The UK Water and Thames Water Crisis: Public Ownership

Thames Water is left with a difficult choice ahead: a private deal or a public rescue. A senior creditor deal remains in play. However, in its latest annual report, Thames Water revealed that special administration is now a real possibility for the company, whether a deal is made or not.

In the first article of this two-part piece, I cast doubt over the future of Thames Water (TW) and the so-called market-led solution. That is, private investment would be responsible for restoring TW’s ailing finances and preparing the company for the upcoming 2025-30 regulatory period. 

Despite pressure from Ofwat, the economic regulator, the senior creditor deal remains on the table. However, with Ofwat yet to make a final decision on the deal, recent developments in the water sector cast greater uncertainty over the developing situation. 

Following the release of the UK water sector review by Sir John Cunliffe and the Independent Water Commission on 21 July, Ofwat is to be abolished. Replacing Ofwat will be a single water regulator for England and Wales as the government attempts to fix a broken industry. The impact of these changes on the TW deal is not yet clear, but undermining the economic regulator at a crucial time for the deal, with no guidance yet on when and how this single regulator will form, raises the question: what will happen to the Thames Water deal now?

The government does not upset the market during a critical time for public finances, which has helped TW avoid special administration thus far. Both sides continue to seek a market-led solution, playing into the hands of the creditors in a private rescue who seek to steer the direction of the deal. However, TW made a shocking admission in its annual report that special administration is now a real possibility, whatever the outcome of a deal. The burden of change needed to meet the demands of the upcoming 2025-30 regulatory period may prove to be too much for the struggling water provider, along with the restructuring needed to fix its financial woes. As the TW saga comes to an end, this second part of the two-part piece will address what special administration is, what it means for the UK’s largest water company, and why it will likely happen anyway. 

What is the Special Administration Regime (SAR)? 

In its 2024-25 Annual Report released in July, TW made the remarkable statement that “there exists a material uncertainty” whether a suitable deal can be delivered, “either within the [2025-30 regulatory period] or at all”. Without a deal, the company “would need to consider all options…but a possible consequence would be a special administration of [Thames Water]” (Thames Water, 2025).

What does special administration mean? For a vital public service like water, the Special Administration Regime (SAR) keeps water services going in the event that the company running it cannot afford to do so. This involves the water company typically declaring insolvency, at which point the government would step in and take control of the company while a plan is made to restore the company’s financial position. This form of temporary public ownership protects the water company’s assets, preventing them from being liquidated (sold off) to raise capital for the company’s creditors, who would usually be prioritised in traditional administration proceedings. This ensures the public interest comes first over a return to the company’s creditors, keeping public waterways active as the government works on a fix. 

Unlike other forms of special administration, such as banking (e.g., 2008 crisis) or energy (e.g., Bulb energy in 2021), a unique feature of a water SAR is that the acting Secretary of State can put a water company into special administration without the company declaring it is insolvent, should they believe the company has failed in its regulatory or statutory duties (Pijper, 2025). This means there are two ways for a water company to enter the SAR: either the company declares itself is insolvent and the government takes control of its operations, or serious performance issues lead to an intervention by the state. Insolvency in the former context refers to restructuring a company‘s finances, including write-downs or write-offs on the value of debt, to make the company’s finances viable; in the latter, should the company commit serious offences and fail to perform its duties, a performance-related SAR would mean a sale to a new owner. 

The direction of entry into the SAR influences how a water company can exit the process. Prior to the Water (Special Measures) Act 2025, a water company could declare insolvency and go directly into administration proceedings through the courts. This risked a poor outcome for the public stakeholder as special administration would circumvent proper public representation. For example, a restructuring of the company debt could take place that fails to address other issues like infrastructure maintenance and pollution incidents. Now, under the beefed-up legislation, Ofwat and the Secretary of State must both be notified in order for administration to proceed. While stronger water legislation has frustrated water companies and their investors, new legislation enshrines the public interest in the process. 

How has Thames Water avoided Special Administration? 

