The Secretary of State for Environment, Food and Rural Affairs (Mr Owen Paterson)
I wish to update the House on progress on the Thames Tideway Tunnel since the written ministerial statement—3 November 2011, Official Report, column 41WS—made by my hon. Friend the Member for Newbury (Richard Benyon).
In that statement the Government reaffirmed their support for Thames Water’s plans to build a tunnel to reduce the amount of untreated waste water being discharged into the River Thames. We also stated that while the private sector could and should deliver the project, the Government were willing in principle to provide contingent financial support for exceptional project risks where this offered best value for money for customers and taxpayers.
Following due consideration the Secretary of State has determined to exercise his power today to issue a Thames Tideway Tunnel project specification notice and a Thames Tideway Tunnel project preparatory work notice made under the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 (“SIP regulations” ). These notices will be available on the gov.uk website shortly.
This action follows the consultation undertaken from 4 December 2013 to 6 January 2014 on the draft reasons for specifying the project under the SIP regulations as a specified infrastructure project and the draft reasons for issuing a preparatory work notice for Thames Water. On 23 April 2014 we published a summary of responses to these two consultations.
The specification notice prevents Thames Water from undertaking the Thames Tideway Tunnel and requires it to put the project out to tender by running a competitive procurement for an infrastructure provider (“IP”) that is separate from Thames Water. The specification notice contains the activities that the IP has to undertake and includes the project’s financing, design, construction, operation and ownership. The preparatory work notice permits or requires Thames Water to undertake certain activities of a preparatory nature in connection with the specified infrastructure project.
In addition to these notices, we have also published an additional two notices: a notice setting out the Secretary of State’s reasons for specifying the project and a notice setting out his reasons for issuing the preparatory work notice.
In summary, the competitive procurement of a separate IP will help ensure value for money by providing an objective means of testing whether the financing costs of the project are appropriate and reasonable. If the project were to be delivered solely by Thames Water then this competitive element for determining and helping drive down the financing costs of the project would be absent. A separate entity that undertakes the project will also isolate the project risks within that entity. That will both reduce the risk that the costs of delivering Thames Water’s other services to customers will increase due to the risk profile of the project, and ensure that any Government financial support is focused on the project.
Thames Water is permitted or required to undertake certain preparatory work in relation to the specified project where this makes sense for the project timetable or to reduce interface risks. This preparatory work has a similar risk profile to Thames Water’s existing business.
Following the procurement process, the economic regulator Ofwat will consider designating and licensing the successful bidder as the project’s IP. This is likely to be in mid-2015. Assuming the IP is licensed, it will then become subject to a modified regulatory regime which is broadly similar to the regime which applies to water and sewerage companies.
Following further careful consideration, we have also confirmed that a support package from the Government is necessary to enable the project to attract private sector finance at a cost that is reasonable for customers. In structuring this support package we have been mindful of the need to keep the burden on the taxpayer to the absolute minimum required for the project to be viable.
Through the Government support package, the Government will take on some of the low probability but high impact risks the project faces during the construction phase. If these risks do not materialise, there will be no exposure for the taxpayer. The package provides support in the following five scenarios:
where an event during construction leads to an insurance claim that exceeds the limits of the IPs’ insurance cover, the Government would meet the liability above that limit. In addition, if certain insurance cover becomes unavailable in the market and is essential for the project to continue. Government will consider providing that cover;
should the IP be unable to access debt capital markets as a result of national or international economic or political events, the Government would be prepared to provide a short-term loan on commercial terms. This would help the project to continue during any period of disruption in the financial markets, for example like those experienced in 2008;
where exceptionally large cost overruns occur the Government would be prepared to invest equity in the project to enable it to continue to completion where this remains viable. The IP would be incentivised to manage costs and so avoid this situation occurring and to seek further private equity before calling on the Government. However, if the Government were required to invest, appropriate measures would be put in place to ensure taxpayers received value for money;
the Government support package also makes provision for the Government to discontinue the project and pay compensation to debt and equity investors in certain circumstances. For example, where the IP requests an investment of Government equity due to exceptional cost overruns, the Government would have the option of discontinuing and paying compensation rather than providing equity; and
the final element of the Government support package is a commitment from the Government that should the IP go into special administration and remain there beyond 18 months, the Government will either make an offer to purchase the IP or discontinue the project.
The Government support package is subject to state-aid approval from the EU Commission.
Following the Government’s decision to specify the project, we expect Thames Water to initiate the procurement process for the IP by publishing a contract notice in the Official Journal of the European Union. Competitions for the three main construction contracts for the project are already under way.