What’s the point of fining Thames Water?

That should teach it a lesson. The utility giant Thames Water has today been hit with a massive £122.7 million fine for failing to deal with sewage properly, and for paying out excessive dividends. No doubt the regulator Ofwat thinks that will focus the minds of the company’s management and force it to sharpen up its act. There is just one snag. Thames Water is already close to going bust. In reality, it needs new management and a restructuring of its massive debts – and a fine won’t help that. 

After what it described as the sector’s ‘biggest and most complex investigation’, Ofwat imposed a fine of £104.5 million for Thames Water’s treatment of wastewater and £18.2 million in what it described as ‘undeserved’ dividend payments to its main shareholders in 2023 and 2024. ‘This is a clear-cut case where Thames Water has let down its customers and failed to protect the environment,’ Ofwat’s chief executive David Black said. The company will be hit with a huge penalty designed to make it change its ways. 

No one would want to defend Thames Water. We can all argue about what exactly has gone wrong. But one point is surely clear. The UK’s system of privatised water companies, largely owned by foreign private equity funds (Australia’s Macquarie, known as the ‘vampire kangaroo’, in this case) and micromanaged by regulators, has clearly failed. A dysfunctional planning system that means the UK has not built a new reservoir since 1992 hardly helps. Put the two together, and the UK has a creaking water system that barely functions adequately anymore and which may well break down completely over the next few years. 

The trouble is, it is hard to see how a huge fine fixes any of that. Thames Water is already in deep financial trouble. The American private equity giant KKR has been chosen as the ‘preferred buyer’ of the business, with plans to reduce its debts of an estimated £19 billion. It is likely to be the only way it can avoid either bankruptcy or nationalisation.

But this fine may well make the deal too expensive. Ironically, if it has to be taken into state ownership, the government may well end up paying the fine to itself and then using the money to bail out the business. This would be an apt symbol of the UK’s broken regulatory state, with different arms of the government fining each other for incompetence. Yet it would do very little for the city that relies on the company for its water supply.

What Thames Water really needs is completely new management, a government that allows new reservoirs to be built, a relaxation of net zero targets that have added to its costs, a regulatory system that does not try to remotely micromanage the industry, and a restructuring of its debts so that it can afford to invest again. A fine won’t achieve any of that – it will only make Thames Water’s problems worse.