Either SAR scenario fares poorly for a water company’s investors and creditors, who could stand to see their stakes wiped out. In the case of TW, there would need to be at least a 30-40% writedown of senior creditor debt in order to make its finances work (Jolly and Isaac, 2025). The senior creditors offered 25% in their final offer to win over Ofwat’s approval in October, but this is not enough. The creditors must go further to make the company operational and meet the demands of the £104 billion water sector upgrade under the 2025-30 regulatory period. 

But while debate continues over a private deal, TW’s repeated failure to meet its regulatory and statutory duties make it a candidate for a performance-led SAR. Last year, for example, it was the sector’s largest contributor to serious pollution incidents, overseeing a 34% increase in spills that the company blames on poor operational conditions and bad weather like “significant rainfall” (Kelly et al., 2025). Yet the Environmental Agency (EA) is clear, “none of these factors, including wet weather, can excuse the unacceptable number of incidents last year” and that, much like the independent report to the High Court in February for the recapitalisation plan (noted in the last piece), spills come down to “persistent underinvestment in new infrastructure, poor asset maintenance, and reduced resilience to the impacts of climate change” (Environment Agency, 2025). 

So, why hasn’t a Thames Water special administration happened sooner? Since privatisation, water companies have paid out £85.2 billion in real terms to its investors through dividends and taken on £65 billion in debt. In this time, there has been little-to-no preparation for meeting the long-term needs of the UK water sector. As its primary offender, TW represents the tip of an iceberg that is a deeply flawed market mechanism. Poor oversight has allowed water companies to focus on returns to shareholders over sustainability, and the crisis has now become a much deeper, symbolic issue concerning both public trust and the health of UK public finances. This brings us to the central theme underlying the wider renationalisation debate: the cost problem.

What is a UK water company really worth? According to the Social Market Foundation (SMF), nationalising UK water companies could cost £90 billion (2018). In March, Emma Hardy, the water minister, updated this to reflect Ofwat’s recent “regulatory capital value 2024 estimates” and brought the sum up to £99 billion (‘Water Bill – UK Parliament’, 2025). A massive figure that does not include the additional costs of delivering the water sector upgrade needed to avoid a future water crisis. Should a water company fail and enter the SAR, a public takeover could therefore blow a hole in public finances. This is why there has been a clear preference for a market-led solution on both sides of a TW deal. The government fears a market and fiscal crisis brought on by a public takeover of UK water companies, which has helped TW to avoid special administration despite its ailing finances and poor performance record.

But there are problems with the proposed figure that overshadow the true cost of renationalisation. The original £90 billion figure is based on a 2018 report that was funded by the water industry itself. Bias in the report is underscored by the research’s approach to what a fair ‘takeover value’ would be for UK water companies. A value that uses inflated figures from Ofwat’s Regulatory Capital Value (RCV) model (which the regulator uses to set price controls and represents an estimated value of the regulated assets owned by a water company) as a proxy for company value, plus net debt, and an “acquisition premium” despite such a premium not applying in a public takeover of a UK water company (Social Market Foundation, 2018, p. 11). Simply put, there is not enough information to make an accurate prediction of company value. The SMF use a rough model of estimated company worth that “bears no relationship to reality” (McGaughey, 2025).

The £99 billion figure proposed by the water minister is again a flawed guess of what UK water companies might be worth. The Department for Environment, Food and Rural Affairs (Defra) recently updated this takeover value to £100 billion in a policy paper on the issue, using the same Ofwat model as a base for valuations as the SMF report. Defra views the RCV model as a best guess of the total cost of renationalisation, and includes additional costs for purchasing water company equity and debt, which effectively means compensating the owners and creditors of the company. Meanwhile, the RCV model fails to factor in the cost of environmental damages, or the failure of water companies to maintain their existing assets and meet their licence obligations. This is telling, since it reveals the agenda of the government is to prevent upsetting the market: paying out the owners and creditors is more important than factoring in historic environmental crimes and performance issues.

Importantly, Ofwat has not endorsed the use of its model for water company valuations. It is a tool the regulator uses to set price controls in its periodic review, nothing more. Both the SMF and Defra recognise the problems with estimating water company worth using the RCV model as a frame of reference. Defra mentions their figure is “illustrative” and notes that total costs could go either way (Defra, 2025). The uncertainty around a takeover figure has stifled real action over the issue. In reality, however, the “true cost” of renationalisation, as noted by expert Dr Ewan McGaughey, could in fact be “closer to zero” (2025).

