The former Director General of water industry regulator Ofwat has expressed serious concerns about Thames Water’s plans for the proposed £4.2 billion Tideway Tunnel, describing it as a “flawed project.”

In his detailed report, ‘Thames Tunnel; A Critique of a Flawed Project’ Sir Ian Byatt attributes the current problem of overloaded sewers sending tonnes of raw sewage from the Combined Sewer Overflows into the river Thames to inadequate maintenance by Thames Water of its sewer system. The report says:

“This deteriorating situation seems to have resulted from inadequate maintenance by Thames Water of its sewer system. Thames Water was slow in dealing with high leakage in water supply pipes, and had to be pressured by Ofwat to increase expenditure on reducing leakage.  It now appears that a similar situation has arisen with respect to the sewerage system, again requiring regulatory intervention.”

Sir Ian also criticizes both the current and previous Governments as opting for a "tunnel only" solution and brushing aside cheaper and more flexible solutions which regulators have accepted as a fait accompli. The report describes the "tunnel only" solution, preferred by Thames Water and supported by Ministers, as at the high end of the range of possible costs. In his view neither Ministers nor regulators have set out the underlying analysis behind the Ministerial decision to opt for this solution.

The report says there are several schemes that could potentially meet European Union objectives of the Urban Wastewater Treatment Directive, the key driver for the construction of the supersewer. Sir Ian has highlighted the results of a study commissioned by Ofwat by Jacobs/Babtie which shows that a mixed solution incorporating SUDs and green infrastructure and combining different elements in different areas could be carried out for half the cost of the tunnel only solution.

Strong criticism of financing arrangements

The report levels particularly harsh criticisms with regard to how the proposed Tideway Tunnel would be financed, stating:

“Thames and its owners, Macquarie, have known about this project for many years….. As the need to deal with London's wastewater system has been known for many years, a responsible company would have accumulated - or preserved within the utility - sufficient funds to undertake the investments required to fulfil its obligations.”

“In the 12 years from 2000 to 2012.....Thames Water has paid £3.4 billion in dividends to its owners, £2.2 billion has been paid out in the last 6 years. Priority seems to be being given to repatriating the money, apparently to unknown off-shore destinations rather than dealing economically with London's problem.”

According to Sir Ian, the suggestion that the Government should assist the financing of the project under the Water Industry Assistance Act( 2012) and Flood and Water Management Act (2010) would “relieve Thames Water of its obligations and protect its RCV to the benefit of its owner - who has already taken out a significant part of its investment through the payment of very large dividends.”  He says in the report:

“It would be perverse to reward Thames with a major increase to RCV as a consequence of the decision to improve profitability by neglecting maintenance of the sewerage network.”

“Thames Water has paid excessive dividends, yet argues that a government guarantee is necessary to cover potentially catastrophic  risks.”

“Rather than rewarding the company with a large increase in its Regulatory Capital Value (RCV), regulatory action should be directed to getting the company to step up its sewer maintenance programme.”

The report suggests that the "tunnel-only" project could be more expensive for both customers and taxpayers than better sewer maintenance and the adoption of a combination of smaller and more flexible solutions, combined with conventional financing by Thames Water/and or its owner Macquarie. Sir Ian comments:

“In terms of financing the scheme, the contractual and financial arrangements put in place must be the best possible deal for customers, rather than for shareholders and investors.”

Cost benefit analysis under question

According to the report, costings have shown wide variations while  estimates of benefits have been disputed. Cost/benefit estimates have also varied widely with some showing estimate of benefits that exceed cost, but most showing benefits that fall short of costs, particularly for Thames Water's customers.

The report says that since the work on options was conducted and Ministerial decisions made, there has been a big escalation (more than a doubling) of Thames Water 's cost estimates. Sir Ian comments:

“Thames claim that this escalation results from a detailed bottom-up estimation of costs, contrasting this with earlier desk studies. But it may represent risk averse behaviour, gold-plating or regulatory gaming.”

“There seems not to have been any critical investigation of this big increase in costs, although Defra revised its cost benefit assessment (which is subject to dispute) to show benefits exceeding costs.”

Independent review now needed

The former Ofwat chief is now calling for an independent assessment to be made, before final decisions are taken, that would cover:

• the contribution that can be made by better sewer maintenance:
• the engineering solutions that can achieve the desired environmental objectives, without involving excessive costs:
• the financial options available to pay for these solutions:
• the interactions between the choice of scheme and method of financing: and
• the insertion of conditions that would prevent the recurrence of the payment of excessive dividends

Whether the Planning Inspectorate’s inquiry into the proposals, which got underway this week, will address these concerns remains to be seen.