Oral evidence: Reforming the water sector, HC 588
Oral evidence, 13 May 2025.
Witnesses
Chris Weston, Steve Buck, Sir Adrian Montague.
Chair
Good morning everyone, and welcome to this meeting of the Environment, Food and Rural Affairs Committee. This morning, we return our attention to our inquiry into reforming the water sector. We are pleased to be joined by witnesses from Thames Water. You are all very welcome and we appreciate your attendance and efforts to be here and answer our questions. Just for the benefit of those following our proceedings and indeed for our own official record can I ask you to introduce yourselves to the Committee?
Chris Weston
I am the chief executive of Thames Water.
Sir Adrian Montague
I am the chairman of Thames Water.
Steve Buck
I am the chief financial officer of Thames Water.
Chair
You are all very welcome. Sir Adrian, welcome back to the Committee; obviously a different committee from the one that you last appeared before. Chris, if I can just ask you for starters about what sort of company you want Thames Water to be. What are the culture and values that you want to bring in your leadership of that company?
Chris Weston
I would like Thames Water to be a high-performing company where the employees enjoy working there and feel supported in what they do, it delivers for its customers and the environment, is financially sound, and all the various operational metrics that you would look at in a water company are doing what they should and continuously improving. Culture is absolutely fundamental. Thames is the eighth company I have run, and culture has been important in every single one of them. As I came into Thames, I have to say I was very impressed with, first, what we do every day. I know it gets overlooked, but 2.6 billion litres of clean water and 5 billion litres of waste are dealt with every day. I could not help but be impressed coming from outside the industry. Secondly, I was impressed with the people I met: committed and passionate about the company, working very hard, and very honest and transparent about what they do. Where it had gone wrong was that Thames had lost direction a bit. I was the fifth CEO in five years, three CFOs and 26 members of the executive had been through the company. That creates confusion for people in the company. I do not think there was any lack of willingness to do the job or to take on accountability and be held responsible for what they do. It required clearer direction—which I have given—a clear organisation structure that matched resource to the performance that was expected of the people, and then a governance structure around it that allowed me and the board to understand our performance, how we were performing, and to discuss it with people. I want the people in the company to feel that they have clear direction and the right resources and are supported in what they do. My job is to make them feel supported and confident in what they are doing.
Chair
How are you doing on that journey?
Chris Weston
I am quite pleased with the progress we are making 16 months in. It is a big ship to turn around; it is very difficult. My two priorities coming in were, first, to create stability around the finances and restructure the balance sheet, which we have made good progress with, and secondly, to create a firmer operational foundation. With respect to that second, we have changed the setup within the company. I suppose it starts with recognising we are an infrastructure company and if we get our infrastructure right it delivers for our customers and the environment. So I set up a team looking at the infrastructure and within that we have a team focused on water and a team focused on waste. We have also introduced a capital allocation and governance structure, which was not there before and is absolutely fundamental to a company such as Thames. By putting that structure in place, people were clear on the resources that they were being given and the performance that was expected of them. There is still a lot more to do. I have also gone out of my way to invest in developing the leadership of Thames. Leadership is where culture starts; it is absolutely critical to setting the right culture. We have had a programme rolling out in the company looking at leadership, a lot of which is all about behaviour. So we are making progress, but this is a long task; it is going to take a long time to turn Thames around.
Chair
There is a basic lack of transparency and understanding about the structures. We will come to this later; I am not going to dwell on it at the moment, but it is apparent to few who actually controls and owns Thames effectively at the moment. That is important, given that you have laid some heavy emphasis on transparency and leadership. You yourself are on a total package of £2.3 million, which is a generous package for a very responsible job. Three months into your tenure, you accepted a bonus of £195,000. With hindsight, was that a wise thing to do if you were wanting to assert that sort of leadership in the company?
Chris Weston
My remuneration was agreed with the board before I came on board. It was not the only reason for me joining Thames, but it was a reason. Fundamentally, I joined Thames because it matters to society and I felt with my experience and track record I could make a difference, and I still believe that. When I came in, I agreed with the board that I would participate in the bonus structure and all its performance criteria, which had been set before I joined, and I would be a member of the whole leadership and management team. That was very important to me: to be consistent across the whole leadership and management team. By and large, people who I talk to recognise the magnitude of the job that is in front of me and that we have undertaken. I made a difference within the first three months: I started to put in place the new organisation structure and to give people confidence and reassurance about how proud they could be of the job they did and what we were setting out to do. That helped stabilise the company, which was important.
Chair
Ten months in, you had this BBC documentary, “Inside the Crisis,” and you told that documentary, “I don’t know how it got this way. I have only been here 10 months. I want to fix it. I don’t know how it got this way.” Ten months in—in a job of this sort—you were not able to explain how we had got to the place that we were. If you do not know what has gone wrong, it must be difficult to put things right. Where is your analysis today of how you got to where this company is?
Chris Weston
I am pretty clear about how we got to where we are now. I was pretty clear then, but I also question the value of talking about it publicly and pointing the finger.
Chair
Just between the two of us then.
Chris Weston
I am clear how we got here. The crisis that we face at Thames has been decades in the making, and all actors have had a role to play. The company and management have absolutely got it wrong. Five chief executives in five years is not a recipe for success, and I would argue consistency in leadership is a very important part of what we need to do now. Equally, the fundamental problem has been with the regulatory regime. There are flaws in it, and that has been recognised by the recent NAO report and the Government commissioning Sir Jon Cunliffe to undertake a review of the water industry. There is a lot that goes right. It is absolutely necessary that we have a regulator, but the regulatory regime needs to attract investment and allow for companies of different types, operating in different environments, with different cost bases. It also needs to allow for companies that might be in trouble and can turn around and improve their performance. I would argue the regulatory regime does not do that at the moment. There is a lot in the NAO’s report and Sir Jon Cunliffe’s review that agrees with what I have just said, so there are many authors to where we are now.
Chair
You cannot surely be blaming the regulatory regime entirely.
Chris Weston
No, I am not.
Chair
In 2022 you lost £1 billion in derivatives. Is that correct?
Chris Weston
I would have to come back on that.
Chair
It is a particularly serious situation when you are dealing with one of the most essential utility products on the planet. You have a complete monopoly, you effectively have the Government standing behind you, and you still manage to come to this place. We want the session today to be forward-looking, but we need to gain from you—as a leadership team—a better understanding and acknowledgement of how we got to this place. The involvement with Macquarie, for example, is something that is fairly well documented. I am not going to rehearse it, but how much of that do you think played a role in bringing you to where you are today?
Chris Weston
That will have exacerbated the situation because the gearing went up during the time of Macquarie’s ownership and it took dividends.
Chair
The gearing is now, what, 83%, is it?
Chris Weston
I think the most current is higher than that: about 88%. It has not been published yet; it is where we are in our annual financial reporting cycle. That will have absolutely contributed to the problem; it increases our gearing, which stresses the organisation, and that certainly has not helped us. I would also add that debt is a very important part of the model for the water industry. We are making investments now that will serve generations to come and will be paid for over generations, and the most cost-effective way to deliver that is through investment-grade debt. But it is excessive now; it is not what it should be. As I said at the beginning, part of what I am setting out to do is to make sure we have firm, financial foundations, which will require a restructured balance sheet.