Renationalising Thames Water: A Zero-Cost Play? 

So far, this article has discussed what special administration is and how it is managed in the case of the water sector. Specifically, how a water company can enter the SAR through insolvency, or at the discretion of the Secretary of State in the event of serious violations of duty. This then raises the question: given its history of financial and performance issues, how has Thames Water avoided the SAR? This opened up the article to discuss the central theme underlying the SAR debate: the cost problem. 

The government has thus far shown little appetite to gamble on the value of renationalisation, and the industry knows this is the case. A lack of political will has helped TW avoid the SAR, despite the Labour government pledging to nationalise the water sector as far back as its 2017 manifesto. In TW’s case, delays, setbacks, repeat offences, soaring debt, and huge payments to executives reveal the impunity under which the company continues to act. For example, missing key performance targets did not prevent TW paying its new CEO £195,000 for just three months in the position last year, even though Ofwat placed the struggling water provider into a “Turnaround Oversight Regime” (heavy supervision and enhanced monitoring) aimed at fixing the company’s dire operational and financial position after “serious concern” was raised (Ofwat, 2024). 

Yet turnaround regimes and record fines, totalling £123 million, have done little to change the business-as-usual ethos of TW. There is little desire to change what has historically worked so well: gaming the regulator has proven to be a profitable business. There is such confidence in the idea that the UK government would not impose losses on TW creditors that the boss of Assured Guaranty (AG), Dominic Frederico, whose company is a TW creditor, noted recently that they are “very comfortable” a deal would go ahead (that nothing would change) and that they were “well protected in terms of the legal structure” (Jolly, 2025). 

The logic behind a zero-cost takeover, however, is that there is no basis in law that the government must compensate a water company’s owners or shareholders in the event of an SAR. The only requirement under UK law is that an “appropriate value” is paid to the secured lenders (creditors) in the event of administration, taking into account a “fair balance” between the parties involved (McGaughey, 2025; Lithgow and Others v. the United Kingdom, 1986). In the courts, this means that TW’s owners and debtholders would have to prove that the government was acting unfairly by forcing special administration. They would need to show that profiting from environmental damages and breaking licence conditions was, in fact, fair play. The extent of evidence from years of malpractice would make this an extremely challenging case to win: the law is not on their side.

The Bigger Picture: Thames Water and UK Political Risk  

If the law is on the side of the government, TW could theoretically be renationalised for zero cost. Entering the SAR would then enable the water company to fix its debt mountain and prepare its services for the upcoming water sector upgrade. Temporary public ownership may not be as costly as purported, and the costs of administration (i.e. hiring an administrator) would be recouped in a sale. However, the government is unlikely to force special administration on TW in the near term, as it views the takeover as a risk to public sector finances and future investment into UK infrastructure.

“[public ownership]…would be a bad outcome, not only for Thames Water but also for the broader water sector and for UK infrastructure investment generally – it would likely result in significant value destruction, and heightened uncertainty in the capital markets.” (Thames Water Investor Group, 2025). This warning made by the Investor Group, a collective that own £13 billion of TW Class A Debt and forms part of the senior creditor group seeking a deal, echoes government sentiment about cascading risks. However, any broader impact on infrastructure investment has thus far not materialised. Debt issuance and equity raises in UK infrastructure projects are expected to reach over or at least $57 billion (around £42 billion) by the end of 2025, displaying strong market confidence in UK infrastructure assets despite the crisis at TW being well known (Plimmer, Douglas and Heal, 2025). 

Caution over renationalisation, temporary or not, is being used by the creditors to influence a decision on a deal. Uncertainty pressures the authorities at a crucial time as the autumn budget approaches, and the government is unlikely to make any radical moves following a costly period of public policy upheaval. Yet firm action is needed to restore the broken water industry, and a quick and forceful SAR on TW would send a clear message that the authorities will no longer tolerate water companies breaking their licence agreements. 

