Utility Week expert view: Karma Ockenden

“The sort of third-party involvement just sanctioned for London’s supersewer could become a necessity for more run-of-the-mill water asset projects.”

Last week was a good week for show-stopping building projects. The Infrastructure Bill was published, promising among other things the slashing of red tape for nationally significant infrastructure projects through improvements to the Planning Act 2008.

And the government confirmed London’s supersewer qualifies as a Specified Infrastructure Project under the 2013 regulations that followed the 2010 Flood and Water Management Act. On value for money grounds and because the project is enormous and complex, Thames Water’s involvement in the Tideway Tunnel will be limited to preparatory work and tendering, rather than financing and building. Sighs of relief from Reading, no doubt.

However, in time, the sort of third-party involvement just sanctioned for the supersewer on special pleading could come to characterise more run-of-the-mill water asset projects too. Indeed, third-party intervention could become a necessity.

In a report out last week from the Cambridge Institute for Sustainability Leadership, some fascinating models for collaborative, multi-sector involvement in water investment were put forward. Sink or Swim, produced by nine companies (including Anglian Water, Severn Trent and Thames Water) across six sectors, takes as its starting point the bald fact that water resources – particularly in London, the south and the east – are under serious stress from population growth and climate change.

The construction of assets such as reservoirs and other storage schemes that might address this problem, as well as demand management and water efficiency initiatives, are currently left to water companies to finance on the back of regulated income from customer bills. Some £4 billion is invested annually on this basis.

However, with around £96 billion needed to fund water investments up to 2030, consultancy Atkins (one of the nine firms) estimates at least another £1.5 billion a year is needed. With cost of living under fierce political scrutiny, the bill increases that would be needed to fund this in the traditional way look unpalatable.

So the report examines who else might contribute to the cost, how, and why they might be motivated to do so. It champions a multi-sector approach and focuses on business-led solutions, though it appreciates government support would likely be required to deliver them. It frames the work around a case study: the need to invest in water storage in the Wissey – a strongly agricultural catchment in the dry east which is struggling with increasing demand and decreasing water availability.

Aside from Anglian, the major stakeholders with an interest in water in the Wissey are: farmers; supermarkets/retailers who source produce from the area; engineering consultancies; real estate experts who provide asset management services to landowners, farmers and the water firm; and financial institutions. For each, Sink or Swim scrutinises potential income streams and benefits that might derive from better water storage (ie, why they might be interested in investing) and where each might get its finance from. It proposes four possible financial models:

Model 1: water firm as sole financier, however only 75 per cent of the investment is funded through regulatory channels and used for public water supply; the remaining 25 per cent is funded through unregulated channels to provide private supplies to farmers and industry, with costs recovered through service charges to those users.

Model 2: water company provides 75 per cent of upfront finance via regulated income for public water supply; farmers finance and control the remaining 25 per cent.

Model 3: water company provides 75 per cent of upfront finance via regulated income for public water supply; supermarkets/retailers provide the remaining 25 per cent, control that proportion or supply, and sell water to growers and other private water users.

Model 4: a third party finances the storage scheme, most likely through a special purpose vehicle that owns the asset, and sells water services to all interested ­parties.

These models have lots of interesting dimensions from the water industry’s point of view. For example:

•    Under model 1, the water company would expand beyond the regulated supply of water to the public into supplying private users such as agri-businesses and industry, and also potentially into greater trading with third-party water service providers.

•    Under model 3, supermarkets could effectively add water to the list of products they sell.

•    Under model 4, there would effectively be a new water firm in play: selling water via conventional water firms to regulated customers; selling water direct to end users; and trading with other interested third parties.

The multi-sector approach to water investment would offer the water industry opportunities and threats, potential gains and potential losses. But whether these firms like the idea or not, it may yet prove necessary to spread the cost of relatively routine water asset finance across broader shoulders, such as with the Tideway Tunnel.