Chair
This question of debt brings us back to the price review and your current situation. I will leave my colleagues to come back to that later on. While we are talking about the churn within the senior leadership team, your former CFO left the business following criticism that he had slowed down time-critical decisions needed for basic functions. Do you share that analysis, and what impact has it had on your work as a CEO to have to bring in a CFO at such a critical time again?
Chris Weston
I am very grateful for the work that Al did for Thames Water over four years. It was a very stressful situation. He was largely the architect of the first restructuring plan, and I was grateful that he worked with me to manage his transition. I have known Steve for about 15 years now and I have great confidence in him. It is hugely helpful that he knows the water industry; that has helped me in managing the transition and getting Steve up to speed on all that needs to be done. Finance is a problem for us. It is a very stressful bit of the organisation—its organisation and the way it runs— because of what we are dealing with. I am very confident that the work that Al has done and Steve will build on will give us what we need over the next few years.
Chair
We have seen it reported that senior staff were having no choice but to press ahead with purchases without sign-off. And these were not trivial things; it was safety-critical chemicals needed to clean water. That cannot be a healthy set of financial regulation, can it?
Chris Weston
There is a lot that we need to improve on in Thames; I completely accept that, and it is going to take a while. Part of it is establishing the model more deeply in the organisation so people have their budgets and authority, which they largely do at the moment, and the company continues to function during a very stressful situation. I am confident that we have the controls and visibility that we need in place in the company at the moment.
Chair
On this point about the stress of the situation facing the company and your employees, to come back to that documentary that you took part in, we saw some really good quality people—very young and promising employees—leaving, and an increase in mental health illness and mental health reported absences. What are you doing to support staff at the sharp end here?
Chris Weston
I was very sorry to see Josh leave Mogden. He is someone who will go a long way in his career, and I was sorry that we had not been able to give him the support that he needed. I can only act on what is in front of me, and each area of the business—the way it is structured at the moment—is designed to deliver for our customers and the environment, and make it easier for our frontline to do so. That means that we give them the resources to be able to do that. We are stepping up our investment over the next five years in terms of operating costs and capital costs, and both those things will make people’s jobs easier. I have given a very clear direction that we should be planning to do 100% of our maintenance—that is not something that we have done in the past—because that will make people’s jobs easier and less stressful. At the same time as we are doing that, we are bringing in more headcount. I do not know how many exactly, but it was probably about 500 in the last year. Over the next five years, there are circa another 1,000 heads that we need to bring in, which will undoubtedly alleviate the stress and make people’s jobs easier. I would also go back to leadership, which we are also investing in. A leadership that is supportive and there to try to create an environment where people can work confidently is very important. At the end of the day, that combination—it might not happen overnight, I accept that—should start to alleviate the stresses and strains in the business. But a fundamental starting point will be getting the balance sheets sorted out and attracting new equity.
Josh Newbury
Chris, one reason that many of your staff are so worried at the moment is the lack of long-term certainty over the ownership of Thames Water and what that picture might mean for them. You have the opportunity today to allay some fears, so can I ask you whether you are willing to guarantee that job numbers, pay, and terms and conditions will be maintained as they are now as you go through that process?
Chris Weston
You used the word “guarantee”, which is very difficult to use because I do not know how circumstances will change. All I see is a growing employee base, both over the last year and over the next five years. People should look at that realistically and take comfort from it, unless we go into SAR, which is more difficult. Even in SAR, their jobs are guaranteed because we have to carry on providing service to the customers, but I cannot say what pressures come through that. Other than that, for at least the next five years, I see growing numbers of employees within Thames.
Josh Newbury
If you cannot use the word “guarantee”, can you commit as chief executive through this process of a change of ownership that you will fight for your staff’s jobs, terms and conditions as that ownership changes?
Chris Weston
Yes. When I look at Thames and some decisions that were made around headcount before I joined, I disagree with them; they should not have been done. They were very short-term in nature. I can understand that people were under a lot of pressure at the time to make those decisions, but I will fight for every job in Thames, and I would like to think that in doing so and with growing numbers, it will help people do their jobs.
Josh Newbury
So if you have a potential new owner who is looking to perhaps reduce terms and conditions and undermine staff numbers, you will make the case for that not to happen?
Chris Weston
Very much so. What might happen is that rather than growing by, let us say, 1,000, we might grow by 600, 700 or 800. It is about trying to become more efficient at the same time, which any business has to do. I firmly believe that to do what we do 24/7, you need the right staffing levels within the organisation. Without that, we cannot do it, and it creates unnecessary stress on the organisation, so I will absolutely be making that point.
Chair
We are going to move on to your performance turnaround planning. Sarah, can I ask you to start on this, please?
Sarah Dyke
Sir Adrian, Thames Water announced an eight-year turnaround plan in March 2021 under the previous chief executive, Sarah Bentley. In June 2023, Sarah resigned suddenly, reporting conflicts with shareholders. In December 2023, the then interim CEO, Alastair Cochran, informed the previous Committee they had refocused on a three-year turnaround plan to improve both the operational and financial performance. The aim of that was to improve the financial performance and stakeholder confidence in the business. How would you assess the success of that plan?
Sir Adrian Montague
The December plan is still current and making good progress. It is perhaps an opportunity to say that we realise there is a vast amount to be done to bring performance up to scratch. We know we are letting customers down. We know that pollutions, spills and supply interruptions cause inconvenience and sometimes real hardship. The right thing to do is to start a discussion of the turnaround plan by acknowledging that we have not always served our customers as well as we should, and through the Committee apologising to them. In terms of the turnaround, we are starting to see real progress. There is a very long way to go, and sometimes it is difficult to see the green shoots, but there are green shoots. Chris is probably closer to this detail than I am, but we are seeing real improvements in supply interruptions and water quality. It is such a big business; you cannot hope to put everything right straightaway. You have to choose your targets and improve things little by little. Chris is doing a great job in that respect.
Sarah Dyke
There are the six priorities that you are delivering around health and safety, pollution, customer complaints, water quality leakage, and supply interruptions. Chris, how would you judge the performance against those measures that you have put in place over the period so far?
Chris Weston
Do you mind if I take each in turn?
Sarah Dyke
Please do, yes.
