The House of Lords was warned last week that the designation of private equity firm Kohlberg Kravis Roberts (KKR) as preferred bidder would “inevitably multiply problems” for Thames Water.

Labour peer Lord Prem Sikka raised his concerns in an oral question in the Lords on Friday asking the Government what guarantees they expect to give to, or receive from, any bidder for Thames Water.

Lord Sikka said:

“Thames Water was put on the road to ruin by private equity. Now its shareholders have designated KKR, another private equity group, as their preferred bidder. KKR’s business model is profiteering, high leverage, low investment, asset stripping and high cash extraction. That will inevitably multiply Thames’s problems.”

Commenting in response, Environment Minister Baroness Hayman of Ullock said it would be inappropriate for the Government to comment in detail on a company’s commercial regulations.

However, she went on to explain:

“Regarding the company choosing KKR as its preferred bidder in the ongoing equity raise process, clearly Thames Water is a commercial entity engaged in a public equity raise, and it would therefore be completely inappropriate for the Government to comment on that. However, I note that the company had a number of potential bidders to choose from, which indicates that a market-led solution to the financial resilience of the company is a possibility.”

Government is "currently monitoring the situation closely”

Baroness Grender raised of the issue of the need for the Government to protect future bill payers from past mismanagement and a debt which should “clearly sit with funds and bond holders who have “in effect asset-stripped” the water company, leaving it without proper investment, “vulnerable to repeated environmental hazards” and therefore in strong danger of being in breach of its own statutory duties.

Responding to her suggestion that the only way to protect bill payers was by putting Thames Water into special administration, Baroness Hayman said:

“The bar for entering special administration is understandably high; the law states that it can be initiated only if the company becomes insolvent, can no longer fulfil its statutory duties or seriously breaches an enforcement order, and Thames Water does not fit those criteria, despite all its other problems.

“All I can say... is that we are currently monitoring the situation closely.”

"We cannot afford to have water companies failing"

She continued:

“The Government are very keen that we sort out the problem with Thames Water, but that is Ofwat’s and the company’s responsibility at present and we are just watching to ensure that Thames Water does not fail, because we cannot afford to have water companies failing.”

Referring to the recent BBC2 documentary on Thames Water, Lord Birt suggested that “the dire position we face” on sewage spills was at least to some extent down to “severe regulatory failure, the regulator’s focus on the price charged for water and the apparent complete failure to insist on the massive investment needed to upgrade our water and sewerage infrastructure.”

Baroness Hayman responded that the review currently being conducted by Sir Jon Cunliffe would “look very carefully” at the way the water industry has been regulated. She acknowledged that the programme had reflected the argument that Thames Water had been “carrying out what Ofwat had asked it to do, which was keep prices low, and because of that there was not sufficient investment.”

“The important thing is that we now look very carefully at regulation to make sure that in future it is fit for purpose and we do not end up in situations like we are in at the moment,” the Minister suggested.

Replying to Lord Teverson’s question that “is it not time that Ofwat was put out of its misery?”, Baroness Hayman of Ullock said she would feed the comment back to the commission.

Baroness Altmann asked whether the Minister could provide some reassurance to the House that any new owner of Thames Water would inject sufficient equity capital into the structure and not just debt, alongside being charged with investing sufficiently and being monitored sufficiently to make sure that past practices are not repeated.

Baroness Hayman told the Lords:

“I would very much hope that any company coming into our water industry would come with the intention to make that investment. After all, the price increases we have allowed water companies to make to their bills through the PR24 is on the understanding that that investment will take place.”