The government has updated insolvency laws for UK water companies to hedge against losses from potential state bailout funding.

On 17th January, the Department for Environment, Food and Rural Affairs (DEFRA) quietly updated its special administration regime (SAR) framework in a move that appears to protect government investments in water companies should they eventually become insolvent.

The procedure is secondary legislation, where a statutory instrument or document is published and is considered approved unless MPs table a motion in parliament to reject it within 40 days – a process known as negative procedure.

The update moves the government to the top of the priority order with regards to re-couping loans it has made to such a water company, leap-frogging other stakeholders who would be due money such as administrators and creditors.

DEFRA described the legislation as the “ultimate enforcement tool” with regards to monitoring performance of water companies in an accompanying explanatory note.

Colm Gibson, managing director at Berkeley Research Group, told City A.M. that investors should pay attention to the “increasing emphasis on using special administration for companies that perform poorly”.

“These changes make it harder for shareholders to mount a legal challenge if they disagree with the special administrator,” he added.

The changes are timely – Thames Water, the country’s largest water and sewage service provider, continues to struggle under a £18.3bn debt pile and recurring operational failures.

The most recent of these include the quadrupling of sewage spills in the last nine months of 2023 compared to the corresponding period in 2022, according to Thames Water data analysed by London’s City Hall.

New chief executive Andrew Weston said he was confident in the group’s ability to turn the ship around upon his appointment in December.

Nevertheless, these procedural changes cast greater wariness from Westminster over the company’s future prospects as major shareholders exit the company and warnings from both regulators and Westminster increase in frequency and severity.

A former water industry executive told City A.M. that while nationalisation doesn’t seem an immediate possibility, the government’s move shores up its coffers should bailout funds be needed.

“It’s a lesson from Bulb that it’s hard to get your money back, so they’ve changed the priority order” they said.

Former energy supplier Bulb entered into a special administration regime (SAR) after collapsing into administration in 2021 and the government footed a £3bn bill to protect the 1.5 million households affected and paid consultancy Teneo £49.9m as an advisor.

“I cannot imagine why the government would change the priority order here unless they had been asked by a water company to put money in.”

Defra and Thames Water have been contacted for comment.



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