Chris Weston
Health and safety is extremely important to me and is something I have always focused on in the businesses I have run. Last year, we unfortunately had 35 lost time injuries compared to 41 the year before. I point out that we worked an additional 2.6 million hours, so that performance is actually quite good. Health and safety is taken seriously within Thames, and I have just appointed—six weeks ago—a very experienced health and safety lead to try to accelerate the progress in that area. I have to say that in the first six or eight weeks of this year, we had seven LTIs, which pains me. There is no obvious trend in that. So that is how we are doing in health and safety. There is a comprehensive plan around health and safety. It is very firmly owned in the line. Esther, my COO, and David Bird, who heads up retail, both have large workforces out and about and understand the importance of it, as do their management teams. The most frustrating area is leakage. We have made progress. Over the AMP and the last year, leakage is at about 569 megalitres a day, which is a huge amount, but it is coming down slowly and is as low as it has ever been. We have a comprehensive plan around that that looks at how we monitor our network and how we see what is going on in the network. It is broken down into a number of geographic areas, which are called district metre areas, DMAs, and we can see the difference between consumption and what we provide into those areas so you get a good idea of where leakage is. We then deploy acoustic sensors into those areas. We are increasing the number of acoustic sensors that we deploy into the DMAs, and as they indicate that there is a leak there, we deploy a gang to find the leak and fix it. That is a never-ending process. In the next five years, that find and fix will cost about £1.2 billion. At the same time as doing all that, we are investing in pressure management within the system. This is large capital expenditure that allows us to manage the pressure more effectively across the whole network and into these DMAs. When we get it wrong—I am sure we will come to it—as in Crystal Palace, for example, when you get a pressure surge, it can cause a mains burst. So there is a lot going into pressure management as well. We are also doing mains replacement and are aiming to replace about 560 km of mains in the next five years. We try to prioritise that so not only does it replace the oldest mains, it also helps in leakage, but leakage gives me a headache thinking about it. How do we improve it? What is the silver bullet? The other area that is frustrating is pollutions. Over the last year, we have seen pollutions increase. The year before, the total number of pollutions was 350. They went up to 469 last year. Within that, there are 33 serious pollutions, and that is not acceptable. No one at Thames comes to work to cause a leakage, and everyone wants to try to minimise that as much as possible. When I look at what causes those leakages, about 60% of the cause is in the network as opposed to our treatment works. We have 110,000 km of network, so there is a lot of network to look after. What are we doing about it? Last year, we cleaned 1,759 km of network, which is about 250-odd km more than we had planned to. So we are trying to be more proactive and use all the sensors that we have on the network and the data we get off it to predict where there is a blockage hotspot so that we can then go and clean it. We are developing that process slightly. At the same time as doing that, we are doing sewer rehabilitation. Last year, we did 21.6 km of sewer rehabilitation, again more than we planned to do.
Chair
I am appreciative of the level of details but sometimes detail can obscure the core truths.
Chris Weston
Sorry.
Chair
And I fear that we are steering into that territory at the moment. Can I maybe just give you one concrete example? Your desalination plant at Beckton, it is reported this morning that it is not going to be operational this year. It was not operational the last time we needed it in 2022. It is far from clear whether it has ever worked at all. That stands in rather stark contrast to some detail you have been giving us. Is that not the problem for Thames Water? When it really matters, you are found to be wanting. Let us deal with the desalination plant first.
Chris Weston
The first thing I would say is we have a team at the desalination plant that is working very hard to try to make it work.
Chair
Has it ever worked properly?
Chris Weston
It has worked in the past.
Chair
It is not going to work this year though?
Chris Weston
No, and I share your concerns. The desalination plant is a big problem for us. I wonder why it was built in the first place.
Chair
Two hundred and fifty million pounds.
Chris Weston
Yes, I accept that. It is not a good story, it was not a good investment, and there are no excuses about it. I would point out one thing with the desalination plant: at the moment, it relies on a very complicated and expensive process. Within it, it has certain treatment membranes. Those treatment membranes are at the end of their life.
Chair
Let us just keep away from the detail. Why is it not working?
Chris Weston
We cannot replace those membranes because there is currently no testing facility in the UK that allows us to test the new membranes.
Chair
Has this come as something of a surprise to you?
Chris Weston
It has been going on for about a year and is an issue for the whole industry to try to address.
Chair
You are the only company in the country that has a desalination plant.
Chris Weston
The testing facility goes beyond just those membranes; it is any material that comes into contact with water that is being prepared for drinking.
Chair
Sarah, pick up on this if you want to, but we need to keep answers tight and focused on outcomes for customers. This is a problem with the industry as a whole here; a lot of it gets stuck down in process, but the service for the customers is bad and getting worse at the end of the day. It is your customers who send Members of Parliament to Westminster, and that is why we want to keep the focus on them.
Sarah Dyke
I think we would agree, as you are suggesting, that you are making solid progress—as a report showed recently—in those critical areas of performance. An article in the Financial Times said that Thames came dangerously close to running out of water supplies in the hot summer of 2022. This year is already proving to be very dry. What measures are you putting in place to ensure customers have a solid and continuous supply of water, and what are you doing to improve that supply?
Chris Weston
We are going through a process of making sure that all our assets are available and all the reservoirs are as full as they possibly can be. At the end of March, they were at 94%. They are still at about 94%, and we are trying to top that up more. We are going through all the water assets we have—including the big London plants and everything in the Thames Valley—to make sure that all critical maintenance is done so we are prepared—as best we can be—for a drought event. We have four levels of drought preparedness. Typically, you are at zero. We have just elevated that to one, which means that we start to go through the preparedness I have just outlined and communicate with our customers about the importance of conserving water. At the moment, from what I can see, we have learned the lessons from the situation in 2022 and are doing all that we need to at the moment to prepare for water shortage. I hope that is not necessary.
Sarah Dyke
How is that looking going forward, given that we will see an increase in demand as climate change takes effect? What are you doing to future-proof that supply?
Chris Weston
Thank you very much for asking that. There is one very big and one slightly smaller capital project. SESRO—the biggest reservoir in the country— has been commissioned and will be near Abingdon. Building will start in 2028 and it will come into service in the late 2030s.
Chair
You will start building it in 2028. We have asked you a question about how you are going to ensure continuity of supply in 2025.
Chris Weston
Sorry, I misunderstood. I thought it was about the future.
Chair
The future would be July for a lot of people.
Sarah Dyke
Going forward.
Chris Weston
For this year, we are going through all our assets and making sure that all the critical maintenance is done so they will be available over the summer period. That is the most immediate thing that we can do, including filling reservoirs. Once we have a source of water, we are able to pull it through our assets, prepare it for our customers and deliver it to them.
Chair
You are still losing 56 megatons of water a day. How confident are you that you will avoid running out of water this summer?
Chris Weston
I am confident we will not run out of water. I am not confident that we will not have to restrict usage because that will depend on what the weather does and what rainfall happens between now and the summer.
Helena Dollimore
I would like to touch on some past experiences that customers have had with Southern Water. In 2019, you committed to the regulator, Ofwat, that you would undertake a series of vital infrastructure projects to prevent storm overflows, reduce pollution instances and improve water security, as we have just been talking about. In 2023, Adrian, just after you became chairman, a letter was sent to Ofwat to say that you would not be taking those 100 projects forward; you would be delaying them further. Instead, the money allocated by Thames Water for those projects was spent on other parts of the business, including paying bonuses and dividends. Adrian, how can customers have any confidence in your turnaround plan and commitment to improve your infrastructure if—in just the recent history—you have rowed back on commitments made to the regulator to fix this vital infrastructure and instead spent it on bonuses and dividends?
Sir Adrian Montague
I will come to bonuses and dividends in a minute. I will talk about the decision we took in August 2023 to defer this further work.
Helena Dollimore
That was also to pay some money to bonuses and dividends; the two are linked, so address the two together.
