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The Guardian has exclusively reported on potential “scare tactics” being used by the Treasury to help force through a private sector deal.

The newspaper revealed Thames Water recently came within days of running out of money recently and is now in a desperate race to find a buyer willing to inject cash, with the US private equity firm KKR in pole position. However, should that takeover fail, the heavily indebted utility could collapse into state hands via the special administration regime (SAR).

Existing budgets at the Department for the Environment, Food and Rural Affairs (Defra), which insiders allegedly describe as already stretched, would have to be used to meet the burden of keeping Thames Water afloat if bids to save the company fail, according to sources.

That pressure to find a private sector solution rather than a state rescue is helping to force through KKR’s bid uncontested, with potential long-term challenges and associated costs not being given serious consideration, sources close the bid and Whitehall insiders said.

Some estimates have suggested temporary nationalisation could cost as much as £4bn over 18 months, a figure used by senior Treasury officials in discussions with counterparts at Defra, sources said. With Defra’s annual budget for last year totalling £4.6bn, the costs could be crippling.

The Thames issue is therefore creating a “binary choice” for regulators and central government: higher customer bills but a recapitalised utility versus what a Guardian source called “potentially catastrophic cuts” to Defra’s budget. Several sources believe this need not be the case if the Treasury were to take a different approach. One person suggested threats to Defra’s budget were an example of “scare tactics” to shut down discussion about other options for Thames.

However, some economists and industry experts reportedly question whether there would be any long-term cost to the government at all in a temporary nationalisation. If Thames was temporarily renationalised, the government would become first in line to recoup its money and could reclaim all the funds spent on financing it when the company was eventually sold, with other lenders forced to deal with steep losses on their loans.

A spokesperson for Defra said: “The company [Thames Water] remains stable and the government is closely monitoring the situation. It would be inappropriate to comment further on the financial matters of a private company.”