Why can't the UK water companies go bankrupt?

Question

There is a New Statesman podcast that gives an answer to the question in the title. Why, instead of the tax payer taking on the ~£16 billion that the owners have saddled Thames Water with, are they not allowed to go into bankruptcy where this debt would be cancelled. They present two options, as well as the problems associated with them:

• Let it fall into bankruptcy, stop supplying water and be broken up and the assets sold separately
  • This would mean that millions of people would be without water
• The government expropriates the assets
  • This would discourage investment in the future

It seems two solutions are not addressed in this podcast. They could perhaps be used in conjunction:

• Investigate and prosecute all potential rule breaking that the company has done.
  • There are serious questions about the legality of the massive amount of sewerage that has been released into the UKs water over the last few years. Find some people who have been made sick and the risks of criminal prosecution would make it rational for the company to settle for whatever the prosecution wants.
  • If this failed there must be other options. One obvious one would be the GDPR. That has a 4% of annual turnover maximum fine. If they cannot find 25 instances of GDPR violations in a company that size I would be shocked.
• Let it go to the administrators but try to sell it as a going concern
  • Many companies keep running while the administrators try to find a buyer. I do not know what the assets are, but they must be worth more running a water system than as a load of plant scattered over the UK. It may be worth completing the tory plans on fines first, but if someone is willing to pay $16 billion for it as is then is that so bad? If not, the government can get it for much less.

These could be combined, such that the cost to the government of buying the assets would be partially offset by the criminal penalties or out of court settlement.

Why is such an approach not a possibility?

Answer 1

The basic fact about companies on the point of bankruptcy is that they are unable to pay their debts. The reason for this is simple and worth putting in bold:

There is no more money.

So what happens in a bankruptcy? The debts don't just vanish. Adminstrators are appointed, and they have one goal: to pay as much back to the creditors as possible. How they achieve this depends, but we accept that the creditors won't get paid in full because there is no more money. If the administrators can find someone to take on the company and pay off the debts, that is all well and good. But there is no guarantee that such a person can be found, and the administrators have a single purpose, to maximise the money that the creditors get back. If selling the company as an ongoing concern means that the creditors get £5billion, whereas liquidating the company means the creditors get £6billion, then the company gets liquidated. The administrators have no responsibility to maintain a service, nor prevent job losses or prevent death from thirst and disease, their only purpose is to maximise the money that creditors get back.

Your suggestion to prosecute doesn't solve the problem, the problem being there is no more money. Perhaps you could find evidence of criminal behaviour, perhaps you could put some people in jail, perhaps you could fine the company. Then you just become another person that the company owes money to, and join the queue of creditors when the company goes bankrupt.

I've no idea how you think a trumped-up GDPR suit would work. But however it wouldn't create money, and so would fail to solve the problem that there is no more money.

So sure, it is probably worth more running a water company than the sum of its parts, but accounting for the debts, it is still negative. Even if you purchase the business for £1, you still have £16 billion of debt to pay. Remember bankruptcy doesn't make the debt vanish, it just changes the rules for how it gets paid back. And so there may well not be anyone who is interested in buying this loss-making business.

And so we reach an impasse. From the point of view of the government, liquidation is unthinkable. Selling is untenable. Prosecution is ineffective. The only option becomes appropriation, and the taxpayer shouldering the burden of the debt, because literally nobody else will do so willingly.

Answer 2

They present two options

There is a third option: Let the old water company go bankrupt and keep the service intact

This is known as the "good bank, bad bank" solution, and it's a form of bankruptcy procedure where assets are sold out but not broken up.

This come from observation that:

• An established and running company may be profitable (A);
• Lots of debt makes a company not viable (B).

The combined A+B may be inviable, but the isolated going concern A may be valued more, much more, than the broken up assets of A. So it's profitable to sell all the company assets to a third party, without the debt.

In the case of water companies, this third option is the most provable course of action even if the broken assets are valuable more, because the water services are normally an essential service in a highly regulated sector, and the existence of a service is the panamount priority, and because of this, to interrupt or broken up the company is not really an option.

This form of bankruptcy asset liquidation is not very common, so few people discuss this, but it is a normal bankruptcy procedure in all its effects: the previous company gets liquidated, the assets are sold, the old creditors receive something.

The restriction to the buyer to keep the services running somewhat implies that most assets will be sold as one entity, on a going concern basis, but that's it. The new proprietaries get the assets, and the old management and creditors are left behind, with no claim on surviving company.

For a relevant example of this, see the history of bankruptcy of original General Motors.

Answer 3

Part of the issue is that, unlike most private business companies, a water company is never truly insolvent. It can raise rates and has a de jure or de facto monopoly over an essential good, so the people served by the company can have their rates hiked to pay for its bills.

The law will generally presume that the debt taken by a public utility was spent for a purpose that benefited the rate payers. So, there is moral justice in paying for the company's debts that benefitted customers with increased service fees for those customers.

While a bankruptcy that discharges the debts of a water company appear to be prohibited, there are probably at least a couple of other options if things get truly out of hand. Also, just because the company can't have its debts erased, this doesn't mean that its creditors can get blood out of a turnip. If there is no money to pay them, then the creditors won't get paid until there is money available, although they will accrue interests and collection costs in addition to the principal amount of their debts.