Sir Adrian Montague
That was not the reason we took that decision; we took that decision because of the funding pressures on the business as a whole. It is true that this business—like many—needs to reward its staff effectively. We are in a competitive marketplace of staff and need to reward them competitively. But the amounts of bonuses paid to staff are very small compared with the capital cost of the works that we were considering at that stage. The fact of the matter is—as we have noted on several occasions—in the last year, Thames has come very close to running out of money entirely. There were times in the last year when we had five weeks’ liquidity. Running a £20 billion corporation on five weeks’ liquidity is honestly hair-raising. What you were seeing in that decision we took in August 2023 was the start of the process. We felt we needed to conserve cash.
Helena Dollimore
How can customers have any faith that you are committed to turning around the business and reducing sewage pollution incidents and water outages if these 100 vital projects—projects that you committed to the legal regulator you would do in 2019—were rowed back on?
Sir Adrian Montague
Because, as I say, it was a funding crunch.
Helena Dollimore
Can customers have any faith now that what you have committed to do will be done if you row back on these commitments so easily?
Sir Adrian Montague
I do not think we rowed back on the commitments. We understand that this is work that needs to be done.
Helena Dollimore
You just said you do not think you rowed—
Sir Adrian Montague
There are many calls on our company’s cash resources. We are having to prioritise, and we prioritise asset health and the routine expenses of the business in preference to this big capital programme, which will be carried forward into this current AMP and done as the funds become available.
Helena Dollimore
Just to be clear, these 100 projects were committed to be done in the 2019-24 period. Customers were charged on that basis for these works, but they were not done, so you have rowed back on those commitments.
Sir Adrian Montague
We have deferred the work. We are still committed to carrying out that work, but we cannot magic money out of nowhere.
Helena Dollimore
But the impact of that referral—
Sir Adrian Montague
Our problem is that this business has been under huge funding pressures ever since I joined and probably before, and we have to prioritise. We prioritised asset health and getting the existing infrastructure business working more effectively.
Helena Dollimore
You did not, because these were asset health projects that you deferred.
Sir Adrian Montague
These are projects designed to improve the asset health but we have other priorities.
Helena Dollimore
You clearly rowed back on commitments, and the impact of that is clearly seen. As Chris just alluded to, there has been a 40% rise in pollution incidents last year under your watch. Last year, you made profits of £140 million, so all this talk about not having the money to do these vital infrastructure projects, customers will come to their own conclusions about.
Sir Adrian Montague
All I can and must say is that the cash box was very nearly empty a lot of last year. We were running at one stage on five weeks' cash. Profit is a different measure. Cash is the only measure that counts; that is what you spend.
Helena Dollimore
So why pay the bonuses and the dividends?
Sir Adrian Montague
Because we have to keep staff. It is a very competitive marketplace out there. Thames Water has very good staff; Chris has brought together a great team. If we are unable to pay bonuses, people will come knocking and try to pick out of us the best staff we have. That is not in customers’ interests.
Helena Dollimore
It is very clear you pay very large bonuses to those at the top of your company. The most junior employees in your company—the people out repairing the water leaks on the roads—what percentage bonus did they get last year?
Sir Adrian Montague
I cannot tell you that, I am afraid. I can write to you afterwards and explain that, but we have put in place a system—
Helena Dollimore
Are you not aware of that figure?
Sir Adrian Montague
No, not at the moment.
Helena Dollimore
As the chairman of the company, if you think bonuses are so important to rewarding performance—
Sir Adrian Montague
This is a structure of bonuses that goes right down through the company. I cannot give you the precise figure; I do not know if you have it, Chris.
Chris Weston
It goes to the frontline, and they can earn between 3% and 6% of their salary as a bonus. The last two years, they have been paid a lump sum because we have not had the capability to structure it in a way that allows it to be performance-related, and that is something that we are fixing at the moment.
Helena Dollimore
So you are awarding bonuses to the lowest-paid members of staff of between 3% and 5%?
Chris Weston
It is 3% and 6%.
Helena Dollimore
How does that relate to the percentage bonuses paid to the CEO?
Chris Weston
My on-target performance can be 156%.
Helena Dollimore
That is 70 times the bonus of the lowest-paid staff in the company. If the work that they are doing on the frontline—repairing mains and leaks and fixing sewers—is so vital, why is the percentage bonus that they receive so much less than what the top leadership of the company receives?
Chris Weston
I accept that it is a lot of money, and I accept it is considerably more than the frontline. As Adrian has said, we try to offer packages that are competitive in the market so we can attract and retain the people we need within the business.
Helena Dollimore
It sounds like you are interested in attracting and retaining those at the very top of the company, but those who are the most junior members of staff—doing the hard work on the frontline—are not receiving the same treatment, and that discrepancy is very clear for all to see. If you were truly committed to fixing your infrastructure, you would have more focus on the morale and support to those frontline members of staff. I would now like to ask you about some examples of projects that other Members of Parliament have raised with us. We know that last year your customer complaints were up 10%, and in many cases, that was caused by a number of supply interruptions. There are specific incidents that have been raised with me by other Members. In Reading, the Member for Reading Central—Matt Rodda—raised an incident where his constituents were left without water over a weekend, and some constituents had no water for up to four days. He has been repeatedly writing to Thames Water and raising this with Ofwat because your company is currently refusing to pay any compensation for that incident, arguably against the GSS standards. That does not seem like an honest and transparent approach as a company, so can you commit to taking that away and looking again at that decision?
Chris Weston
Very much so. If customers are out of supply for more than 12 hours, then compensation automatically kicks in. I will absolutely commit to taking that away and looking at it and making sure we compensate customers in accordance with the policy that we have agreed with Ofwat. I am very happy to do that.
Helena Dollimore
Thank you for that assurance. One issue is that the company is saying that customers’ experience and what they have shared with their Member of Parliament in surveys does not match what your monitors say. Sometimes that can be because if there is extremely low pressure, there is no usable supply. Would you commit in this instance to honour the experiences of those customers that they are sharing with their Member of Parliament rather than bunkering down on this data, which we know from previous performance has often been incorrect? We know Thames Water has a history of sharing incorrect data.
Chris Weston
I am happy to do that. The requirement was at 0.3 bars, and we have recently upped it to 1 bar to try to address that issue. So I am happy to commit to that.
Helena Dollimore
Another area that people have raised with me is that often when there is a leak or repair to be done—which everybody understands that work needs to be done—the road is dug up and then it is left for inordinate lengths of time. Quite often, it appears that nobody is doing any work on that site, but huge delays are being caused by road closures in that time. A number of Members have raised that with me. Can you talk us through what your process is for roadworks and how you minimise disruptions to the public?
Chris Weston
Yes, and I know that is an area that we are not as good at as we could be. There are essentially two gangs that work, and it is meant to be a process that allows the gang that makes good to follow on immediately for the gang that has mended the issue. The process at the moment is not as effective as it should be, but it should happen within 12 hours of the work being done. That is a metric that we are not meeting all the time at the moment, and it all depends on the demands on the business. I accept we do not get that right all the time. We are very conscious of the chaos and issues it can create and are working hard to try to improve the process and get the right level of resource and gangs in place to be able to do that. I am sorry that it causes inconvenience to customers.
