In the UK, there is perhaps no more concrete symbol of state failure than Thames Water. In the privatised British water system, Thames Water is the country’s largest supplier. It provides water to around 16 million people, in and around London. Despite this, and a literally captive market, the firm has found itself in financial difficulties and in need of rescue.

One option to do this has just vanished. Initially, KKR, the private equity group, had said that it would put £4 billion into Thames Water, and deliver a plan to turn the firm around. But this week, it pulled out of the deal.

Now another option will have to be found. The Government would prefer that Thames Water and its £20 billion debt pile become the responsibility of the firm’s creditors, who would take the company over and try to turn it around. But it is also possible that the firm could be put in a so-called special administration regime, or SAR. This would basically entail the Government, for a time, nationalising the firm.

Thames Water is the most egregious example of the Kafkaesque mix of public and private that has arisen in so many areas of British public services and the economy as a whole. Companies were privatised. But in many instances, like rail travel and especially water, this happened in sectors where competitive markets are very difficult to achieve. So, there was strict regulation to ensure decent services and avoid price-gouging.

But these have become hard to bear financially. The result is a system where you have companies that are de jure privatised but almost quasi-state backed. Thames Water might not be run by the government. But if there is no other option, it will be. It is almost the definition of too-big-to-fail.

The costliest instance of too-big-to-fail for the British Government, of course, was its banking system. That blew up in the UK’s face almost two decades ago, during the global financial crisis. Since then, there has been little progress in finding an economic model away from firms that are nominally private, but implicitly rely on the state’s backing if things go wrong.

Trying to rationalise this mess would be a political project that the centre-left Labour party, if nobody else, could actually pull off. Indeed, it would be a politically popular moral mission. Railway nationalisation, and planning reform, are already tentative steps in a system that would do away with ersatz privatisation, and let the actually-existing private sector do what it has to. But there is no bigger vision for this so far.

Turning the economy, and public services, around is the only thing that will save the government’s flagging popularity. Trying to be a toned down version of populist upstarts Reform UK won’t win anyone over. Neither will cutting deals with US President Donald Trump that only partially mitigate the damage in sectors that barely exist in the UK, like the exemption from new 50% steel and aluminium tariffs. As things stand, Thames Water looks set to become merely another albatross around Keir Starmer’s neck.

This is an edited version of an article originally published in the Eurointelligence newsletter.