The lenders to Thames Water are preparing a legal challenge in case a Burnham-led government attempts to nationalise the UK’s biggest water company.
Burnham – who takes over as PM on Monday – has previously said he wants to see “greater public control” of the water and energy sectors and has called for Thames Water to be nationalised.
Thames Water is about £20bn in debt.
Its lenders had proposed a deal to write off nearly half of that and inject new cash in return for some leniency from future pollution fines, but this deal has previously been rejected by the government as being “weak” and bad for consumers and the environment.
Sources close to the creditors have told the that in the event of full nationalisation, they would pursue payment in full of the outstanding debts as has happened in previous cases, which could leave the government with a multi-billion-pound bill.
Fears first emerged three years ago that Thames Water could collapse and on Thursday, the firm warned it has enough cash to last until the end of this year.
Creditors insisted on Sunday that they were still working with officials and regulators to reach an agreement to rescue the company.
A spokesperson for the Department for Environment, Food and Rural Affairs said the government was “prepared for any eventuality”.
“Thames Water customers have been let down for far too long, with 15 years of under-performance, increasing serious pollution, and customers left to pick up the bill,” the spokesperson said.
“The secretary of state has written to Ofwat to outline her early views that she is not convinced London and Valley Water’s proposal is good enough for consumers or the environment.”
The lenders have offered to write off £9.4bn of Thames Water’s near £20bn debt pile and put £3.35bn of cash into the company, but in return they want leniency from future pollution fines in order to turn the firm’s fortunes around.
Objecting to the proposal, Emma Reynolds said in June that she did not want a scenario where Thames Water customers had to “pick up the bill for the company’s failures”.
At the time, she told reporters that the government “stands ready for all eventualities”, including temporary nationalisation.
When asked in a Sky News interview on Sunday whether a Burnham government would nationalise Thames Water, Labour’s deputy leader Lucy Powell said: “Let’s see”.
“This has been an ongoing issue and concern in government,” she said.
“The government has powers to to bring a distressed water company under special measures, and let’s see if the government needs to, wants to use those powers.”
Powell added that “the privatisation of water hasn’t worked”.
“It’s not created competition. What you’ve seen is bills going up and up and up over years and years and years. Investment not being being made … and then now these companies are in are in real distress,” she said.
There is a halfway house, in which Thames would be placed into a so called “special administration regime”, or SAR, which is usually a temporary situation until another private sector buyer can be found.
The existing lenders have made it clear that they would be prepared to join the bidders for Thames in that scenario.
However, comments from the incoming prime minister Andy Burnham that key utilities should be under increased “public control” make it hard to imagine that the government will have much political appetite to find a new set of private sector owners for a company that serves 16 million people which means that a temporary nationalisation might become permanent.
But under either a SAR or full nationalisation, Thames ongoing problems could then leave taxpayers footing the bill for Thames cash shortfalls – a figure that Thames Water management puts at £2bn by the end of next year.
Whatever happens, its customers’ taps and loos will still function, but the future of Thames Water is a key policy test for the new administration.