Economic play book four: Debt mountain

The alarm rang for six o’clock. Sarah hit the snooze button, then remembered she had to go to London this morning. A meeting with the commons select committee on MFU and future finance.

She reluctantly got up, showered and dressed.

She’d laid out a pressed blouse and trouser suit the night before.

She pressed the double espresso button on the coffee machine and waited. She wasn’t a breakfast kind of person but threw some fruit in her bag and her favourite dark chocolate.

She downed the espresso quickly and thought about another but had a glass of sparkling water instead. She’d read recently that we don’t drink enough water. The irony wasn’t lost on her.

The chair of the commons select committee, was known for being challenging and Sarah was already exhausted from recent press articles about the difficulties at MFU and the pollution incidents. Her daughter had also become challenging since joining the pressure group ABC. There were no easy days anymore. She certainly wanted a week where there was neither stress or challenges, but as CEO she could not pick and choose when difficulties present themselves.

Sarah fully expected to be asked to stand down by the environment secretary at the end of this enquiry. The secretary for the environment, had been making press briefing that seemed to allude to that conclusion. While only her employer could remove Sarah from the post, the government could make it very difficult for her to stay in post if they chose to. At this point Sarah wished for her old job again. At least she’d be reading about someone else’s shit, rather than her own literal shit in rivers and the ocean.

Sarah took the tube to Parliament and got off. Whatever happens, she decided she would meet with her family at the Sussex seaside home this weekend, and she might drink a couple of glasses.

In the corridor of Westminster, Sarah heard “hello Sarah” behind her. She turned and saw Caroline Moffat, the environment secretary. How are you, I think it might be thirty years since I last saw you at Oxford.

Sarah agreed.

I suspect the next six hours will feel longer, said Caroline. On that point she wasn’t wrong.

The committee meeting was gruelling, and some of the creditors were also there or they were online. The chair of the select committee, Robert Jenner, didn’t throw her any lifelines. Robert knew he had to make this meeting count for public perception. The public would not take kindly to an image that things carried on as normal, with the taxpayer funding the bill. He asked the creditors why they continued to build the debt pile of the company, knowing it had a fixed income from the users.

Sarah was asked how building up this debt pile has led to more pollution incidents, in the rivers and the oceans. Sarah was shown pictures of dead fish floating in rivers and sanitary products floating out to sea. Robert Jenner had great presentation skills. Sarah defended the investments. She had not been leading the company since it was privatised, and she was not responsible for the greater part of the debt mountain. Sarah showed the developments that were underway or proposed, but MFU had limited access to capital funding and not all the projects she wanted to complete could be given the green light.

Robert Jenner was not throwing her a lifeline and kept pushing on the pollution incidents and where the money had been spent. Finally, Sarah stopped being defensive and asked Robert

“How old were you when the water companies were privatised?”

“Twenty, or thereabouts”

“Were you responsible for that decision?"

"Obviously not."

"Then why am I responsible for decisions taken many years before I was appointed?"

Jenner didn't hesitate.

"You're not. But you are responsible for what happens now."

Sarah nodded. "That I accept."

The select committee, having interviewed everyone concluded the meeting, thanking everyone for taking part and stating that they would come back with their report.

On its part, the government didn't hold all the cards when considering possible outcomes for MFU, but it held the one nobody else had. It could allow the company to fail financially without allowing the water supply to fail with it. But Sapphire was not the only investment group managing critical infrastructure companies and if MFU were the first domino to fall, the other water companies had similar debt and credit problems. The government couldn’t afford to take back control of them all.

After the committee meeting, Sarah needed that weekend away with family. Then just as she was packing her bag and taking one last coffee in the Parliament dining room, she got a call from Caroline to see her in her office.

Sarah knew what this meant, the gruelling interview was the torture before the execution. But this time she received a reprieve. You impressed me with how you handled yourself. Must have been all those bloody pointless Oxford debates you won. I particularly like how handled Robert Jenner. It isn’t personal at these meetings; they are just doing their job holding companies to account. But it feels personal said Sarah, yeh, and it felt personal for me too said Caroline.

I’m coming to your office in two weeks. In the meantime, the committee want to scrutinise your accounts. We need to assess the financial risks posed by MFU. Don’t try to hide anything, please.

The report, “MFU blue water” landed some weeks later, on the desk of the environment secretary. The committee recommended that government prepare to take MFU into temporary public control. They saw no reason why the government should bail out a company that had made poor financial judgements.

Caroline had advance warning of the report recommendations, and she had taken the problem to the treasury for advice. They had the advantage of seeing all the accounting from MFU and understanding what the financial failure of MFU might do to the wider infrastructure debt markets. The preferred treasury option was for the government to become a super creditor ahead of all others.

But it wanted a credible plan from the company. This was the government being prudent and scrutinising the books.

Caroline arranged a meeting with Sarah and MFU, and government providing credit was discussed. How much did the company need and how long for the credit term. Sarah described all the issues that needed fixing, and she used the old traffic light system to define the priorities the company had identified. Pipe works red, sewage amber, new reservoirs green.

Caroline said, make sewage red. No more waste dumping in the oceans. My daughter is spending most weekends picking up rubbish on the beaches, and she sees me as part of the problem.

But the engineers have identified that the pipework’s are crumbling and leaking in many cases, and the company has an obligation to provide clean water to our customers.

"I understand why the pipes are red," Caroline said. "But sewage can't stay amber."

“But that problem isn’t fixable overnight, and fixing it isn’t cheap.”

"No. But we're giving you more headspace to fix more than one thing."

Sarah looked at her.

"And if government is providing that money, I need to be able to tell people that their rivers and beaches are going to get cleaner."

"Then we have two reds."

"Yes."

The government would provide emergency credit, but it would rank ahead of the existing lenders, a super creditor. In return the government expects there to be no more dividend payments and no executive bonuses. Existing creditors will be asked to extend their loans, accept reduced interest rates or increased payment terms or both, while the company recovered. Sapphire would still retain ownership and responsibility for running MFU.

"We're not asking the creditors to write off what they're owed," Caroline said. "We're asking them to wait for it."

Caroline paused, providing time for Sarah to reflect on the offer.

So, let’s make both our daughters proud by making a difference.

Sarah walked out into the cool evening air around parliament square. She sat on a bench looking out over the old river, and a loud party boat went past. She hoped she could pull this off. A message flashed up on her phone. “*Would love to come to Sussex. ABC beach clean Saturday morning. You coming?*”

Maybe this was what she needed, sometime connecting with her family, but she’d rather a barbecue and wine than beach clearing, but maybe they could do that later.