Helena Dollimore
In some cases, do those sites work overnight in order to complete it at a time when there is less disruption?
Chris Weston
Very much so. We are an organisation that works 24/7, and that happens most of the time. If there is an issue, we will be fixing it overnight.
Helena Dollimore
This also relates to the previous conversation we had about bonuses and dividends, and the fact that 100 critical projects were delayed and some of that money was diverted to bonuses and dividends. Adrian, I just wanted to pick up with you on this point. You talked about bonuses, but you did not address the fact that some of that money was used to pay dividends, which is something Thames Water has been fined for doing. Can you comment on that?
Sir Adrian Montague
Yes, certainly. There were two dividends, one in October 2023, another in February 2024. The October dividend was paid to keep our discussions with the then shareholders alive about injecting more capital into the company. They told us—in terms—that we had to continue to pay those dividends to keep the prospect alive of more capital being injected into the company. That is the reason we took that decision, because we believed it was in the interests of customers to try to keep the existing shareholding base and capital structure alive as long as we could. In the event—as you know—that failed. But in October, it was not clear. We were dedicated to trying to get more capital into the company.
Helena Dollimore
How much was that dividend in October?
Sir Adrian Montague
From memory, £157 million.
Helena Dollimore
Which would have more than covered the 98 projects put back.
Sir Adrian Montague
But the point is that we needed to keep our discussions alive to bring more capital into the company.
Helena Dollimore
But it did not work.
Sir Adrian Montague
We did not know it was not going to work at that time.
Helena Dollimore
Perhaps a better use of that money would have been fixing pipes.
Sir Adrian Montague
No, that is wrong.
Helena Dollimore
Why is that wrong?
Sir Adrian Montague
The problem is we were in discussion with Ofwat throughout the period from when I joined in July 2023 until 31 March 2024. We were trying to find a basis—in discussion with the existing shareholders—for them to put substantial billions of new capital into the company. That was a goal worth striving for because that would have avoided much of what has happened over the last year. It was for that reason that we paid that dividend in October, to ensure that we kept those discussions alive because the shareholders said, “We need these dividends. We need to pay our debt service at the level of Kemble.” We have not got into the corporate structure.
Helena Dollimore
We will later.
Sir Adrian Montague
We spent a lot of time on that last time around. The point is that this was not paid to the external shareholders; our external shareholders have not received a penny since 2017. This dividend was an intergroup dividend to allow debt service to be paid at a higher level in the company.
Helena Dollimore
You have talked through your decision to pay that, and colleagues will come to discussions about this later, but customers will draw their own conclusions from this evidence session. A decision was made to defer vital infrastructure projects. We have seen pollution incidents go up in the time since. A more reliable investment of that money may well have been on fixing infrastructure. I just wish to ask you one last question. We have seen huge changes in leadership at Thames Water. One reason you are before us at this Committee is that you are one of the more continuity members of Thames Water, having served as chair since 2023. As a Committee, we have seen many different CEOs and CFOs before us. Can you give us a commitment that the team we have in front of us is the team we will have throughout this Parliament?
Sir Adrian Montague
No.
Helena Dollimore
You cannot?
Sir Adrian Montague
No.
Helena Dollimore
In which case, how—
Sir Adrian Montague
The reason is that we live in a competitive marketplace, and we have to provide the right sort of packages to these people, otherwise the headhunters come knocking.
Helena Dollimore
Every time we have the Thames Water members in front of this Committee, they make assurances about turnaround plans and make commitments. Then when the next set of leaders come around—
Sir Adrian Montague
We have to live in the real world here. No one will give you a commitment that there will be no change in the leadership team over five years; it is simply not possible.
Helena Dollimore
Adrian, if you will allow me to finish the point, we ask the questions at this Committee. We have seen many changes of leadership. At every evidence session, the Committee have been given big assurances by that set of leadership. Then, at the next evidence session, we have a different set of leadership before us, apologising for the mistakes made under their predecessors. So how can the Committee have any faith in the assurances and the commitments that your team are giving us today when we have seen so many changes and row-backs on commitments that we will not simply have a new set of leaders in a couple of years explaining why this turnaround plan failed?
Sir Adrian Montague
We are the new kids on the block here. This is the team that came in with my arrival in July 2023. We are making progress. We all believe in the future of Thames Water and are here to try to put things right. That is the testament of faith we give you. We will not quit until the job is done, but it is not realistic to say there will be no changes in the team over five years.
Helena Dollimore
Can I just ask, why would headhunters come to recruit people from a failing company?
Sir Adrian Montague
It is not a failing company; it is a company in recovery. We are making progress. This is a good team. You can see how the progress is starting to become apparent, and people go for good teams. It is simply unrealistic to think there will be absolutely no change over five years.
Chair
If 40% increase in pollution incidents is a mark of success, what does failure look like?
Sir Adrian Montague
We must go back into those pollution incidents.
Chair
I come back to the point—this is a serious point here—about the experience of your customers and people enjoying the natural environment. There was a 40% increase in pollution incidents, but £770,000 was still paid out in performance bonuses. Why does a water company need performance bonuses? I can see why a merchant bank, a hedge fund or something of that sort might want to reward high-risk, but water is not a high-risk business; it is a sector that has lost its way, is it not?
Sir Adrian Montague
I have not watched the discussions you have had with all the other water company chief executives and their supporters in detail, but bonuses are featured in them all.
Chair
Yes, absolutely, and that is why I am asking you as a sector.
Sir Adrian Montague
The fact is that we are in a marketplace for talent. Talent goes where it thinks it is going to have the best future. We have a remarkable collection of people here because they are believers that we will turn this business around. That is what they get their satisfaction for, but there are limits.
Jayne Kirkham
Just quickly to go back to the other people who work for Thames Water—the water engineers and others—I have just had a quick look on the website and there are numerous vacant roles there, so would the same not apply? As Helena was saying, you need those talented people to work on the ground as well. So why is so much attention paid to the bonuses of the people at the top and not those of people doing the work on the ground when you have vacancies?
Chris Weston
We have a lot of vacancies that we are advertising for at the moment—about 700—because we recognise the ramp-up in capital that we have to deploy over the next five years. Some areas are much more difficult to recruit than others, such as mechanical and electrical engineers and process controllers, and we are always assessing whether the level of compensation—remuneration—that we offer in the market is competitive. In many instances, we are finding at the moment that we are having to pay above market to attract people into Thames Water. That is happening.
Chair
I am going to move on to Price Review 2024. Barry, you are going to lead our questioning on this.
Barry Gardiner
Could I make a mention of my Register of Members’ Financial Interests? Sir Adrian, we have crossed swords before.
Sir Adrian Montague
Pleasant discussions before, Mr Gardiner.
Barry Gardiner
Indeed. I do not want to incur the wrath of the Chair, so I have formulated my questions to you in such a way that they do not demand an explanation; they only demand an answer, and usually that answer can be either one word or a very short sentence. So let us see what I can do to oblige.
