How Nationalising Thames Water Could Add Over £16.8 Billion to UK Debt

Ministers have been warned that taking control of Thames Water could add £16.8 billion to the UK’s debt, posing a significant challenge to Labour’s fiscal rules. This would complicate Rachel Reeves’ goal of ensuring debt reduction by 2028-29, a target with little room for manoeuvre as projections show the margin stands at just £15.1 billion.

The fiscal implications arise from the government’s “public-sector net financial liabilities” measure of debt. Under this framework, debts held by nationalised water companies, including heavily indebted firms like Thames Water, would be added to public liabilities without factoring in the value of the £90 billion in physical assets owned by the companies. Such moves risk eroding confidence among investors while constraining government borrowing capacity.

Thames Water has been pushing for an exemption from more than £1 billion in pollution fines. The company argues that the fines are deterring much-needed investment from creditors as it seeks a financial lifeline. Labour MPs have likened Thames Water’s negotiating tactics to “holding the government and taxpayers hostage.”

Adding to the complexity, many of Thames Water’s bondholders are financial institutions critical for investment in other public-sector infrastructure initiatives. Government officials have expressed concern that forcing these creditors to accept a “haircut” on their investments could undermine trust and discourage much-needed capital in other public projects.

Efforts to find solutions have been curtailed as the US private equity group KKR’s decision to pull out of a potential deal left bondholders as the only viable source of new financing. This leverage places bondholders in a stronger negotiating position, with government figures acknowledging the difficulty of forcing alternative outcomes without damaging investor relations.

The Office for Budget Responsibility has stressed that bringing water companies into public ownership would significantly increase public debt. Industry experts argue that the sheer scale of Thames Water’s liabilities complicates any nationalisation attempt, creating an intricate balancing act between achieving Labour’s fiscal rules and safeguarding the UK’s infrastructure investment environment.