Thames Water will seek approval for an emergency cash lifeline in court on Monday as it faces running out of money in four weeks’ time.
Lenders to the debt-saddled company are offering up to £3bn in additional short-term loans to buy time to complete a major restructuring of the UK’s biggest water and waste company.
Failure to secure approval will see Thames edge closer to a temporary nationalisation, which could cost the government some £2bn a year.
The company is still considering whether to appeal against a decision by the water industry regulator Ofwat to increase bills by 35% above inflation over the next five years – short of the 53% increase it applied for.
Thames Water has been struggling for some time and has been heavily criticised over its performance following a series of sewage discharges and leaks.
The dire state of the company’s finances emerged about 18 months ago when it began a search for funding to avoid collapse.
The Thames fiasco is a combination of poor historical regulation, greedy shareholders, climate change and management failure. Its debt pile is currently about £17bn.
But regardless of what happens to the company in the future, water supplies to households will continue as normal.
In the latest bid to survive, lenders have offered Thames a further loan of up to £3bn in two instalments.
The first payment is to get it through to the autumn, and a second is to be used if the company decides to appeal against Ofwat’s 35% bill rise to the Competition and Markets Authority (CMA) – a process that could take up to a year.
The company has until 18 February to launch an appeal to the CMA.
Investment bank Rothschild is also soliciting bids to take over the company and inject much-needed funds.
The court hearing on Monday is scheduled for four days with a possible extension as a much smaller group of lenders is challenging the terms of the lifeline and proposing an alternative.
Although Thames will not collapse immediately if the deal is not approved by the judge, insiders have acknowledged that the company will move a step closer to temporary nationalisation – a so-called Special Administration Regime – if it fails.
The government has already sounded out a number of consultancies to take that on if the situation arises.
The company has been keen to stress that whatever happens, its services to 16 million customers would continue uninterrupted, but big questions about the future of Thames and other key infrastructure providers have been thrown up.
Some argue that Thames should be allowed to go bust and have the government take over the company due to it being the architect of its own misfortune. Previous owners loaded the company with debt, took out big dividends and paid executives handsomely. Caving in to its demands for customers to pay more now for a failing service would be a gross injustice.
Others say that poor regulation has allowed this mess. Bills were kept too low for too long which hampered investment in the aging infrastructure that is now being overwhelmed by a wetter climate. Ofwat is fighting yesterday’s battle and making things worse by imposing fines of tens of millions of pounds for failures, thus further depriving the company of the funds to fix the very things it is being fined for.
What Thames and ministers both agree on is that neither want this sprawling company on the government’s books. Consultancy Teneo has predicted a temporary nationalisation would cost up to £2bn a year.
However, a wider, perhaps more important argument made by some is that the failure of Thames as a private company would send an unhelpful message to the international investors that Chancellor Rachel Reeves hopes will invest hundreds of billions in UK airports, wind farms, rail links and everything else on her long shopping list of growth-boosting projects.
Sources close to the company and its creditors argue that we cannot agonise over and regulate for past mistakes. We are where we are – between a rock and a hard place. Carve out a special deal for Thames – or risk its collapse.
Thames has just over two weeks to appeal to the CMA to bump up the bills it’s allowed to charge. It’s not without risk – the CMA could revise them down.
Last week, the chair of the CMA was forced out by ministers unimpressed by the regulator’s focus on growth. Thames says it needs higher bills to invest £20bn over the next five years. It will be an interesting test case for the new chair.