Chair
That does not incur wrath at all. That is an example; fill your boots.
Barry Gardiner
That is why I have tried to do it that way, Chair. The £3 billion of debt funding that you arranged is in two tranches of £1.5 billion, is it not?
Chris Weston
Yes.
Barry Gardiner
The second tranche was conditional on you putting in a challenge to the CMA against Ofwat’s PR24 price control ruling, was it not?
Sir Adrian Montague
No. I do not believe that is right.
Barry Gardiner
You do not believe that is right?
Sir Adrian Montague
I do not believe that is right.
Barry Gardiner
You put your CMA challenge on hold, did you not?
Sir Adrian Montague
Yes.
Barry Gardiner
Is it still on hold, or have you abandoned it?
Sir Adrian Montague
No, it is still on hold.
Barry Gardiner
Did you put it on hold because the CMA challenge could not report back in time to let potential equity investors see the final price control in order to invest or develop their engineering plan of what they are going to spend and how they are going to deliver it?
Sir Adrian Montague
No.
Barry Gardiner
So when was PR24 capital investment programme due to start? Was it April 2025?
Sir Adrian Montague
At the beginning of this AMP. April 2025.
Barry Gardiner
So the CMA challenge would only have reported back in October, which would have been a six-month delay. Is that correct?
Sir Adrian Montague
Probably later than that.
Barry Gardiner
So even more than a six-month delay.
Sir Adrian Montague
Just a word of explanation, if I may. The CMA has six months from the date of its referral but has liberty to apply for a longer period, and in complex cases, it applies for a longer period, as it did in 2020.
Barry Gardiner
As I said, the CMA challenge would have put the final adjudication and decision on what your investment allowance was back beyond the point at which your future potential equity investors would have wanted to start the programme, would it not?
Sir Adrian Montague
I do not think it follows.
Barry Gardiner
It certainly follows if AMP8 was supposed to start in April 2025, and yet you could not get investors in if they did not know how much they were going to be allowed to invest in the company and how much work was going to be agreed to be done with the regulators.
Sir Adrian Montague
They knew that—as we knew that—on 17 December, when the final determination was handed down.
Barry Gardiner
But you were going to appeal it, and you told me that you had put the appeal on hold in order to challenge that determination by Ofwat.
Sir Adrian Montague
We agreed with Ofwat that in the light of the equity interests we have had, it would be worthwhile for the equity holders—the equity bidders—to discuss with Ofwat whether there were understandings that could be reached that would allow them to accept that determination. For us, we had determined it was neither financeable nor investable.
Barry Gardiner
Let us move on to those understandings. How far behind are you on the investment programme on AMP7, PR19?
Sir Adrian Montague
I do not think I can answer that; Chris may be able to.
Chris Weston
Compared to the allowance that we agreed with Ofwat, we have spent an additional £1.7 billion.
Barry Gardiner
How far behind are you on not just AMP7, but also on WINEP7 programmes?
Chris Weston
I was going to then go to the point that your colleague brought up. We are behind on the WINEP7 project, and that will complete during AMP8. One or two of the larger schemes might even go into AMP9.
Barry Gardiner
You said that it is behind in time. What about in financial terms?
Chris Weston
Yes. It is also more expensive.
Barry Gardiner
So it is going to be more costly because of the delays. The failure to achieve your ODIs—your Outcome Delivery Incentives—on sewage and leakage, and your MeXes—the measures of experience—the more penalties you incur, and the more difficult it will be to sucker in new investors. Sorry, let us put that another way, the higher interest return that they will demand. Yes?
Chris Weston
The ODIs in the last AMP were about £500 million.
Barry Gardiner
Of course the same applies to AMP8, so the further behind you fall with the work of AMP8, the more expensive it gets and the more penalties you incur. Is that right?
Chris Weston
Correct.
Barry Gardiner
Given AMP8 is at least two times the capital work of AMP7 and you have made no attempt to source the additional contractors that you will need, this means you have only re-engaged the existing contractors. This means your ability to press on with AMP8 is constrained, and in this first year of AMP8, you will probably only just be completing AMP7, will you not?
Chris Weston
I do not agree with all that. We are ramping up capital expenditure quite significantly. In the last year, capital expenditure is up on the year before by 38%, so quite considerably. I accept we are behind where we would like to be in AMP8, and we are going through a process of improving our capital governance so we can invest more for the benefit of our customers and the environment.
Barry Gardiner
But your problem is that because you are behind in both AMP7 and AMP8, you are incurring additional penalties. You just said £500 million hangover from last year in AMP7. That means that it is going to become even more expensive to get the capital in and persuade investors to come in because they see that the further you fall behind, the more problems you have with penalties.
Chris Weston
I agree with that. The final determination was about £20 billion. We felt that we needed to spend a lot more than that, getting on towards £24 billion, and that our performance would not be what was demanded by our regulator. That leads to the penalties increasing in AMP8 as you suggested, and that is an issue for incoming shareholders and our creditors.
Barry Gardiner
Absolutely. The Environment Agency has also said that it will significantly increase its inspection and enforcement regime on Thames Water. What amount has Thames internally estimated that this might cost? Maybe this is one for Mr Buck. You have made an internal assessment of that, so what is it?
Steve Buck
I do not have that information to hand.
Barry Gardiner
Have you made an internal assessment?
Steve Buck
Of the additional cost of the inspections?
Barry Gardiner
The additional cost that you are factoring in will come from the fines the Environment Agency levies against you for those additional inspections that they have promised to fulfil.
Steve Buck
In terms of our future financial planning, I have factored in the additional investment costs that Chris has referred to, the extra £4 billion, and an extra £900 million for the ODI penalties in AMP8.
Chris Weston
There has been an assessment done of the penalties that may arise from what the EA has done.
Barry Gardiner
That is what I was asking.
Chris Weston
And we have made that available.
Barry Gardiner
How much is that assessment of the additional penalties from the EA?
Chris Weston
Forgive me, I will have to come back to you on that.
Barry Gardiner
If you can write to us on that, thank you. The revised regulatory business plan that you are developing requires a reduction in penalties from Ofwat, does it not?
Chris Weston
Absolutely. The aim is to be able to deliver the performance that we agree within the allowances that Ofwat gives us, but it is going to take many years to get to that point.
Barry Gardiner
If Ofwat refuses to reduce those penalties, is the equity investment still on the table from KKR?
Chris Weston
That will be a decision for KKR, but as you have pointed out, it is much more difficult for an investor to come in, being very aware of those penalties. It will go to the return.
Barry Gardiner
If not, will it be too late to go back to the other potential investors that you have excluded from the process, or would it result in a special administration regime?
Chris Weston
It is a very fluid situation, but those are both possibilities.
Barry Gardiner
Are they? Are the others still there? Are they still keen and showing interest?
Chris Weston
Apologies, it will depend on the timeframe that you are looking at. If the current process fails, you have to consider what the creditors may or may not do, because they may step in, do a debt-for-equity swap, and restructure the balance sheet. We would probably go back into a CMA process that would run, and there is no guarantee that we would not stay on a market-led solution as opposed to a special administration. But it is a very fluid situation, and those are all possibilities.
