The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rory Stewart)
I wish to update the House on progress on the Thames Tideway Tunnel since the written ministerial statement— 5 June 2014, Official Report, column 11WS—made by my right hon. Friend the Member for North Shropshire (Owen Paterson).
The Thames Tideway Tunnel is an example of world leading British engineering at its best. It will boost economic growth across the capital, generate thousands of jobs and bring significant benefits to the natural environment by protecting the Thames from sewage. In the 21st century, the most dynamic city in the world should not have a river that is polluted by sewage every time there is heavy rainfall.
In the previous statement the Government confirmed they had required Thames Water to put the project out to tender by running a competitive procurement for an infrastructure provider that would be separate from Thames Water and would be responsible for delivering the project, including its financing.
The procurement was carried out under the Utilities Contracts Regulations 2006. The Government and Ofwat were consulted throughout this process. On 14 July 2015 Thames Water announced that the consortium forming Bazalgette Tunnel Ltd was its preferred bidder for the project’s infrastructure provider. The shareholders are a consortium of pension funds and long-term investors represented by Allianz, Amber Infrastructure (representing International Public Partnerships and Swiss Life), Dalmore Capital and DIF.
On 12 August the European Commission announced that it was content that the state aid contained in the Government support package was compatible with the European Union’s internal market. The adopted decision is expected to be published in the Official Journal of the European Union in due course.
On 14 August Ofwat announced that it had designated Bazalgette Tunnel Ltd as the infrastructure provider under the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013.
On 24 August Ofwat awarded Bazalgette Tunnel Ltd a Project Licence and commercial close was reached on the project. The Project Licence award followed two public consultations carried out by Ofwat in October 2014 and August 2015. Bazalgette Tunnel Ltd also signed the project documentation and the three main construction contracts with three consortia who will construct the tunnel.
In addition, Bazalgette Tunnel Ltd and the Secretary of State for Environment, Food and Rural Affairs, with other project parties, have entered into contracts constituting the Government’s contingent financial support for the project the “Government support package” and other associated documents. The Government support package has enabled the project to attract private sector finance at an acceptable cost for customers and will only be called upon if certain low-probability but high-impact risks arise during construction. If they do not materialise there will be no exposure for the taxpayer.
The Secretary of State, Bazalgette Tunnel Ltd and Thames Water also signed the liaison agreement. This enables Government to monitor progress on the project and will assist with managing any likely calls on the Government support package.
I am placing the core contracts today in the Library of both Houses, subject to some commercial redactions. I understand that other contracts relating to the project will be made available in due course by the parties involved.
The competitions for both the infrastructure provider and the construction contracts were highly competitive. The winning bid for the infrastructure provider offered a weighted average cost of capital (WACC) of 2.497%, which is fixed, subject to the terms of the project licence, until the first price review following construction. The construction procurements delivered a target build cost which is unchanged from that estimated in 2011. As a result, Thames Water now estimates the project will lead to an average household customer bill impact which will peak at £20 to £25 by the mid-2020s (in 2015 prices), of which £7 is already included within customer bills. They also expect that their current average household bill for water and wastewater services will remain at the same level, before inflation, until at least 2020. This impact is considerably lower than the maximum estimate of £70 to £80 given in the written ministerial statement— 3 November 2011, Official Report, column 41WS—made by my hon. Friend the Member for Newbury (Richard Benyon). This is a significant and welcome reduction in the estimated bill impacts of the project.
From the first periodic price review following construction of the tunnel prices will be regulated by Ofwat as they are for the remainder of the industry.
Construction on the main drive sites is anticipated to start in late summer 2016 with physical completion scheduled for 2023.
Many parties have invested a great deal of time and effort to reach this significant milestone. Government look forward to continuing to work closely with Bazalgette Tunnel Ltd, Thames Water and Ofwat so that it can manage the taxpayer risks that arise from the Government support package during the construction period and help ensure a successful outcome for customers, taxpayers and the environment.
[HCWS175]