The Ultimate Outcome

While there are grey areas, if something would obviously have to be rescued by the State rather than allowed to go bust, then it belongs in public ownership, just as if something obviously would not, then it does not. Corner shops? Obviously not. But water? Obviously, as is the case everywhere apart from England and Chile. Renationalisation, which ought to lead to the National Grid that was proposed by Labour in 1979, would not be difficult, as Gill Plimmer writes:

Thames Water, the UK’s biggest water and sewerage company, has been teetering on the brink of collapse for more than two years as it struggles under its £20bn debt pile.

The utility, which serves about 16mn people in and around London, has been in the hands of its lenders since 2024. They include the US funds Silver Point Capital and Elliott Management. The lenders have proposed an emergency deal for Thames Water as a last-ditch solution after KKR, the private equity firm, walked away from a rescue a year ago. The lenders’ most recent recapitalisation deal has awaited regulatory sign-off from Ofwat since March.

The government wants to avoid Thames Water being taken into state hands. But this week environment secretary Emma Reynolds said the lenders’ plan was not “good enough” and that “we stand by for any outcome”, raising the prospect that the government could take over Thames Water. But what would that look like?

What is the Special Administration Regime?

The government’s Special Administration Regime, or SAR, is a form of temporary nationalisation and is widely viewed as the most likely pathway for a “renationalisation” of Thames Water.

A JPMorgan Chase credit note circulated after Reynolds’ comments assessed that the “risk of special administration at Thames Water is as high as it’s ever been”.

Under the regime, a court appoints an administrator, a qualified insolvency practitioner, to run the company in the public interest. The administrator ensures that services keep running and that suppliers and employees are paid on time. The debt interest and repayments could be frozen, freeing up additional cash for infrastructure.

The company could continue to receive income from customers under the SAR, and Thames Water could even be “cash flow positive in that window”, lawyers said. If the government did need to provide interim funding, it would likely be repaid first in any restructuring, either during SAR or when the business is sold.

A recent example is Bulb Energy, which collapsed in 2021 and was placed in a comparable SAR. The energy supplier was sold to Octopus Energy one year later and the government recouped all the costs.

What are the political considerations?

An added dimension to Thames Water’s future is who the prime minister will be come October. On Thursday, voters will decide whether Andy Burnham, the Greater Manchester mayor, will become the MP for Makerfield; the first step on his putative journey to replace Sir Keir Starmer as prime minister. Burnham, who is on the left of the Labour Party, has said there is a “very strong case for public ownership for Thames Water”.

If Thames Water were to be taken into public ownership through special administration, creditors of the water company would have a right to “appropriate value”, a figure set in the “public interest” under legislation introduced in 2024, lawyers said. This figure would take into account the company’s financial and environmental failings, which may reduce creditors’ claims to compensation.

British Steel is in the process of being compulsorily renationalised and it is unclear how much will be paid to the Chinese owners. Nationalisation of the entire water sector is also popular; more than 80 per cent of the public support it, according to a YouGov poll last month.

Estimates of the costs of nationalising the sector vary wildly. The government last year estimated it to be about £100bn. Others disputed this figure, pointing out that the “appropriate value” is not the same as market value, and can take into account the cost of repairing infrastructure that should have been fixed.

The government’s borrowing costs would also typically be at a lower rate than a private company’s.

Since water is organised by regional water basins, a more left-leaning government may look at local public ownership if it were to renationalise the entire industry.

Why is it crunch time now?

Even before Reynolds’ intervention, the clock was ticking. Thames Water is expected to run out of cash in October. It has already spent £2.25bn of a £3bn emergency loan it agreed with creditors last year, which carries a 9.75 per cent interest rate.

Even if Ofwat signs off the creditors’ latest proposal, it must then pass to a public consultation and be approved by the courts.

The creditors have proposed writing down £9.6bn of debt, injecting a further £3.35bn of equity and lending the business £6.55bn if Ofwat agrees a deal.

But the deal also will cost about £750mn, including legal and advisory fees, on top of the £800mn already paid for the first emergency loan.

There are other pressures. Thames Water needs to produce its accounts by July 16 but if Ofwat has not agreed a deal, auditors may struggle to sign off the accounts as a “going concern”.

Thames Water’s bills are expected to rise by about 54 per cent by 2030, taking the average water and sewerage bill to approximately £727 a year. From 2030 there will be further bill rises — hard for consumers to swallow if there is no visible sign of improvement.

If the creditor deal goes ahead, the company is planning to seek a stock market listing as soon as 2030 and needs time to improve the business.

What are the risks?

The government is concerned that state intervention will leave it taking responsibility for water company failures and deter much-needed investment in the UK.

The creditors’ provision of more debt and equity also relies on leniency on environmental targets such as pollution and leakage. The consortium argues that any more regulatory fines would wipe out cash that could otherwise be invested to improve the company’s creaking infrastructure.

This proposal also carries political risk and moral hazard: if the government agrees to those demands, other water companies could rebel against special treatment and see regulatory penalties as optional.

JPMorgan analysts estimate “the ultimate outcome likely close to a coin toss at present” for Thames Water. Reynolds’ letter may be a forerunner of a government policy more in favour of state ownership — or it could just mean she is positioning herself for a role in a Burnham cabinet.