London’s new £4.2bn “super sewer”, one of the UK’s biggest infrastructure projects and due to begin construction in the next few months, is being investigated by the National Audit Office over its “unusual” financial structure.
The government spending watchdog said it would examine how the complex funding model was chosen and the risks faced by taxpayers and consumers. Taxpayers will bear the brunt of financial factors such as cost overruns or another global collapse in credit markets, while consumers will have to pay for a third of construction costs through higher water bills.
The probe comes as the government is under pressure to invest in big new infrastructure projects to boost the economy following Britain’s vote to leave the EU. The tunnel, which will run under the river Thames, is the second-largest project in the capital after Crossrail.
The NAO will also investigate why the tunnel — the biggest investment in London’s sewers since Sir Joseph Bazalgette built the network in 1858 — was chosen over smaller, greener alternatives to reduce the tens of millions of tonnes of sewage flowing into the Thames each year.
The report is due to be published in the autumn, just as the seven-year construction of the 25km tunnel is formally launched. It will “set out the risks faced by customers and taxpayers as the project moves towards completion, and how these risks are being mitigated”, an NAO briefing note on the probe said.
A private company has been set up by the government and Thames Water, the capital’s privately owned water supplier, to own, manage and finance the project during construction.
Construction risks involved in digging the “super sewer” beneath the Thames range from the potential undermining of Big Ben’s foundations to the flooding of the London Underground transport network — though contractors say this is unlikely.
Andy Mitchell, chief executive of Tideway, the company set up to own and deliver the project, said he was confident it was “delivering this vital project in the most timely and cost-efficient way”.
He added: “We will continue to get on with providing London with this much-needed piece of infrastructure.”
While about one-third of the cost for construction will be funded by Thames Water through an increase in customers’ water bills, the remaining £2.8bn is being raised by Tideway, whose shareholders have invested £1.2bn of equity.
In a move aimed at attracting investors traditionally weary of taking on construction risk, they will receive an income from the day building begins. When the tunnel is completed, the new company will supply sewerage services to Thames Water on a 125-year concession, paid for with a monthly fee by customers directly instead of Thames Water.
The Department for the Environment, Food and Rural Affairs said the project was needed to “modernise the capital’s ageing sewage system”. It said a separate private sector infrastructure provider to finance and deliver the project was “in the best interests of customers and taxpayers”.
In January Thames Water was fined £1m for repeated sewage leaks into the Grand Union canal. Alongside other water companies, it was also criticised by the NAO for taking excessive profits, while paying no corporation tax. Macquarie, the Australian infrastructure investor, is in the process of selling its last 26 per cent stake in Thames Water.
The project has been controversial since 2006 when Philip Fletcher, then head of Ofwat, wrote to the government arguing “there is scope for improvement options that offer better value for money”.
It is the second investigation into the infrastructure project by the watchdog, which in 2014 warned that the method used to finance the project could prove expensive for taxpayers. The complex financial structure required fresh legislation in 2010.
Critics including Sir Ian Byatt, the head of water regulator Ofwat between 1989 and 2000, say that not only is the tunnel now unnecessary but that it would have been cheaper if the government paid for it, even if it was subsequently privatised.
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