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The UK’s water watchdog has promised investors revenue guarantees, no competition and minimal risk as it tries to drum up more than £50bn for projects to address water shortages.
Investors will have the “right to collect” revenues from customers, “opportunities for upside”, “capped liabilities” and “investment positive” support from the government, according to an Ofwat briefing paper seen by the Financial Times.
The document, presented to investors at a conference at the London offices of investment bank Jefferies last Friday, adds that there is “no exposure to competitive or market stranding risks” — referring to the fact there is unlikely to be any change in demand for water infrastructure.
Investment of as much as £50bn is needed to back about 30 new projects to improve Britain’s crumbling infrastructure over the next 15 years. Already approved by Ofwat, the projects include reservoirs, treatment works and water-transfer schemes. Most of these will be delivered through private-finance schemes and largely paid for through an additional surcharge to customer bills.
This is controversial because water companies have become a lightning rod for public anger after a spate of financial issues, sewage leakage and supply outages, as well as an already sharp increase in household bills.
Ofwat, which oversees the 16 private water and sewerage companies in England and Wales, has a statutory duty to protect the interests of consumers, “wherever appropriate by promoting effective competition”. It is also tasked with ensuring water companies can finance their activities.
The new infrastructure is meant to address a projected water shortfall of nearly 5bn litres per day by 2050, according to Ofwat. The Environment Agency has warned that the driest spring in 69 years has left the country at risk of drought this summer.
Investors, including Agilia Infrastructure Partners, Equitix and Aviva, attended Friday’s conference, according to Ofwat.
The projects will sit outside the usual five-year bill-setting regulatory process, have their own management teams and in some cases will be paid for throughout the construction period. Investors will either be paid through a surcharge on customer bills throughout a licence period of about 25 years or for the entire life of the project.
Ofwat argues that there are measures in place to protect customers and that the creation of separate privately financed vehicles will lower costs. But the additional charges are likely to concern consumers, who have already faced bill increases averaging about 26 per cent per household from April 1, the biggest annual rise since privatisation 36 years ago.
Mathew Lawrence, head of Common Wealth, a think-tank, said the new schemes were a “get out of jail free card for water companies”.
“They haven’t built enough water infrastructure and now they can’t afford to, so they are being told to set up a whole lot more debt-laden balance sheets, which will also be paid for by customers.”
Some of the schemes, including the new Abingdon and Fens reservoirs, are modelled on the new Thames Tideway sewage tunnel, for which Londoners have been paying an additional surcharge — currently £26 a year — on their bills since construction started. They will continue to pay for the tunnel over its projected 125-year lifespan.
Ofwat argues that the new PFI schemes are needed to encourage competition and bring expertise because “many of these projects are of a size and complexity that water companies have not delivered since privatisation, and third-party providers and investors may be better placed to deliver them”.
Martin Young, an independent water and energy consultant who attended Friday’s conference, said the “size and scale of the projects was such that it would create a whole new asset class, and would sit well with infrastructure investors and pension providers seeking to invest in long-duration assets with predictable cash flows”.
There have been no new reservoirs built in the 36 years since privatisation. The new projects include 10 reservoirs, eight water recycling schemes, two desalination plants and nine transfer schemes that will bring water from wetter areas in the north to the drier south.
Ofwat said: “Engaging with investors and the supply chain is critical for competitive procurement, driving value for money for customers. This type of engagement activity from key stakeholders is important to optimise the delivery of projects, and we will work with companies to scale up market engagement in coming months.”
Jefferies declined to comment.
