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The environment secretary, Steve Reed, has said the government is stepping up preparations for temporary nationalisation of Thames Water, indicating it will reject pleas from the company’s creditors for leniency from fines and penalties.
Thames Water’s largest creditors control the utility and have made a bid to cut some of its debts and provide £5.3bn in new funding to try to turn it around.
However, the creditors have said their plan needs considerable leniency from the water regulators Ofwat and the Environment Agency over fines for environmental failings. The Guardian this month revealed that the creditors had asked for immunity from prosecution for serious environmental crimes in return for taking on the company.
Reed on Thursday told parliament that Thames Water must meet its statutory obligations, after being asked about possible “regulatory easements”.
“Thames Water must meet its statutory and regulatory obligations to their customers and to the environment,” he said. “It is only right that the company is subject to the same consequences as any other water company.
“The company remains financially stable, but we’ve stepped up our preparations and stand ready for all eventualities, as I’ve said before, including special administration regime if that were to become necessary.”
One person close to the situation said they believed it was “50/50” whether the government imposed a special administration regime (SAR), essentially a temporary nationalisation.
There are about 100 creditors who are in line to take over the ownership of Thames Water. They include big institutional investors such as Aberdeen, BlackRock, Invesco and M&G, and US hedge funds such as Elliott Investment Management and Silver Point Capital.
Regulatory easements would prove controversial because they would in effect make it much easier for Thames’s new owners to achieve bigger financial returns, as it would exempt the company from fines that could reach hundreds of millions of pounds. In May, Thames Water was fined £123m by Ofwat – the biggest ever fine imposed by the regulator. The creditors expect future fines of more than £1bn if current regulations are applied.
However, the creditors have argued in meetings with government that the only way to turn around Thames Water is for the threat of fines to be lifted. The US private equity firm KKR pulled out of a rescue deal after making the same argument.
A spokesperson for the creditors said: “Broad regulatory support is needed to unlock a market-led solution for Thames Water that will secure billions of pounds in fresh investment for its ageing network, allowing a world class leadership team to start the intensive turnaround and deliver better outcomes for customers and the environment.
“This investor group is committed to working with the government and regulators to agree a pragmatic plan that recognises what Thames Water can realistically deliver and they expect to be held accountable for an ambitious trajectory for the company’s return to compliance. More than £10bn would be written off to get the company back to investment grade, expected to be the largest financial loss on an infrastructure asset in British history.”
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About £6.7bn in debt will be written off under the creditor plan. Another £5bn has already been written off in equity investments by the previous owners.
A person familiar with the creditor group’s thinking said SAR would be a “political decision”, because the requested regulatory easements were within Ofwat’s powers. “If they decide they can’t [be lenient on the environmental obligations] they’ll just end up doing it in government themselves” after taking over Thames, the person said.
Other water companies would be likely to seize on any leniency to argue that they should also be exempted from fines on the grounds of fairness. However, the creditors argue that exemptions for Thames Water should be the first stage in an overhaul of the regulatory system. The former Bank of England deputy governor Jon Cunliffe is considering the shape of a new system.
A Thames Water spokesperson said: “Thames Water is committed to improving outcomes for the environment and its customers. We are investing billions of pounds in our network and any recapitalisation of the business will need to ensure that is maintained for the benefit of all our stakeholders. Our focus remains on a holistic and fundamental recapitalisation, delivering a market-led solution which includes targeting investment-grade credit ratings.”
