Thames Water is now a ticking time bomb for Labour

As a former Royal Artillery army officer, Thames Water chief executive Chris Weston is used to handling high explosives. 

Now the former military man is having to draw on his battlefield experience to defuse a ticking time bomb at Thames Water, which threatens to detonate under the new Labour government. 

The utility giant, Britain’s largest water company with 16 million customers, has warned investors that it could run out of cash next year if a new consortium of shareholders is not found to solve its funding crisis. 

The group has just £1.8bn of cash left to tide it over until next May and £15bn of debts, leaving it dangling on a cliff edge of uncertainty which could prompt it to seek a government bailout. 

The situation has become so bad that Thames warned there was a “material uncertainty” over whether it can continue beyond the next 12 months. 

Mr Weston, 60, is now racing against the clock to stitch up a funding deal with major infrastructure and pension investors to inject fresh capital into the group and stave off a Labour nationalisation. 

Documents published on Tuesday revealed that he needs to find £3.25bn from investors and strike a deal with bondholders, while also keeping regulators happy.

Thames has been struggling for several months owing to its complex financial structure. 

After its tortured ownership under Macquarie, which took out billions in dividends, the group has been left with £15.3bn worth of debt and a creaking 19th century infrastructure dating back to when it was built by engineer Joseph Bazalgette. 

For the new Labour government, the crisis at Thames poses the first real test of its mettle amid questions over whether a failure by Mr Weston to strike his deal could trigger nationalisation.

Will Mr Weston succeed and live up to his battlefield status, or will Sir Keir Starmer be forced to step in and revive memories of Labour’s prior nationalisations?

The Government has so far indicated it has no desire to bring Thames back under state control but if Mr Weston fails, the taxpayer could become the investor of last resort. 

The new Business Secretary Jonathan Reynolds said there is no desire to re-nationalise Thames while Chancellor Rachel Reeves has also said a move “doesn’t stack up” against the party’s fiscal rules. 

Yet if Mr Weston fails to get a deal done in time, Ministers could be forced to act 

Against this backdrop, Labour has already hinted it wants to take a more interventionist role with water companies.

Its manifesto pledged to put “failing” water companies into “special measures”.

The Government has so far failed to spell out what this means, and Mr Weston himself admitted he was confused about the concept. 

“I don’t yet fully understand what the special measures referred to in the Labour manifesto are,” he admitted on Tuesday. 

Yet amid rising anger over pollution and sewage in water supplies, there are growing calls to nationalise water groups from backbench MPs.

Left-wing Labour MPs such as Kate Osamor have previously called for Thames Water to be brought back into public ownership, while Clive Lewis has also indicated support for ditching a capitalist model for water companies. 

Ruth Cadbury, a more centrist Labour MP, whose constituency covers the River Thames, backed the Government to introduce special measures for failing water companies after Thames’ fresh update today.

“I know the Government is not saying nationalisation but what’s more important is ensuring that in the years to come we have clean water to drink and they process sewage without polluting our rivers and beaches. 

“My understanding is that special measures do not mean nationalisation. Nationalisation is very structural and what my constituents want is outcomes and the structure of how this happens isn’t necessarily the answer. 

“Our front bench is not ruling it in, nor are they ruling it out.”

Industry figures are increasingly fearful that if Thames goes into special administration, the Government could seek to nationalise the whole water sector.

The Earl of Devon, a crossbench peer, recently highlighted the wider industry issue, pointing out that growing regulatory burdens on water companies such as the Environment Act was making it “unprofitable” to invest in the water industry and that nationalisation was “at some point inevitable”. 

Mr Weston would not be drawn on his detailed discussions with the Government but said that although a bailout was a “possibility” there was “a lot more water to go under the bridge”. 

“It is extremely early days,” he said. “We have been in contact with the Government, as you would imagine, as part of the normal course of process and I have every confidence that we will have discussions as appropriate with them in the near future.” 

For the former British Gas executive, who is widely considered to have brought a fresh reality to proceedings and displays a calm under pressure which reflects his military background, his most pressing task now is to find new investors to take the strain.

Thames’ nine current shareholders, which includes the Canadian pension fund giant Omers and UK groups like Hermes and USS, have failed to commit to any fresh funding owing to uncertainty over Thames’ future.

Earlier this year they pulled the plug on an emergency £500m equity injection after Thames was deemed “uninvestable” in its current state. 

Working with his advisers, Mr Weston is now planning to launch a charm offensive in the autumn to lure new investors to stump up £3.25bn. 

He suggested there was “interest in the market” to buy shares in the company and that “informal discussions” had already taken place.  

“We are wholly focused on bringing new equity into Thames Water. We will go to the market and we will look at a broad church of investors” he said. 

“Some of those investors may or may not be some of our existing shareholders, that isn’t a matter entirely for them.”

One glimmer of hope for Thames is the booming interest in infrastructure investments from major North American investors. The likes of BlackRock, Brookfield and KKR have all sung the praises of infrastructure in recent months due to its stable returns.

Yet to lure investors in, investors need to be able to make a healthy profit and that hinges on the role of Britain’s water regulator Ofwat. 

The regulator, led by chief executive David Black, will deliver a key verdict on July 11 by ruling on whether five-year business plans put forward by Britain’s 20 water companies can proceed. 

Thames wants to hike customer bills by 56pc to an average of £608 per year by 2030.

It says the ratepayer hike is required for a £20bn investment plan and to make the company attractive to investors. 

If Ofwat agrees, the fresh funding package could unlock a new wave of investors into the group and stave off insolvency. Fail, and Thames could struggle to attract the cash needed to survive.  

The problem poses serious questions for the new Labour government who are keen to both protect ratepayers from bill hikes amid the cost of living crisis and maintain its pro-business stance.

Luke Hickmore, a leading bondholder in Thames Water, said Thames’ latest warning over whether it can continue was “a shot across the bows of Ofwat”.

“It just continues to amp the pressure on them,” he said. 

“Saying these are things that need to be covered to avoid going into special administration, which would be very bad for the sector, this is part of that whole cat and mouse game between the regulator and Thames. 

“I do think this is quite a careful game for Ofwat to play because you don’t want to spook investors.”

It is understood that Labour was in contact with Thames bondholders before the election, with creditors lobbying against any plans to force losses on lenders.

Mr Weston suggested Ofwat could push through a bill hike for Thames while also cracking down on other water companies. He pointed to the unique challenges of supplying water to London, a city with nine million people. 

“Operating in London, one of the most congested cities in the world with an infrastructure that’s 150 years old and that needs replacing, is a very different prospect to operating elsewhere in the country,” he said. 

Mr Weston, who previously led energy provider Aggreko, said getting shareholders to inject equity was better than forcing taxpayers to shoulder the burden.

“I don’t think it’s in the interest of anyone that we go into special administration that is not good for our stakeholders. It will probably go to the taxpayer so it is not a solution.

“Special administration is absolutely not inevitable. There is an alternative,” he said. 

Time is not on his or the Government’s side, however.