Barry Gardiner
When KKR was bidding, because of its size—£638 billion—it boasted that it could, “Bully the Treasury into stopping Ofwat and the EA from imposing the penalties and fines.” Is that why you chose them as your preferred bidder?
Sir Adrian Montague
No, certainly not.
Barry Gardiner
You will recognise that that was a claim that they did make.
Sir Adrian Montague
I do not recognise the quote, and I do not support the sentiment.
Chair
But it is a strategic choice that you made to keep KKR as the only show in town.
Barry Gardiner
Indeed.
Sir Adrian Montague
In every bidding situation, at some stage or other, you have to go down to a single bidder. That is when you are in sight of the finish.
Chair
At the point at which you chose though, you still had the option of keeping other live options and you chose not to take it, so the consequences that fall from that—
Sir Adrian Montague
In practical terms, we did not have that option, Sir. The work that KKR is doing to move from preferred bidder status to a complete contract is extraordinary.
Barry Gardiner
You are paying for it.
Sir Adrian Montague
We have a limited amount of resource.
Barry Gardiner
You are paying for all the work that KKR wants. Let us not try to bluff.
Sir Adrian Montague
I am not suggesting that we are not doing so; I am just pointing out that they are posing immense demands on the business.
Barry Gardiner
Let us get back to the point that the Chair and I were in the process of making, and that is that you chose to eliminate those others from the bid. In response to the Chair, what you said was that there came a point when you had to do this, it was the right thing to do, and those bids fell away. Yet we have heard from Mr Weston that actually we might be having to go back to looking at those bids. At the time, Ofwat and the market looked at what you were doing and said, “Well, why are you doing this so early?” So what we are trying to get at is why did you do it so early?
Sir Adrian Montague
We need to go back a little in time, Mr Gardiner.
Barry Gardiner
Oh no, not another explanation. Come on. Just answer it.
Sir Adrian Montague
You are asking me, and I am giving you an explanation, which is that this was part of a long-running process that eventually looked at six bids. Two of those bids fell out of contention pretty quickly, so we were left with four bids. We conducted a detailed evaluation of all those bids, and I can tell you that the KKR bid was—by far and away—the best. Technically, financially, in terms of the commitment to provide equity, it was ahead. So, conscious of the need to create a disciplined process towards completion, we chose KKR. It is true that KKR said, “We are only going to do this if we are the only person in the field,” and we agreed with that because we could not have handled more than one.
Barry Gardiner
So you did not choose KKR because it could bully the Treasury. Did you choose KKR because it committed to giving the senior debtholders less of a haircut?
Sir Adrian Montague
No.
Barry Gardiner
But they did, did they not?
Chair
We are going to come to this later on in the session.
Barry Gardiner
Investors would normally want to see the board structure as well as the investment structure of the company, but you have said that the entire board will step down as soon as the new investment goes in. Is that because the Court of Appeal removed immunity from Thames directors against any claims a future special administration regime might bring?
Sir Adrian Montague
No.
Barry Gardiner
Why was it?
Sir Adrian Montague
Why was what, Mr Gardiner?
Barry Gardiner
Why have you said that the whole board would step down? Because when you were answering my colleague, you said that you could not give an assurance that they would stay in place, but you did not say, “I can give you an assurance that they will not be in place over the next five years because we have already said that we will all stay.”
Sir Adrian Montague
Your colleague was discussing the executive team, and I was referring to the executive team. If you are talking about the board, then it is true that when you have a change of control of a big company like this, you have to expect there will be huge changes in the board. It may be that the new equity owners will want some people to stay, but the expectation is that a majority will step down.
Barry Gardiner
Why did you not say that to my colleague?
Sir Adrian Montague
Because she was talking about the executive team.
Barry Gardiner
No. She was talking about the board as well, you know that.
Sir Adrian Montague
No, she was talking about the team.
Barry Gardiner
More specifically about you three.
Sir Adrian Montague
No, she did not. She talked about the executive team.
Barry Gardiner
I am sure Hansard will tell us who is right.
Chair
Are we done? I will move on to the question around securing emergency funding. We have touched on this already, but Tim, you are going to lead us on this.
Tim Roca
Can I ask about the £3 billion loan from your Class A bondholders including Elliott Management and Silver Point? We have had a note from your Class B creditors—you will not be surprised to hear—who described it as a payday loan style arrangement. Can I ask Chris perhaps for your assessment of the loan and its potential risks to the future viability of Thames?
Chris Weston
Certainly. You also have to consider how it came about and the timing of it. We started talking to the creditors as a whole in July last year. We had to come to an agreement by 25 October, and coming up to that time, the As and Bs were working together. On 22 October, we had an approach from the Bs entirely separate from the As, and that was a surprise to us. Given the deadline was the 25th and there was no certainty that the Bs could deliver what they were suggesting, we went with the outcome from the As that was most certain to give us the firm financial foundation that we needed. Anything that the Bs proposed had to be agreed by the As, and I could see no prospect of that happening.
Tim Roca
So the reason you went with the A proposition is because you could not see an agreement. The difference between the two offers was quite substantial, was it not? The As offered an interest rate of 9.75% and the Bs offered an alternative at 8%, which would have potentially saved £375 million.
Chris Weston
It will be put forward by each of them. I do not think the difference was as stark as you suggest, and I go back to that we had absolutely no confidence that the Bs would be able to deliver what they proposed. It just came in too late, and we were working to a liquidity runway that demanded action be taken by 25 October. We had spent months negotiating it with the As; it takes a long time with a lot of paperwork to get the certainty you needed, and we just could not have done it with the Bs.
Tim Roca
But that was not the assessment of everybody at Thames, was it? Because actually there were members of the board who thought the Bs’ offer was better. That was reported in the Financial Times.
Sir Adrian Montague
With respect, the Financial Times was not in the boardroom. I was in the boardroom. Everyone was united in dismissing the Bs’ offer.
Tim Roca
And that was on the principle that that was a solid offer that you needed immediately, whereas the other offer—which was a lower interest rate—there was no certainty of it being accepted.
Sir Adrian Montague
Yes. We have talked a little about the pressures on liquidity already today. We were concerned that we might run out of liquidity in December unless we pressed on with the As’ offer.
Tim Roca
We are talking about alternatives. The High Court suggested you might have found better terms in the market from new funders. What is your assessment of that?
Chris Weston
We were in a very difficult situation. I have seen absolutely no evidence that there was any funding from elsewhere on better terms, and I would have been very surprised if we had found it.
Tim Roca
Again, the Class B creditors have suggested there are hidden terms and conditions in the terms that you agreed to in the end. Can you talk a little about what they might be referring to?
Chris Weston
I am afraid I do not know what they are referring to.
Tim Roca
Are there any hidden conditions?
Sir Adrian Montague
No. Bear in mind that there was an extraordinary amount of disclosure in the court proceedings, thousands and thousands of pages of documents. We are not aware of any hidden terms.
Tim Roca
Was this at the point where you had five weeks left of liquidity that you were talking about earlier?
Sir Adrian Montague
Yes.
