Thames Water has started the hunt for international investors to fund the construction of its controversial £4bn super-sewer across London.
Britain’s biggest water firm will formally advertise for backers in May in a process led by the investment bank UBS. Rather than funding the scheme off its own balance sheet, Thames is setting up a new company that will own the tunnel, whose investors will be repaid with interest from increased water bills paid by Thames’ customers.
Thames is owned by a United Nations of investors, hailing from Australia, China, Abu Dhabi, and, closer to home, BT’s pension fund, Hermes. Several of them are expected to explore making an investment in the sewer. The fundraising will test the appetite of overseas investors to back British infrastructure as political uncertainty mounts. Financiers say Ed Miliband’s more interventionist approach to business, after pledges from the Labour leader to reform energy and banking markets if his party takes office a year from now, has raised investor concerns.
The 15-mile super-sewer, which will run west to east across the capital, is the centrepiece in an upgrade of the underground network that was originally constructed by Sir Joseph Bazalgette in the 1850s. Then, the capital had two million inhabitants, whereas the water and sewage system serves four times that population today.
Thames has had to battle opponents concerned about the environmental impact of digging a new tunnel. Planning consent is due in September. In addition, the company must wait until December to see if it has won approval from the regulator, Ofwat, to inflate bills by £40 extra per year by 2020 to cover costs of the project.
Two-thirds of the £4.2bn scheme will be built by the new company, with the remainder handled by Thames, where it will connect with the existing sewage system that runs alongside the river.
“We are creating a separate business, a special-purpose vehicle, to deliver the tunnel, but at the same time our customers will be paying for that investment,” said Martin Baggs, Thames Water’s chief executive. “The money will flow through from customer bills to this SPV when it is up and running.”
The company, which serves 8.5 million London customers with 2.6 billion litres of tap water every day and 14 million in the wider South-east with waste water, came under fire for paying zero corporation tax last year, even though rules let companies that are investing heavily defer payment.
Thames has already shown its prowess in installing new infrastructure. Coming into service next spring, the Lee Tunnel is a giant, four-mile storage tank designed to cut roughly in half the 39 million tonnes of diluted sewage that is discharged annually into the river system.
At 75m, it is the deepest tunnel in London. Costing £650m, it will eventually connect to the Thames Tideway Tunnel – to give the super-sewer its official title – beneath the Abbey Mills pumping station near Stratford in east London.