What happens now? The shape of the TW deal has been captured by the interests of the senior creditors. These debt-distress experts have controlled the process since the February High Court ruling on the recapitalisation plan, under which the struggling water company secured an emergency £3 billion loan from its creditors–some of whom have already recouped large profits on the emergency funding. Under the final revised offer, the senior creditors have pledged not to pay dividends and keep ownership of the company until 2030, restore marketable debt to investment grade in under two years, write off all junior creditor debt and write off around 25% of their own senior debt to sway a decision. In return, they seek higher customer bills to support the water sector upgrade, and a 10-15-year regulatory leniency period for the water company and its executives. 

The proposed deal would diminish any attempt to revitalise the broken water sector, providing explicit benefits to its worst offender, and effectively wiping out all the other bondholders and shareholders who have a stake in TW’s future. It is a bad deal that offers no guarantees that the company would not crash out into the SAR anyway, since not enough senior debt is being written off. Moreover, regulatory leniency would allow TW to continue breaking its licence conditions without fear of criminal charges or prosecution. It is a deal carved to serve only the short-term needs of the senior creditors. 

However, the government has made some steps towards a contingency plan. FTI Consulting, an administration firm, was approached in August for advice on the SAR should the TW deal collapse. This was confirmed by the chancellor of the exchequer, Rachel Reeves, who noted in September that while a market-led solution is still the preferred option, talks are ongoing with FTI Consulting as the government “prepare[s] for all eventualities” (Almeida, 2025). In the event of an SAR, another solution is a sale to CKI Infrastructure Holdings, a Hong Kong-based firm that owns Northumbrian Water and retains a broader interest in UK energy and rail assets. Although concerns have been raised about the bidder, notable issues around national security, CKI already have an interest in UK infrastructure assets, and is willing to intervene after the company enters the SAR. Other bidders also stand ready to make their play, displaying the continued interest in UK water despite the issues at TW. But since TW has signalled that the senior creditor deal is the only viable option, the proposed deal will have to fail before other options are considered. Given the lack of a credible deal that works for the government, the public, and the water company’s future operational needs, the likelihood now is that we will witness the collapse of TW into the SAR, even if the senior creditor deal is approved. 

Conclusion

This two-part article has aimed to explain what the two options are for Thames Water’s future: the market-led solution, comprised of a private deal to restore TW’s finances tabled by TW’s senior creditors after equity firm KKR’s exit in June; and the public solution, which is the special administration regime. Under the SAR, TW can either enter throughinsolvency or a state intervention arising from serious performance concerns. Since TW has repeatedly broken its licence agreements, there are grounds for the Secretary of State to force a performance-led SAR. Particularly now that the Water (Special Measures) Act 2025 has provided new powers for the authorities to do so. 

However, concerns about the cost of renationalisation have stifled action: no one knows what a UK water company is really worth. The government fears that the costs of an SAR could blow a hole in public finances at a crucial time for fiscal policy, while deterring market investment into UK infrastructure assets. Yet the £100 billion sum for a public takeover of UK water companies is based on rough estimates of the regulatory model for price controls. No law stipulates that the owners and investors must be compensated in a takeover, and the true cost of renationalisation could be closer to zero.

In the last stages of the TW saga, the government has shown it is reluctant to gamble on the price of renationalisation. The likelihood then is that TW will collapse into the SAR. Shareholders have been left marooned. TW lost 41% of its external shareholders last year alone, including three of its five biggest shareholders. Further exits and writedowns are expected as the TW crisis comes to a close. But while these entities have noted mounting political and regulatory risks as key factors in their decision, it is in fact the senior creditors who are committed to wiping out the other bondholders and shareholders under a deal. 

As the second CMA deferral deadline looms on 22 October, we are likely to witness a judgment on Thames Water’s future soon. The final senior creditor offer remains unrealistic, and more is needed to make TW viable in the upcoming regulatory period. The government accepting such an offer would be politically catastrophic, particularly now that the issue is firmly in the limelight and would become a display of the government’s ability to stand up for the public interest.Fears of cascading risks from a potential SAR have thus far proven to be unfounded, and it is likely that a TW collapse has been priced in. We are likely to witness a TW SAR in the short- to mid-term, but don’t rule out a bad deal as the government drags their feet over firm action on the water sector’s future. 

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