Thames Water CEO warns uncertainty over Burnham's plans risks bailout collapse

The chief executive of Thames Water has warned that uncertainty over Andy Burnham's plans for the water industry has increased the risk that a deal to bail out the company could collapse. Britain's largest water company is drowning in debt of nearly 20 billion pounds and is due to run out of money by the end of the year.

Chris Weston, the chief executive, told Sky News in a round of off-camera calls with journalists that the situation is very fluid. He said: "There's a lot of uncertainty, which has been added to by the change of Prime Minister. We've not had any direct discussions. Our creditors continue to be supportive, but it does heighten the risk."

The company is in talks with its creditors about a restructuring plan. The creditors, who control about 17 billion pounds of Thames Water's debt, have proposed a solvent deal that would write off a large chunk of the debt and inject new money. In return, they want some leniency on future fines. But the Environment Secretary, Emma Reynolds, has already written to the regulator Ofwat to say she has concerns about the latest terms.

Now Sky News has learned that a group of investors involved in the rescue bid are poised to launch a multi-billion pound legal challenge if the government moves to nationalise the company. The London and Valley Water Consortium, which includes some of the world's biggest fund managers, has engaged a specialist law firm called Palace Partners to help plot a legal fight if its offer is rejected. The alternative to the solvent deal would be a special administration regime, a form of temporary public ownership, which would wipe out the investors' debt with no return.

Labour's deputy leader Lucy Powell has refused to rule out putting Thames Water into special measures. She told Sky's Trevor Phillips that the government has powers to bring a distressed water company under special measures and that the privatisation of water has not worked. She also defended Andy Burnham's decision to scrap digital IDs, saying it was a chance to refresh and reset the government's priorities.

The political backdrop is that Andy Burnham, who will become Prime Minister on Monday, has said he supports public ownership of water companies. He has described water as the most essential of all the essentials of life. The company's accounts show a funding hole of 1.1 billion pounds, which is currently covered by emergency borrowing at nearly 10% interest. That borrowing will run out by the end of the year, making the decision on the rescue deal urgent.

If the private sector deal collapses, the company could be placed into special administration. The cost of keeping the taps running during that process is estimated at between 4 and 8 billion pounds, which would ultimately fall on the taxpayer. Full nationalisation of the entire privatised water industry could cost 100 billion pounds, according to the Environment Department, though that figure is disputed. Whichever route is taken, the cost is likely to be passed on to customers through higher bills.