Ministers are drawing up plans to impose legally binding debt targets on England's water companies for the first time, in an effort to prevent further corporate failures of the kind facing Thames Water. The environment secretary, Emma Reynolds, is developing proposals that would compel firms to keep their borrowing below set levels or face legal penalties, forming part of a forthcoming clean water bill. The move matters because it comes as allies of the incoming prime minister, Andy Burnham, work separately on proposals to bring water companies into public control — an ambition Burnham has named as a priority once he enters Downing Street later this month.

The plan is understood to centre on a "gearing ratio" — a company's debt as a percentage of its overall value, as determined by the regulator, Ofwat. Current Ofwat guidance says net debt should be no more than 55% of a company's value, but many firms far exceed this: Thames Water, straining under £17.6bn of debt, has a ratio of 86%, while South East Water's is 75%. Reynolds has not yet decided the level at which the binding target would sit, though companies that miss it would have to explain themselves to ministers, with further sanctions to follow. Industry figures suggest firms may accept the measures if the target is set reasonably, but warn that rapid debt repayment could leave less money for infrastructure such as sewers.