Britain’s new Prime Minister could be about to bring the country’s largest water company, Thames Water, into public control.
Since winning the Makerfield by-election that put him on the path to Number 10, Andy Burnham’s team has been drawing up plans on how to seize control of the failing water company.
But solving the Thames Water dilemma is far from straightforward; it’s a question Labour has been wrestling with since it came into power two years ago.
At the heart of it is a debate over how much public ownership would cost the taxpayer – with the potential for full nationalisation of utility firms running into the billions of pounds.
Thames’s lenders have suggested they will sue the Government if it attempts such a move.
The outcome will depend on Burnham’s appetite for risky decisions, and could be a crucial first test of his relationship with his new chancellor as well as his future policy decisions.
What will Burnham do with Thames Water?
Thames Water has been on the brink of financial collapse for over two years and a growing number of voices have been calling on the Government to take over the company.
Ministers could do this by entering Thames into a Special Administration Regime (SAR), which would see a court appoint an administrator to temporarily oversee the running of the firm.
This outcome has felt increasingly inevitable since the Environment Secretary, Emma Reynolds, rejected the rescue deal put forward by Thames Water’s creditors in June.
Burnham has signalled his willingness to take control of Thames Water; during the Makerfield campaign he said public ownership is something that “should be done” in the company’s case.
The interesting question perhaps isn’t whether Burnham will bring Thames into SAR, but what will be done with the firm after that.
Two options being discussed are a full nationalisation of Thames Water or a mutual model similar to what exists in Wales, with Burnham considering the latter.
Under the first option Thames Water will be owned by the Government, while under a mutual model customers would own shares in the company, meaning any profits would be reinvested into the business rather than paid out to external shareholders.
One theory is that the Government might look to split Thames Water into two, with one company covering London and the other covering the remaining area, which includes Gloucestershire, Wiltshire and Oxfordshire.
The London company could be overseen by the mayor, similarly to Transport for London (TfL), a move that would align with Burnham’s greater ambitions around devolution.
However, Thames Water’s lenders argue a solution can still be found without the firm entering a SAR.
They have put forward a proposal that would see them inject new funding into the business and write off around half of the firm’s £20bn in debt, in exchange for leniency on future pollution fines. However, this has been rejected by the Government.
Sensing the shifting mood, it’s understood the lenders have signalled their willingness to discuss the issue of greater public control with the new Prime Minister.
The lenders are likely to point to the agreement between United Utilities and the Greater Manchester Combined Authority, which sees them collaborate on planning issues, as an example of how public bodies could have more oversight over private water firms.
“We are keen to meet new ministers as soon as possible to discuss how we can work together in the best interests of customers, including by enhancing public control of the company’s operations,” Mike McTighe, who is leading the governance overhaul and building the new Thames Water board, said.
How much will it cost?
The question over how much it would cost the Government to bring Thames Water into public control is hotly debated.
Many people, including environmental campaigners and Reform UK, argue Thames’ lenders should not be compensated if the company is taken into a SAR.
However, Thames Waters’ creditors have signalled they would take the Government to court if Burnham attempted this.
Under such a scenario, it’s likely the Government would seek an out of court settlement.
Thames’ creditors are owed £20bn and will be looking for a deal that reflects this. The Government is unlikely to agree to pay this upfront but could propose a deal in which the new mutual company pays a portion of this back over time.
Then there’s the question of who would pay for the massive investments needed in Thames Water’s infrastructure to reduce sewage spills and maintain water supply.
Thames Water has committed to investing £20bn in its infrastructure over the next five years, which will be paid via a mix of customer bills and private finance.
If the Government took over the running of Thames Water it would have to borrow the money to fund these investments.
Under the UK Government’s current accounting rules, any borrowing by a publicly owned company contributes towards the public debt, meaning nationalising Thames Water would likely break Labour’s self-imposed fiscal rules.
For this reason, Burnham is thought prefer a mutual model, which would keep Thames Water’s borrowing off of the public balance sheet.
What does it mean for water bills?
Many believe water bills will remain lower in the long-term if Thames Water is brought into some kind of public or mutually owned structure.
This is because the firm would not be required to pay dividends to shareholders, driving up costs.
However, a Government-owned Thames Water would still have to make tough decisions around how to fund the massive investment required to reduce sewage spills.
It’s worth noting that water bills are lower in Scotland, where the industry is under public control.
However Scotland has its own challenges when it comes to sewage pollution and in many ways is behind England when it comes to identifying and fixing the problem.
Will other water companies be nationalised?
Burnham has promised a 10-year plan for the country that is expected to include proposals on bringing the entire water industry into public control.
What exactly that looks like will depend on what happens with Thames Water, an important test case for wider nationalisation plans.
Rather than taking over the sector all at once, many expect the Government to take over a company as and when they are seen to be failing, like in the case of Thames Water.
For this reason, South East Water is viewed as the next likely target for public control due to the widespread failings that have resulted in a series of water shortages in the region.
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