Outside of business water providers, comparison websites and auditors who help business and residential customers get the best deal possible, the water industry generally is functioning at its best when it stays out of the news.
That is not what has happened at all, however, in recent years, particularly with regard to the biggest private water company in the United Kingdom, Thames Water.
Thames has lurched from controversy to scandal to existential crisis over the past decade, but since 2024 the relatively remote chance that it would end up collapsing entirely has become a very real reality, with sweeping and significant consequences for the entire industry and all of its customers.
The most recent report that the Moody’s credit rating agency has once again downgraded the debt rating of Thames Water as it struggles to get a 3bn emergency loan approved by its creditors amidst legal challenges has led to renewed concerns about the domino effect an increasingly possible collapse could cause.
What would a collapse for a water company look like, how possible is it, and what would happen next?
On The Knife Edge
With every week that goes by, Thames Water faces increasing scandals, mounting debt and an increasingly shortening runway where the company will run out of money entirely and face an unthinkable bankruptcy and collapse.
With £23bn in repairs to Victorian water infrastructure and 1980s IT infrastructure required at a time when the company has been paying significant bonuses and dividends to investors despite its financial precarity, Thames Water is in a crisis of its own creation.
Demanding higher bills whilst also threatening regulator Ofwat with increased base pay if bonuses are limited has not exactly helped its case, and whilst the courts are deciding if the price increases agreed in December and the emergency loan can happen, the court of public opinion has already announced its verdict.
Whilst a statement such as this suggests that Thames Water does not care about the customers who made this extravagance and obscene levels of debt possible, it is one of many statements that could potentially shape the political case for what comes when the money runs out.
What Happens When The Ship Sinks?
Thames Water is running out of options and running out of time. According to recent reports from the Financial Times they have until March until they run out of cash entirely and would not simply be debt-laden but actually insolvent.
However, a water company cannot simply liquidate, enter a CVA or go into a conventional administration, because 16m people and businesses rely on the company to supply them with drinking water, wastewater and industrial water for particular needs in Greater London.
If Thames Water liquidated, it would lead to a catastrophic crisis and leave millions without water until the issues are resolved, so instead of this, a unique form of insolvency known as a Special Administration Regime (SAR).
Applied for by the Secretary of State for Environment, Food and Rural Affairs (in other words, the head of Defra) to the High Court, the SAR can only be undertaken if at least one condition of four is met:
- The company is insolvent or is likely to default on its debts;
- The company has failed to meet its obligations to its statute or licence, or is likely to fail in the near future;
- The company has requested a SAR itself, often out of concerns about the first two conditions;
- It is in the public interest to place a company into an SAR.
Thames Water is extraordinarily close to meeting three of the four, even if it has been adamant that it should avoid what it has rather disingenuously described as “renationalisation”.
It is extremely close to insolvency and has already had several periods in 2024 where quick renegotiations with its creditors have been the only barrier to outright insolvency.
It has failed to meet its statutory obligations and has received some of the largest fines in the history of Ofwat (and by extension private water in England and Wales) as a direct result. Given the scale of Thames Water’s debt, it appears they might be unable to do so.
The general public has been notably in favour of renationalisation (in an even greater form than the SAR) since the first issues with Thames Water under the Macquarie Group, something that has only grown louder with each passing year and each area of outstanding natural beauty polluted with raw sewage.
The consequence is that an SAR would cost billions and would be paid for by the taxpayer, but this has not stopped it from being a popular option given the current state of play.
The bigger concern for the water sector is that an SAR would have a domino effect on other water companies, particularly those looking for investment, and could lead to further SARs and a potential renationalisation of the whole industry.
The government has already started looking for restructuring advisors, so whilst an 11th-hour deal is not out of the question, an SAR looks increasingly likely despite being previously unthinkable.
