UK water companies embrace PFI to deliver £14bn of infrastructure

Britain’s debt-laden water companies are being encouraged by the regulator to set up new privately funded companies to deliver billions of pounds of critical infrastructure such as reservoirs, treatment plants and pipelines, which will be paid for through customer bills.

United Utilities – the water company that came under fire this week over sewage leaks at Windermere – is seeking investors for an estimated £1.75 billion project to replace the aging Haweswater Aqueduct; a 110km pipeline in north-west England that was built in the 1950s and supplies around a third of the water supply in Manchester, Lancashire and Cumbria.

It is an example of a model from industry watchdog Ofwat, known as ‘direct purchasing for customers’ (DPC). The regulator argues that the model – where regulated water companies create off-balance sheet special purpose vehicles, backed by private investors – will encourage competition to deliver much-needed water infrastructure across the country. Around £14 billion worth of projects are earmarked to use the model over the next ten years.

Funds backing the SPVs receive returns in exchange for financing, designing, building, operating and maintaining infrastructure under contracts with terms of 20 to 35 years or longer. The costs are paid by customers through their bills – during or after construction, depending on the plan – with the project returning to the water company when the private finance initiative (PFI) expires.

Although Ofwat claims that the creation of separate privately financed vehicles will reduce costs, the additional costs associated with DPC schemes are likely to affect consumers who are already expecting a sharp increase in bills over the next five years.

Water companies are already the subject of political scrutiny and public anger after a series of service failures and pollution. The woes of Thames Water, Britain’s biggest water supplier, have also put the utilities’ finances under scrutiny. According to research by the Financial Times, water companies are under fire for paying out £78 billion in dividends while accumulating £64 billion in debt in the 32 years between privatizations from 1991 to March 2023.

Dieter Helm, professor of economic policy at the University of Oxford, said that while there were benefits in using DPC programs to improve infrastructure, their use was partly the result of ‘Ofwat’s inability to prevent the balance sheets of the utilities are abused for financial purposes. engineering”.

“Now they need more private balance sheets from DPC to fill the gaps,” he added.

“The longer-term risk is that the DPCs will further fragment the system because, unlike the usual contracts entered into by the water utilities, DPC means that the utilities no longer retain control of the assets or are responsible for their maintenance” , Helm said.

Ofwat declined to comment.

For example, the impact on customer accounts of United Utilities’ Haweswater scheme is not yet known, according to the company, which said this week that annual after-tax profits fell 38 percent to £126.9 million. The utility expects to choose the winning consortium early next year and begin work shortly thereafter. The investors will establish the SPV that will design, build and maintain the pipeline under a 33-year contract.

Map of the Haweswater Aqueduct from United Utilities

Southern Water is also advising on plans for a £459 million water recycling project that would be delivered under the DPC scheme. The company has already asked for the biggest increase in bills in the country – a 74 percent increase, which would take bills to around £727 a year before inflation between 2029 and 2030.

If approved, construction of the Hampshire Water Transfer and Water Recycling Project is expected to start in 2028, with the new system operational in 2034.

Rob Stewart, director of capital delivery at Southern Water, said the project will “help protect Hampshire’s rare and sensitive chalk streams and keep taps and rivers flowing for generations to come”.

Welsh Water also used the DPC to build new treatment plants to replace three plants built in the twentieth century that were “reaching the end of their operational lives and becoming increasingly difficult to maintain,” the company said. It is in the early planning stages and the proposals will be put to the public later this year.

Ofwat has refined the DPC model following the implementation of PFI agreements such as the Thames Tideway Tunnel, London’s new “super sewer” expected to be operational next year. Thames Water customers pay for the tunnel through a surcharge on their bills – currently £26 per household per year – even though the tunnel is owned by a separate company set up by the utility and the government.

The watchdog says consumers will benefit from DPC projects because regional water monopolies – all of which have been privatized in England and Wales – will have to compete for their major infrastructure programmes.

“We see this as providing a significant opportunity for investors and the supply chain to participate in a forward capital programme,” Ofwat said in a note to investors in 2022. “The water sector has a strong track record of delivering stable returns on the long term and an income stream. supported by regulated revenues payable by customers and is therefore an attractive proposition for investors.”

In addition to DPC programs, Ofwat is also encouraging companies to launch projects based on the model used by the Thames Tideway Tunnel. The “specified infrastructure provider model” differs from DPCs in that the SPV used would be self-licensed and regulated directly by Ofwat.

The model was intended for projects of a size, risk and complexity so great that it could threaten the financial survival of the existing debt-laden water company, Ofwat said. It is being considered by Thames Water for the new Abingdon reservoir, for example.

Other innovative models to realize new infrastructure are already being developed. They include a project by Southern Water and Portsmouth Water to create a new £340 million reservoir in Hampshire, the first in 29 years. The costs will be recovered through Southern Water customers’ drinking water bills between 2029 and 2030, initially at around £17 per home per year, Southern Water said.

There is still skepticism about whether the private financing models will ultimately help solve Britain’s water problems, or whether they will just store problems for the future.

Ofwat has “already allowed water companies to create these overcomplicated, debt-laden financial structures and now they are going to add to that mess even further by setting up even more companies with completely clean balance sheets that will soon be debt-laden,” says Feargal Sharkey . , a water campaigner. “In the end, it is always the customers who pay the costs.”

Leave a Reply

Your email address will not be published. Required fields are marked *