One option would be to have a third-party receiver appointed on the petition of interested parties to the proper court to run the company if there were allegations of serious misconduct like embezzlement in the company, or if the directors of the company had simply thrown up their hands and failed to do their jobs. This wouldn't discharge the debts, but it could potentially prevent a destructive management team from doing more harm. A receiver could also sue anyone whose wrongful conduct or fraud deprived the company of an ability to pay its debts as they came due.

The other option would be for parliament to pass special legislation, call it the Thames Water Company Debt Adjustment And Bailout Act of 2025, for example, to address whatever problems have come up on a tailored, one off basis.

For example, the national government might direct the Bank of England to refinance the debts of a water company with a payment schedule and interest rates that would make it possible for the Thames Water Company to repay its debts in a reasonable manner. Indeed, it is possible that the Bank of England already has the authority to do something like that without any new legislative authorization.

Alternately, special legislation might create a "Thames Water Resolution Trust" that would buy the assets of the company for fair market value using eminent domain power, and resell those assets at auction to a substitute water company, with the proceeds of the sale applied to the debts of the creditors. This wouldn't be a true bankruptcy. But Thames Water is presumably a limited liability entity of some kind whose investors can't lose more than they have invested in the company. In U.S. law, this would be called an "assignment for benefit of creditors", but the British would probably call it something different.

Answer 4

Interest rates exist to compensate for the occasional bankruptcy. And I see no reason why Thames Water should not or could not go bankrupt. What one probably should do is mentally separating the daily operating and the overall financial situation, e.g. mentally divide the company into a daughter organization running the business and a parent organization owning the operating business and also owning the debt.

It's in the public interest to keep the operating business daughter running but who cares what happens to the umbrella company. The standard market mechanisms would mean that creditors (some investment companies) have to write off some debt in case it's unsustainable and the mentioned $16 billion is a rather low amount not threatening the stability of the financial system. One way to do this is would be a debt-to-equity-swap. During the restructuring of the umbrella company, liquidity for the operating business could be at risk but the government could give a loan to that business unit maybe under preferential conditions in order to survive this phase.

Is this really necessary? Or could the umbrella part of Thames Water simply continue and maybe increase prices as needed? Turns out, it cannot simply increase prices as needed (and the idea of the privatization was probably lower prices, not higher ones). The associated regulation authority Ofwat can for example regulate the price and investments needed. If Thames Water cannot financially make it under its regulating conditions, it should simply declare bankruptcy and restructure. However, such processes can take years to finish.

You write that bankruptcy would mean that millions of people would be without water, but that doesn't have to be true. It all depends on the government action. Ofwat for example writes “Safeguards are in place to ensure that services to customers are protected regardless of issues faced by shareholders of Thames Water.".

So presumably a bankruptcy is an option and people will not be without water. Costs for the public could be minimized and either the regulating agencies already have the authority now or can get it by some act of Parliament. The key is to separate the operating business from the overall financial situation and keep the operating business going. Should you feel bad about investors potentially loosing something? Just counterbalance that with the profits in the past and it very likely will still be a positive number. They knew they invest in a highly regulated market.

You may ask why water needs to be regulated. Ofwat says: "Because competition is limited, there is a risk that these companies will not deliver the services their customers want. They may also charge higher prices to increase their profits. This is why they need to be regulated. And it is why Ofwat was created when the water and sewerage authorities were privatised in 1989".

Answer 5

Generally speaking, decision-making about a private company providing public good services, in this scenario water utility company servicing very large population, will in my opinion include several considerations:

• This type of company is very hard to be substituted by another provider, as it usually has very large fixed costs that take a long period of time to recoup.
• You cannot afford downtime as the good provided is a public good that is very necessary and often fulfills basic human needs, such as in this scenario access to drinking water for a large population of people. This must be considered in scenarios such as a company going bankrupt which could lead to significant disruptions to operations of such company or even to full halt which is politically unacceptable as it would create very large cost to society.
• Financing of private owned utility providers is often done by both large and small shareholders, including different kind of funds such as pension funds, often from the country in which this company operates. Collapse of such company could have adverse effects on all shareholders, especially the small individual ones. On the other hand as stated previously collapse of such company is often unacceptable for the state, this can lead to moral hazard for operators of such company as they can rely on being bailed out by the state to some extent.
• If such a company is state owned there are different dynamics and considerations that need to be made and known problems of state owned companies associated with productivity, corruption, larger political influences in its decision-making, bankruptcy is not much easier scenario in that option either.

Whether to privatize a company with these characteristics, keep it public or operate it in some sort of public private partnership is a complex problematic, bankruptcy of such company is almost never easy due to it providing public goods no matter who owns it.

Answer 6

The government expropriates the assets...This would discourage investment in the future

This one is interesting and bears some scrutiny.

Yes, if there is greater risk then that will depress share prices and increase lending rates. But if a company (or other corporate entity) is underwritten to reduce such risks, then why should this be done at the tax payers expense?