Andy Burnham has told policy officials across Whitehall to consider options previously viewed as unfeasible for Thames Water, which is running out of cash and recently asked creditors for an additional £2.4bn. The prime minister is pushing for alternatives beyond the two main plans he inherited: a bailout deal with the American hedge funds that own the company's debt, or a special administration regime (SAR).
One option under discussion is converting about £100m in environmental fines the company still owes into a government stake, giving ministers a say in how Thames is run. Under this model, if the company were fined again the government would automatically increase its share rather than collecting cash. However, critics argue this would fall short of Burnham's promise to nationalise the company outright.
Government sources described the fate of Thames as a "litmus test" of whether the administration could tackle medium-term challenges. "There are more options than people have assumed to date including ones that have never been properly considered," one source said. Another said Burnham had told officials to "look at all the options and not feel constrained", a departure from the approach under his predecessor Keir Starmer.
Environment Secretary Angela Eagle is working on a water bill that would lift a Thatcher-era cap on government ownership of water companies and could rewrite the bankruptcy regime for the industry. Government advisers believe changes to the special administration regime would make it easier to take companies such as Thames into state control in the future.
Creditors had proposed a £10bn rescue plan for Thames, but the previous environment secretary made clear her opposition. Government lawyers also believe it will be difficult to have the company placed into SAR because it is being kept afloat financially by its creditors and has maintained services.
Burnham is under pressure to go further, such as stripping Thames of its licence or pushing for immediate SAR without offering compensation to creditors, a plan that would almost certainly face legal challenge. A government adviser said: "Litigation was always a 100% certainty." The prime minister is understood to be more willing to take on legal action than Starmer was.
Ewan McGaughey, a professor in law at King's College London, said: "The government's best option is to start a special administration process for Thames Water before it runs up more debts, and sends billions more overseas. An orderly transition to public ownership does not require that banks in control are bailed out – on the contrary, the law says polluters should pay."
Lena Swedlow, deputy director of the Compass campaign group, said: "The obvious solution is to put Thames Water into SAR, and then brought into public ownership so it truly works for everyone. While reform of the failing regulatory mechanisms is welcome, any recapitalisation and debt-to-equity schemes that do not seek to permanently wrestle the company from private hands will fail to be in the interests of the workers, stakeholders, and the 16 million people Thames serves. Everything else is noise in the wind."
Officials say other water companies are likely to be dealt with through a mixture of stricter regulation and increased oversight by elected officials, as international investors see Thames as a unique case.