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January 22, 2013 9:31 pm
The proposed £4bn “super sewer” under London could be built by the government rather than the private sector under a radical plan put forward by Oliver Letwin, David Cameron’s head of strategy.
Attempts have been going on for more than a year to secure private funding for the Thames Tideway Tunnel scheme, a crucial piece of infrastructure as it will end the 39m tonnes of untreated sewage being flushed into the river every year.
The talks come against a wider effort by the government to secure institutional investment for an array of big infrastructure investments, a process that has proven disappointingly slow.
But in recent days, Mr Letwin, the Cabinet Office minister and Tories’ intellectual troubleshooter, has put forward an alternative proposal for the government to finance the Thames tunnel itself.
Some Treasury figures agree that if the state is guaranteeing the risks on the scheme, there is no point in outsourcing it to the private sector. “Why should we nationalise the downside and privatise the upside?” said one government source.
Under the original plan, Thames Water would set up a separate, ringfenced body to own the scheme, which would raise equity and debt from the markets. It would then be paid back over the following years through a rise in water bills for 14m customers of up to £80 a year.
Ministers have previously said that they were prepared to offer a guarantee to cover any “exceptional risks” in the construction of the huge project, which involves an eight-metre tunnel 100 metres below the surface of the Thames. This promise came in late 2011, ahead of a more recent promise by George Osborne, chancellor, to guarantee up to £40bn of new infrastructure schemes to boost the economy.
Now, by contrast, the government has raised the idea of building the project itself, taking advantage of the cheap cost of borrowing through the gilt market. Ministers have been advised that in other countries, a scheme of this complexity would normally be built by the state rather than the private sector.
The model being considered by Mr Letwin is similar to that of High Speed 1, the fast rail link from London to the Channel tunnel through Kent, where the government took on the development of the project and then leased it to the private sector.
One industry source suggested that Thames Water was not wholly opposed to the idea, given the huge reputational risks involved with building such an ambitious scheme through the heart of the capital. “This is a utility business having to shoulder a very very complex construction project with a different risk-reward profile,” he said.
Thames Water refused to comment. However, a Treasury spokesman said the favoured option was still for the private sector to build and finance the scheme.
“In a project of this scale and complexity there may need to be financial support from government and we have made it clear that we are willing to provide this where it is value for money for customers and taxpayers,” he said.
Thames Water has resisted the idea of carrying out the £4.1bn project itself, given its “unusual construction risk”.
Instead, the company has appointed UBS to run a tender for the financing of the tunnel, with bids expected ahead of April for commercial operators to run the new special purpose vehicle.
Industry analysts note that while water companies themselves remained attractive to institutional and sovereign wealth investors, their unbuilt, non-cash generating assets – including the super sewer project – present more risk, and thus require a higher return.
The complexities of the super sewer’s construction means cost estimates have doubled since the original estimate of about £2bn six years ago. However, one industry expert said that there was already strong interest in the project from some large sovereign wealth funds.
Speaking to the FT last November, Stuart Siddall, finance director at Thames Water, said: “Big pension schemes have a wall of cash coming in – they have to invest,” he said. It’s a sector that, because we have been a capital hungry industry, needs to attract funding.”
Over the past year Thames Water’s parent company Kemble has seen a third of its ownership change hands through sales of stakes to the BT Pension Scheme, Abu Dhabi Investment Authority and China Investment Corporation.
Angelos Anastasiou, utility analyst at Seymour Pierce, stressed that UK water companies remained attractive to both equity and debt investors: “There is still life in the takeover market for UK infrastructure assets, with purchasers likely to be primarily from wealthy far eastern entities, from sovereign funds and other, similar, cash-rich players.”
Additonal reporting by Michael Kavanagh
BAZALGETTE’S HIDDEN MASTERPIECE UNDER STRAIN
The subject of untreated effluent flowing into the Thames has long attracted the attention of political leaders, writes Michael Kavanagh.
The suspension of parliament in 1858 caused by the “Great Stink” was what originally prompted political backing for the construction of a sewer system that required an initial £3m commitment from the Treasury.
In normal conditions, that system, designed by Sir Joseph Bazalgette, is still able to divert sewage that in Victorian times had flown untreated into the Thames. However, in heavy rains, Thames Water is forced to use overflow pumping stations to divert sewage into the river, as the system can no longer cope.
Since the 1990s the increased strain placed on the network from London’s population growth prompted the government and Thames Water to start looking for ways of tackling ever more frequent overflows.
Thames Water argues there is no realistic alternative. But escalating cost estimates have added to the controversy, with opposition from residents groups close to proposed riverfront construction sites and claims that Thames Water should have accumulated enough from customer bills to pay for the £4.1bn project itself.
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