[qcnguy]

Paying dividends is good. It's how you attract the capital for investment without having to raise it via sale of government bonds or money printing.

The problem here is financial illiteracy - the alternative to paying dividends isn't that the same money all gets spent on the water network. Large scale investment is rarely funded from general revenues as it'd require spending years accumulating a huge cash pile that sits around doing nothing, and governments see such piles as pigs to slaughter. So the alternative is that the government borrows the money and then has to pay interest on it. From your perspective the UK "wastes" 8% of its spending on interest payments, and it's rising rapidly, but of course if it didn't pay interest then nobody would lend it money and all funds would have to either come from taxes or via inflation.

[KoolKat23]

Government bonds are considered lower risk and the interest rate is lower, i.e they will attract the same money for less. Private shareholders are more expensive.

This also doesn't consider "debt recapitalisation" where these private companies draw down new debt on promise of future cash inflows from consumers and then suck out dividend cash "de-risking" their holding in the company. The government can bail it out or the can close it then, it's not their problem as they received the cash upfront.

[qcnguy]

Government bonds are only low risk in economic theory. In real world practice lending to left wing countries can be high risk as they like to accumulate too much debt and then default. That's why the UK government is paying 5.8% on its bonds at the moment despite being able to print its own money, which is the same average interest rate paid by Thames Water. Lending to Thames is not seen as riskier than lending to the state, despite that Thames faces huge regulatory constraints like price controls and the British government can literally force people to give it all their money.

> private companies draw down new debt on promise of future cash inflows from consumers

This is what governments do too.

[KoolKat23]

It's interesting it's at the same rate, I imagine as everyone knows the government would have to bail them out. So the question remains why do it? It doesn't actually benefit the general public then. Increased risk for government and like you mentioned increased hurdles for running the utility.

Of course government do that, but they're left holding the bag regardless, so the incentive is very different.

These are not counterpoints.

[qcnguy]

Why do what? Have private water companies? Same reason for having private food supply, private electricity providers, private communication providers, and in most countries private healthcare providers. They run the business better than the state would, which is itself a benefit to the public.

A government bailout means nationalization, which means investors lose everything. That risk doesn't suppress interest rates, it increases them. Thames Water's interest costs are around average for corporate debt, implying the market doesn't anticipate a water nationalization anytime soon.

[KoolKat23]

Unlike the others this is a natural monopoly.

Your first message contradicts your second, which one is it are they paying government risk level interest rates or business risk level interest rates.

Edit: I just went and looked up their rating with one of the big agencies. CCC rated (junk basically) with a negative outlook, they did get an upgrade on a refinance last year, but from CC (so now lesser junk).

UK's last rating was AA (if you're interested).

[qcnguy]

There's no contradiction. Thames and gilts both pay ~5.8% on average. This is about the same as "Baa" (moderate risk) corporate debt.

https://fred.stlouisfed.org/series/BAA

Thames' debt costs are normal for a company of its type, but for a government this bond yield is danger-level high. That's why there's so much talk in financial circles now about the UK needing another IMF bailout, although I have grave doubts about whether that's actually possible given the sheer size of the UK's debt load compared to the smaller third world countries that normally need IMF help, and the near simultaneous talk in France of a bailout there too. The IMF just doesn't have the resources for even one bailout of that size, let alone two.

Don't pay attention to credit ratings of countries vs companies. They aren't comparable due to political interference and general crapitude at the ratings agencies (remember they rated sub-prime mortgage debt as AAA). They also disagree, S&P rates Thames' class A bonds as Caa3. What really matters is the yield. That's the ground truth.

Note that Thames' interest costs have been all over the place. 5.8% is the current amount it's paying, but the actual bonds it has issued have had a wide range of yields.

The reason it's considered high for a government is because government debt should be much lower risk than a company. Governments can order banks to transfer everyone's savings to themselves, they can print money, they can prevent their citizens from leaving and seize all the assets... they can do things to raise money that would be considered incredibly evil and criminal if companies tried. And of course they can in principle set bond yields to whatever level they like by making the central bank or other financial institutions legally required to buy their debt.

That's why economics textbooks teach that government bonds are the lowest risk possible and so should have yields far below corporate debt.

In reality:

1. Governments can default on their debts just like companies do. History is full of such examples. Bond yields reflect that fact.

2. Governments can sell bonds that are inflation linked, so printing money isn't a way to escape those debts. The UK has an abnormally high amount of such debt that's inflation linked. The only way to pay them back is via cutting spending or increasing tax revenue, but the UK can't do the latter (recent tax rises have failed to come close to expected revenue increases) and can't do the former either because...

3. Governments can be prevented from paying their debts by law. Some countries have "debt brakes" or "debt ceilings" that can block the issuance of new debt to pay old debt, and in other cases (like the UK) the government may rely on ideologically extreme MPs who refuse to pass laws that bring spending in line with revenues.

So you add these things together and something that could in principle be a sure bet ends up looking as risky as an ordinary company.