What would happen if Thames Water is temporarily renationalised?

The Guardian

8 hours ago

When the environment secretary, Steve Reed, stood up in parliament last week, his message for the owners of the struggling Thames Water appeared clear: there would be no leniency on fines for breaching environmental standards – despite the requests of creditors who control the company.
Amid the standoff, Reed said the government had 'stepped up our preparations' for the next stage: putting the company, a provider of water and sewage services to 16 million customers in London and south-east England, into temporary nationlisation, known as a special administration regime (SAR).
Thames Water's perilous position stems from years of mismanagement, during which it built up unsustainable debts of about £20bn. Over the past year its problems have come to a head, with the company scrambling through a court battle in February to secure emergency funding, and now finding new owners.
Things have not gone smoothly. The US investor KKR pulled out of its bid to buy Thames, leaving a group of about 100 creditors in line to take over the ownership. They include big institutional investors such as Aberdeen, BlackRock, Invesco and M&G, as well as US hedge funds such as Elliott Management and Silver Point Capital.
So what would temporary nationalisation actually involve?
Rather than selling off the business for parts, the special administrator's first priority is maintaining the essential water service. Similar regimes are in place for other crucial institutions such as energy companies, the Post Office and banks.
The creditors would have a claim on proceeds of an eventual sale after that objective has been achieved. Senior class A bondholders would expect to receive some money back. The loans of class B creditors are likely to be worthless, and Thames's official owners last year acknowledged that their shares were worth nothing.
No water company has gone through special administration. But the energy company Bulb was nationalised temporarily in 2022 after surging energy prices forced it into insolvency. That process ended up making the government money when energy prices returned to normal.
Some of the most detailed cost estimates have come from consultants at Teneo hired by Thames Water. They said SAR would require as much as £4.1bn in funding from the UK government – seemingly a daunting addition to government debt.
Yet the Teneo report and another prepared by consultants at Kroll make it clear they expect that burden to be temporary: even in the worst-case scenario, the government would eventually recover 100p in the pound.
Dieter Helm, an Oxford University professor who has advised previous Labour and Conservative governments on energy and water policy, said: 'Whatever way it's done, it's pretty much inconceivable the government will not recover its costs.'
Thames Water argued there would still be big extra costs of £51m a month as suppliers put pressure on and people leave the business – although many of these were forcefully disputed in court.
Whatever the costs, they would be covered by the proceeds of an eventual sale out of SAR, with whatever is left shared out between the creditors. Such a sale does not seem impossible: the Hong Kong-based CK Infrastructure reportedly asked this month for its bid to be considered again.
Helm has argued that the government should opt for SAR in order to prevent a free-for-all of special pleading from other water companies hoping to avoid fines.
'Every regulatory regime has to have a procedure for handling failure,' Helm said. 'Currently nobody knows what happens if you get into trouble. Nobody knows what happens if you play with the finances.'
Charlie Maynard, the Liberal Democrat MP who intervened in the February court case and is appealing to the supreme court, wants Thames to be mutually owned by its customers after an SAR process to cut its debts.
'It's clear from Thames Water's own adviser that SAR will have a zero net cost so it is ridiculous that the government has not put the company into SAR already,' he said. 'SAR is the only way that the company will end up with a balance sheet strong enough to manage the material spending required over the next 10 or so years to get Thames Water's sewage system back in to shape and stop our rivers being filled with excrement.'
One person with knowledge of the Bulb administration process said: 'Sorting out Thames Water in the public sector will be cheaper in the long run. The government definitely shouldn't be afraid.'
Thames Water and the main creditors are strongly opposed to SAR. A Thames spokesperson said: 'An SAR doesn't fix Thames Water's problems. It will delay the delivery of improvement for our customers and the environment. It will be disruptive, add risk and uncertainty, increase costs, hinder our operational turnaround, destabilise our stakeholders and colleagues, and will not fix the balance sheet.'
Creditors also have a lot to lose if forced to write off debts beyond the £6.7bn – or about 20p of every pound initially lent – they have offered to reduce Thames's financial burden. But under the worst-case scenario set out by Teneo, they could only receive 45p for every pound of debt.
There are other arguments against SAR that the government may find compelling. One of the most notable is that Thames's operations are in need of a turnaround, so the prospect of the government owning every sewage overflow or flood may be unattractive. Trustees of the pension fund have also raised concerns.
The Thames creditors also include some powerful investors who have told the government that imposing steep losses will make them much less willing to invest in Britain in the future. They argue that even if the government does not face any direct costs, the indirect cost will be much greater.
On top of that, Thames and the creditors claim that any future owner will still require regulatory easements – leaving the government back where it started.
A spokesperson for the creditors said Thames Water needed £5bn immediately and 'SAR is the wrong answer with a viable market solution on the table'. They added: 'Any exit from SAR will require regulatory support and SAR will only delay and increase the cost of the turnaround and leave customers and the taxpayer exposed to the continued risk of Thames Water's worsening environmental performance.'
Thames Water has enough money to make it to next year at least, but eventually the creditors will have to either move forward with the takeover or pull out if they are not granted regulatory easements such as exemption from fines and prosecution during the turnaround.
Some people expect litigation from creditors if it gets to SAR. However, the process gives the government, in tandem with the appointed special administrator, a lot of power, according to a senior restructuring lawyer close to the situation. 'It is very challenging for the creditors,' the lawyer said.
The preferred option for the government is still a private-sector owner without government intervention. But if no deal can be reached, temporary nationalisation may be the only option left.