidents of sewage overflow, generous executive salaries, and dividend disbursements, seems to be overwhelmed with debts that exceed its financial capacity to repay.

Thames Water is facing a critical situation as its debts have surged to over £14 billion, raising concerns that the UK government, and ultimately taxpayers, may have to intervene to rescue the company.

While this news may have come as a shock to many of Thames Water’s 15 million customers, my research on water company finances has led me to believe that these issues were not entirely unexpected. The problems plaguing the company have been building up over a long period, and I publicly expressed concerns about them over five years ago.

Water and sewage companies

When the water and sewage companies in England and Wales were privatized in 1989, the goal was to infuse fresh capital and innovation into the sector to drive efficiency. However, in the 2000s, a new breed of financial investors emerged as dominant players in the industry.

Our recent study found that, as of 2021, nine out of 15 English water and sewage companies were owned by “special purpose companies” created solely for acquiring water utilities. These special purpose companies were owned by a mix of private equity funds, pension funds, and sovereign wealth funds.

These investors were able to utilize the revenue generated by water companies to deliver substantial returns to shareholders, and one method employed was by increasing company debts.

At the time of privatization, water companies had no debt in 1989. Yet, by March 2022, the sector’s total debt had reached £60.6 billion. Some of the increased debt was used to refinance the companies, enabling investors to recoup part of their original investment in acquiring the water utility.

Our research indicates that Thames Water epitomized this model. Following its takeover by a consortium led by Macquarie, an Australian investment bank, in 2007, the company’s debt rose from £3.2 billion to £10.7 billion over the next decade. The proportion of assets funded through borrowing surpassed 80%, while dividends worth £2.5 billion were paid out. Thames Water previously claimed to have a “strict, performance-linked dividend policy monitored by Ofwat.“

The high level of debt

The high level of debt poses several problems for a water company. Firstly, it leads to inequality, as customers’ water bills are utilized to repay debts that were incurred to pay dividends to the owners. Secondly, as exemplified by Thames Water, these heavily indebted companies become vulnerable to financial pressures.

Thames Water’s finances are now on the brink of collapse due to a combination of factors. One significant pressure is inflation, which is increasing the value of the company’s debt while also driving up costs. Over half of Thames Water’s debt is linked to inflation, contributing to the escalation of its overall debt burden.

Additionally, the cost of improving performance has become more urgent since Ofwat, the water company regulator, gained new powers in April 2025 to restrict dividend payments that undermine financial resilience or lack performance-based justifications.

In 2022, the government unveiled a £56 billion investment plan to address the growing issue of sewage discharge. All of these factors place immense strain on Thames Water’s financial stability.

If the company’s finances unravel, it is likely that the government will step in to ensure continuous water supply while devising a rescue package, similar to what occurred with the energy company Bulb.

Water supply

However, this situation also presents an opportunity to adopt a new public model for water supply, one that views water not as a private commodity but as an integral part of the broader ecosystem, encompassing social equity and environmental sustainability.

Public ownership does not have to mean reverting to the past. In fact, it would align the UK with the majority of the modern world, including most of Europe. The transition to public water provision in Paris in 2009, after years of outsourcing, is widely regarded as a success story.

The past 34 years have exposed fundamental flaws in the current system. This crisis presents an opportunity to steer England’s water management in a new direction.

Read the original article on Phys.

Read more: Using Squid Game to Teach Economics.