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The attempt to restructure Thames Water’s waterlogged balance sheet is a complex and time-consuming undertaking, we can all agree. Current lenders will have to agree to write off many billions of pounds worth of debt, or have the pain forced upon them. Courts have to sanction the main steps. There is a risk (still) that the whole thing falls apart.
But one aspect should have been easy to understand from the outset: if Thames had thoughts of paying bonuses to some of its executives merely for staying on the payroll during the process, the only way to do so would be to get approval in advance from the regulator or government ministers, or both.
Why? First, because Thames, at risk of collapse, is a political football like never before and has been under special regulatory supervision since last summer. Second, because Steve Reed, the environment secretary, has been taking aim at undeserved bonuses from his first day in office. Third, because Ofwat, the regulator, is about to get new powers to block bonuses, as has been known for months. Fourth, because Thames’s board would risk enraging its senior staff if it promised them mega retention payments and then was unable to deliver them.
That last scenario is the one that has come to pass. When Sir Adrian Montague, Thames’s chair, revealed the existence of a retention scheme, complete with “very substantial” payments in three stages, to a committee of MPs a week ago, it came as news to both the government and Ofwat. A spokesperson for the former said ministers would block the plan. The regulator demanded details.
Now the inevitable U-turn has happened. Thames has “decided to pause” the retention scheme while it awaits guidance from Ofwat. Good luck with any resuscitation effort: it is probably doomed already, thanks to the clumsy manner in which Thames has handled this affair.
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Montague was appointed by Thames in 2023, in part, because of his supposedly well-tuned political antennae. He is a former Treasury official and boardroom veteran with a central role in clearing up two corporate messes of a generation ago, British Energy and Railtrack. It is astonishing that, seemingly, he could not see how the retention payments would cause a political stink.
To compound matters, he told the MPs a week ago that it was the class A lenders to Thames, not the company, who had “insisted” on the payments to prevent an exodus of top staff at a bad moment. “To be honest, this is the first time that I have encountered this,” he volunteered. One week on, Montague says he “may have misspoken” when he pinned the scheme on the insistence of the creditors behind a £3bn emergency loan to the company.
In the grand scheme of things, this mini-drama won’t affect the restructuring plan; KKR, the preferred bidder, is doing its due diligence and outline terms could be announced by the end of next month. At a push, one can concede that a board of a company in Thames’s dire position has to consider the risk of top staff walking away or getting poached. But come on, if your solution is to throw cash at those individuals, or to get the lenders to do so, don’t kid yourself that you have a free hand when you are in a hole as deep as Thames’s.
The precise interpretation of bonus-blocking powers in the new Water (Special Measures) Act is almost irrelevant. If the minister can derail your retention scheme at a stroke, you risk being humiliated if you didn’t seek political cover in advance. The corporate naivety, or just plain arrogance, is extraordinary.
