Cost of Thames super-sewer slashed as Ofwat awards licence to Bazalgette

Bazalgette has awarded three large contracts for construction work, and workers will be on-site next month

Joseph Bazalgette’s sewers have served London for 150 years but are being overwhelmed (Reuters)

The £4.2bn super-sewer under the Thames will be built at a much lower cost than predicted, after the water regulator stepped in to force down financing costs.

News of the lower cost of the 15-mile pipeline came as the water regulator Ofwat formally awarded a licence to Bazalgette, the company set up to lead the project.

In turn, Bazalgette has awarded three large con-tracts for construction work, and workers will be on-site next month, with tunnelling due to start early in the new year.

The super-sewer is needed to deal with the problem of 39 million tonnes of untreated sewage that flows into the tidal part of the Thames every year, whenever there is heavy rain, as well as to cope with the growing population.

Thames Water said “cheap-er finance and efficiencies” had brought down the projected cost of the new in- frastructure dramatically, meaning its customers in London should not see their water bills jump to pay for the work.

Ofwat said the lower costs were achieved by putting the financing costs through a competitive process, the first time that has been done in the water sector.

Bazalgette, named after Joseph Bazalgette, the 19th century engineer who build central London’s first sewer system, has achieved a cost of capital – the rate of return that is acceptable to investors – of just 2.497 per cent.

The regulator Ofwat said it was now keen to see if going out to competition for financing, as well as construction costs, would work for other big projects in the sector.Separately, Balfour Beatty, the construction company that has been hit by seven profit warnings since 2012, said it would begin work on the west 6km section of the tunnel in September.

Balfour has been awarded a £416m contract on the project as part of a three-way venture with Morgan Sindall and BAM Nuttall.

The central section will be built by a joint venture of Ferrovial Agroman and Laing O’Rourke, while Costain is in a consortium with French construction giant Vinci and underground engineering specialists Bachy Soletanche to build the east section.

The Thames Tideway Tunnel is expected to create more than 9,000 direct and indirect jobs at the peak of construction. The work will take seven years to complete.

The tunnel, 7.2m (24ft) in diameter, will run beneath the river from Acton in West London to the Abbey Mills pumping station in the east.

More than 1.7 million British pensioners will have an indirect investment in the Tideway project through their pension funds. The funds and other long-term investors are backing the Bazelgette company through a consortium represented by Allianz, Amber Infrastructure Group, Dalmore Capital and DIF.

Slashing the cost of financing the project will mean that annual water bills in London should remain flat for the next five years, Thames Water claimed on Monday.

The cost to Londoners of the tunnel was put at £70 to £80 on top of annual average bills of £370 four years ago, but now financiers say it can be built for just £20 to £25, before inflation. Thames Water customers are already paying £7 a year towards the tunnel cost in their bills.