UK ministers have appointed insolvency advisers to make contingency plans for the potential collapse of Thames Water.

The company, which supplies 16 million customers, has been racing to pull together a deal to avoid financial collapse.

In a development first reported by Sky News, Steve Reed, the environment secretary, has signed off the appointment of FTI Consulting to advise on plans for Thames Water to be placed into a special administration regime (SAR).

The appointment indicates that FTI is the frontrunner to act as administrator if the government enacted an SAR, although a court would ultimately approve such a step.

The government has been trying to avoid such an outcome, with the Treasury threatening that a potential £4bn bill from the SAR could be forced on to Reed’s department. This process would ensure that the taps stayed on for customers but would heap immediate costs on to the government.

However, the government’s Water (Special Measures) Act contains a provision for SAR costs to be recouped from customer bills further down the line.

Thames faced embarrassment earlier this year when its preferred bidder, KKR, pulled out of a deal at the last minute. Now, its class A creditors, who hold the bulk of the company’s senior debt, are in talks with the regulator, Ofwat, about a deal to inject capital into the company, which has £17.7bn of net debts and regulatory gearing of 84.4%.

The company has been trying to get Ofwat to write off more than £1bn in expected fines from failures to invest in infrastructure to stop sewage spills, in order to secure a rescue deal. Chris Weston, chief executive of Thames Water, told a recent parliament committee that the company could not afford to pay these fines and continue to invest and operate as was expected by the regulator.

A company spokesperson said: “Our focus remains on a holistic and fundamental recapitalisation, delivering a market-led solution, which includes targeting investment-grade credit ratings and returning the company to a stable financial foundation.

“Constructive discussions with our many stakeholders continue.”

Andy Prendergast, national secretary of the GMB union, said: “Thames Water has been sacrificed on the altar of privatisation. It’s sinking without a trace under a deluge of debt, while huge amounts of cash from inflated customer bills have flooded out to directors, shareholders and loan servicing.

“If you want an advert for why private companies shouldn’t be involved in certain sectors, this is it. Yet another damning indictment of Thatcher’s terrible legacy.

“The government must now intervene to find a water-tight solution that protects Thames’ millions of customers and gives immediate guarantees for the thousands of loyal workers and their pensions.”

skip past newsletter promotion

Sign up to Business Today

Get set for the working day – we’ll point you to all the business news and analysis you need every morning

Privacy Notice: Newsletters may contain info about charities, online ads, and content funded by outside parties. For more information see our Privacy Policy. We use Google reCaptcha to protect our website and the Google Privacy Policy and Terms of Service apply.

Thames Water faced fury recently over plans to pay senior staff members millions in bonuses from a controversial £3bn loan granted by the class A creditors. The company has been banned from paying performance-related bonuses to its chief executive and chief financial officer because of its poor performance.

A government spokesperson said: “The government will always act in the national interest on these issues.

“The company remains financially stable, but we have stepped up our preparations and stand ready for all eventualities, including applying for a special administration regime if that were to become necessary.”

FTI Consulting has been contacted for comment.