The UK government is drafting plans to impose legally binding debt targets on England's water companies, aiming to prevent corporate failures similar to Thames Water, which is struggling under £17.6 billion of debt. Environment Secretary Emma Reynolds is leading the initiative, which would for the first time force companies to maintain debt below specified levels or face legal penalties.
Background and Context
The move comes as allies of Andy Burnham, the incoming prime minister, work on proposals to bring water companies under public control. Burnham has stated that taking the “essentials of life” back into public ownership will be a key priority once he enters Downing Street later this month. However, he has not yet detailed how this would be implemented.
A source close to Reynolds stated: “Under the Tories, water companies were allowed to rack up debt and pay out dividends while taking customers for a ride. The secretary of state is putting an end to that, asserting control over poor-performing companies, protecting customers and tackling pollution.”
Proposed Debt Targets
The plan, part of an upcoming clean water bill, would set a binding target for the ratio of debt to a company's overall value, as determined by the water regulator Ofwat. This gearing ratio is currently recommended at no more than 55% of net debt (total debt minus cash) relative to company value, but many companies exceed this. Thames Water has a gearing ratio of 86%, while South East Water's is 75%.
Reynolds is considering the appropriate level for the binding target. Companies that miss the target would be required to explain to ministers, and further sanctions would follow for continued non-compliance, though these have not yet been specified.
Industry Reactions
Water industry figures suggest companies are likely to accept the measures if the debt target is set at a reasonable level. However, some warn that forcing rapid debt repayment could reduce funds available for infrastructure improvements, such as sewer upgrades.
Thames Water is currently at the center of negotiations between the government and creditors over a £10 billion rescue package. Reynolds recently wrote to Ofwat opposing the proposed deal, arguing it did not sufficiently protect consumers, effectively pushing the company closer to temporary administration.
Public Control Proposals
Burnham's allies are exploring models used in Paris and Berlin, where water services are run by independent organizations but with most shares held by municipal government. In a recent online Q&A, Burnham said: “Public control can include a range of measures, from strong regulation to public ownership.”
The fate of England's water industry remains uncertain as government officials and industry executives prepare for Burnham's administration. The legally binding debt targets are seen as a step toward strengthening regulation, while the public control proposals signal a potential shift in ownership structure.
