Thames Water could be renationalised with the bulk of its £15.6bn debt added to the public purse under radical plans being considered by the government, the Guardian can reveal.
The blueprint, which is codenamed Project Timber, is being drawn up in Whitehall and would see Britain’s biggest water company turned into a publicly owned arm’s-length body. Some lenders to its core operating company could lose up to 35-40% of their money under the plans.
The contingency planning, which is at an advanced stage, reflects the deep concern in Whitehall about the state of a company that has become a totem for the failure of privatisation in public utilities. It had zero debt when it was taken out of public ownership in 1989.
One of the UK’s biggest nationalisations in more than a decade would pull Thames’s vast liabilities into the government’s debt figures. A new arm’s-length public corporation would be formed to hold the water monopoly, modelled on the company that built the £18.8bn Crossrail project.
The company serves 16 million customers in the London and the Thames valley region, but its finances have been left threadbare after previous shareholders siphoned out billions of pounds of dividends and it was hit with hefty fines for pollution and leaks. Its parent company Kemble recently defaulted on its debt and Thames has said it has enough money in its operating company to last for 15 months.
Renationalisation would be deeply damaging for the government during an election year, reversing its privatisation by Margaret Thatcher’s administration.
Still, with Thames’ crisis likely to run beyond the expected autumn election, it may be a new Labour government that is faced with the challenge of salvaging the water monopoly.
The blueprint is being led by the Department for Environment, Food and Rural Affairs (Defra) and the Treasury. The plans for a special administration of Thames are based on the assumption that its heavily leveraged parent company, Kemble, is wiped out and its lenders, who are owed about £3bn, are not recompensed from the public purse.
Some bondholders for the Thames’ operating company – which sits within a regulatory ringfence – may also see the value of their loans cut by as much as 35-40%, according to figures that underpin the potential nationalisation and seen by the Guardian.
In April, the Guardian also revealed Thames’ plans to further tap bond markets even amid acute concerns among existing bondholders about the write downs they may be forced to make on their existing loans to the water company’s operating arm.
However, the lenders likely to bear the most pain under renationalisation would be the smaller share of creditors to Thames, known as category B bondholders, who hold about £1.6bn of Thames’s operating company debt. The vast majority of category A bondholders, who are owed about £13bn, would see a smaller “haircut” of about 5-10% under a central scenario, although this could rise to 25% in a more extreme scenario.
These figures are slightly more severe than some industry estimates from bondholders seen by the Guardian, in which B bondholders would lose about 30% of their money in a worst-case scenario and category A lenders would be forced to take 5% haircuts.
Shareholders in Thames, which include the funds giants USS and Omers, would see their entire investment in Thames wiped out under the renationalisation plans.
However, forcing lenders to also bear financial pain would be highly controversial, given Thames’s creditors include some of the world’s biggest asset managers, which lent to the company on that assumption that their investment carried the same gold-plated risk rating as government debt.
Whitehall and the regulator, Ofwat, are still optimistic that a nationalisation may be avoided, however, sources said.
While public corporations are known as arm’s-length bodies the move would ultimately allow the government far greater control and scrutiny of Thames’s day-to-day operations, sources said, speeding up its reform and return to the private sector. The company could be broken up into a “London Water” company to serve the capital and a “Thames Valley” firm to look after the rest.
Still, the level of control assumed by the government will be a main factor in determining how the Office for National Statistics (ONS) judges it should be accounted for within the national debt. Thames has about £19bn of assets, ranging from 20,000 miles of water pipes to reservoirs and sewage treatment works, as well as its £15.6bn debt pile.
Whether or not liabilities land on the government’s balance sheet often depends on the level of control it exerts over it.
In 2014 the £30bn debt at track and station owner, Network Rail, was added to the public purse after it was reclassified as a public body by the ONS. However, in 2017 housing associations’ £66bn debt was reclassified as private after the then communities secretary Sajid Javid relinquished “just enough” control.
Sources at the water regulator Ofwat are confident that Thames’ operating company will be an attractive prospect for private sector investors once its parent company is wiped out, and a new plan for its finances and governance is secured.
If the company can convince Ofwat with a new turnaround plan and business plan, due within days, then it might yet be able to hike consumers’ bills by nearly 40%. Ofwat is due to rule on that business plan at its 23 May board meeting.
It is understood Thames could also face some leniency on fines for its failure to meet performance targets if it is renationalised, given the problems of fining a state-owned body. Ofwat has the ability to censure Thames in three ways: via fines which put the money straight into the public purse, by rebates to consumers, or by securing undertakings.
With much of its assets buried underground, Thames and the regulator have struggled to get to grips with the true state of its ageing infrastructure. Thames has ramped up its claims of poor conditions of its underlying assets in recent years, as its finance struggles have become plain.
Ofwat, meanwhile, has sought to gather its own intelligence on the state of Thames’ assets, and believes the company’s challenges are similar to those of other water operators who are not making the same financial claims regarding their business plans.
A Defra spokesperson said: “As a responsible government, we prepare for a range of scenarios across our regulated industries – including water – as the public would expect.”
A spokesperson for Thames Water referred the Guardian to its 28 March statement and said the talks with Ofwat and other stakeholders are ongoing.
“Thames Water intends to pursue all options to secure the required equity investment from new or existing shareholders,” the statement said.
A spokesperson for Ofwat declined to comment.