Tim Roca
Does the deal include any financial retention incentives for executives at Thames?
Sir Adrian Montague
The deal required us to put in place a retention plan for a limited number of senior executives.
Tim Roca
Can you give us an idea of what those incentives might be?
Sir Adrian Montague
We have created incentives to try to retain our most precious resource, which is the senior management team. We have a bonus paid in completion of the first restructuring plan, another one at the end of the second restructuring plan, and then a large amount right at the end of the process.
Tim Roca
What sort of size are these bonuses?
Sir Adrian Montague
In the case of the first two instalments, it is 50% of salary.
Tim Roca
So very substantial bonuses.
Sir Adrian Montague
Very substantial. To be honest, this is the first time that I have encountered this. I have done a few reconstructions in my time, and I do not think we would have got there but for the fact that the lenders insisted, should we say.
Tim Roca
A layperson looking at this would see that there was an offer from the A’s at 9.75% that came with financial incentives to retain people, and there was an offer from the B’s at a lower interest rate, and there might be some scepticism or a suggestion that one offer was gone with for other reasons. What would you say to that?
Sir Adrian Montague
I would say that would be inappropriate at that conclusion. The team was working astonishingly hard. We have talked a little about the vital importance of keeping the team. In my answer to Ms Dollimore, I was trying to emphasise the importance of the team. We need this team to stay until the completion of the transaction.
Tim Roca
The Class A offer involves an incentive scheme for executives that could be worth up to £1 million for yourself, I suggest, Chris. Is that correct?
Chris Weston
At the moment, I am not part of that scheme.
Tim Roca
But it would be up to £1 million for some executives, would it not?
Sir Adrian Montague
It is certainly a large amount of money.
Tim Roca
Customers will find that extraordinary in view of that earlier amount.
Sir Adrian Montague
Customers should also take into account that they will pay none of that amount. This is an amount that will be funded by the lenders, and at the end of the day, borne by the lenders because we wanted to isolate this scheme from the general run of customers. It is the lenders who attach so much importance to the completion of these transactions, and they are paying for the privilege.
Tim Roca
Can we talk a bit about the time pressure? We have just talked about the five weeks’ liquidity. The Class B group said that the loan took advantage of the time pressure Thames is under. So was the urgency that drove the deal solely about liquidity?
Sir Adrian Montague
That is right. We have had very, very tight liquidity at a number of points over the last nine months. In October, we needed to complete a change to the agreements to release some reserves and get to the start point for the reconstruction plan. We had about five weeks’ liquidity at that time. When we were in the High Court and the Court of Appeal, liquidity was also very, very tight. We are talking about a huge corporation of 8,000 employees. Having five weeks’ liquidity is a nightmare.
Tim Roca
But urgency will have worsened the conditions that you will have got from lenders, will it not?
Sir Adrian Montague
I do not think it worsened it. They are tough conditions, I would not pretend otherwise. But we were in a beggars cannot be choosers situation. We were running along the edge of the precipice, and we had to secure the financial future of the company.
Chris Weston
Could I also just add that that liquidity runway was short, but it allowed us to carry on investing—as we needed to—the capital investments to meet the legal, regulatory and environmental obligations. As the creditors came in and became more engaged, they recognised the importance of doing that. They did not constrain us in cash and constrained that investment. That could have been an option and would normally be an option in that situation, but it was not, and that is what also constrained the runway.
Chair
Just to go back very briefly to the question of financial retention incentives in Class A, who pays these?
Sir Adrian Montague
The lenders pay for that.
Chair
The Lenders will pay these?
Sir Adrian Montague
We know this is a sensitive point, so we have set up an auditable process which traces the monies that are paid in these incentives back to the lenders. They get funded out of our new facilities, and those facilities will not be repaid by customers.
Chair
And that will not be recycled through some other process to come out of customers’ pockets?
Sir Adrian Montague
No.
Chair
Okay. We are going to move on to the court proceedings. Barry, do you want to lead the questions on this?
Barry Gardiner
Just before we do, Mr Weston, you said that you had seen no evidence that you could have sourced additional funding on better terms from anywhere else. I believe you received an offer in early September from one of the groups that eventually put a bid in of £1 billion, which was on better terms, was it not?
Chris Weston
I will have to come back to you on that. There were offers that came in, the substance to them was often debatable. As a team we certainly felt that the A’s, with the certainty they provided and the proportion of the creditor base that they spoke for, was an important factor in any decision-making process. But I would have to come back to you on the particular one that you are referring to.
Barry Gardiner
Do you know the one I am referring to?
Chris Weston
Not particularly, no.
Barry Gardiner
The Class A bondholders argued that there was insufficient time to implement an alternative restructuring plan, if the A plan could not be implemented. The Court of Appeal described the enormous time pressure of the case as unacceptable, and requests to expedite the appeal proceedings as, “Frankly, ridiculous”. To what extent did time limitations force the court’s hand?
Sir Adrian Montague
I do not think the court would ever be in a position of allowing its hand to be forced: it is very professional in its approach—the judgment at first instance ran to 176 pages—it looked minutely at every aspect of the plan, and it was an extraordinary performance.
Barry Gardiner
But it did say that the plan you were putting up was unacceptable. Were you intentionally trying to—
Sir Adrian Montague
Clearly not, we were in a position where we were very tight on liquidity, we were working all hours that God sent to try to finalise a package to allow us to start those court proceedings. This whole process goes back to when the existing shareholders decided not to provide further capital to the company. As soon as that happened, we had our backs to the wall, we started a twin track process of trying to find equity and trying to bring the lenders together, in the first instance, to provide this extra liquidity. It was a very close-run thing.
Barry Gardiner
What impact would a SAR have on Thames Water’s operations and on the senior staff?
Sir Adrian Montague
A SAR would make life extremely difficult for everyone. We think that the suppliers would wonder how long they wanted to continue working for Thames because obviously their future would be in doubt, and the same would be true of the senior staff, “Who knows what the outcome will be if we went into SAR?” We think they would be receptive to offers from elsewhere. We think the burden on the Government would be considerable. At the court of first instance, the expert said that he thought it would amount costs of about another £5 billion for the Government—I think I have that figure right—so wherever you look, there is additional strain on the process. The Government would have to finance this programme because there will be no other liquidity available. If you remember, that is what happened in Railtrack—I do not know whether we share that experience, we probably do—and the Government would seek to recoup that amount, we guess, by having to sell the business to someone else, but many months later.
Barry Gardiner
In fact, under the new Water (Special Measures) Bill they have the right to recover that and to make sure it is not the public that are paying the bill. The High Court judge said that he might have refused to sanction the plan from the outset if the, “Eye-watering level of the adviser’s fees had been clear up front.” Why were those costs so high, and how much have you spent on legal costs to date?
Chris Weston
The costs reflect the magnitude of the restructuring that is underway. It is the largest restructuring of a balance sheet in British history, and the number of parties involved and the costs reflect that. The costs incurred are extremely high and that reflects what I have just outlined, and to date, over the last 12 months, it is about £159 million.
Barry Gardiner
Why do you think the judge said that he might have refused to sanction the plan from the outset if he had known those costs were so high?