Spending watchdog probe into Tideway finance may have Water 2020 implications

In a move that could have implications for plans to roll out competitive direct procurement for large water and wastewater projects after 2020, the National Audit Office is investigating the assurance arrangements put in place for the Thames Tideway Tunnel.

The government spending watchdog plans to scrutinise plans for delivering the £4.2bn super sewer because of their unusual nature. Rather than being built by the incumbent monopoly, last August Ofwat awarded a licence to independent investor consortium Bazalgette Tunnel Limited to finance and deliver the project, with a contingent support package provided by government in the construction phase.

The Tideway Tunnel will be the first project to be delivered under the Specified Infrastructure Projects Regulations 2013, introduced by the Flood and Water Management Act 2010. These allow for certain large and complex projects to be delivered by infrastructure providers that are selected by the incumbent undertaker (in this case Thames Water) following a competitive procurement. IPs are to be regulated by Ofwat under a project licence.

The NAO last week issued a call for evidence and will report in autumn. It will examine how the project’s public sector steering group gained assurance over the evidence base which informed the target outcome for the project and the choice of the Tunnel over alternative options. It will also set out the risks faced by customers and taxpayers as the project moves towards completion, and how these risks are being mitigated.

Ofwat has hailed the Tideway tendering process – particularly the market testing of financing costs – as a big win for customers. Last summer it commented: “The cost of capital for this project, just 2.497%, has resulted in a significant reduction in the cost to customers. Previous worst case forecasts had predicted the impact of the tunnel on average bills would be £70 to £80. In fact the impact is now expected to be much lower than this: around £20 to £25 per year by the mid-2020s. £7 of this is already included in current bills.”

Consequently the regulator is keen to explore how the competitive market model used for the Thames Tideway Tunnel could be exported to other water infrastructure developments. In its Water 2020 papers, Ofwat supports wider use of competitive direct procurement for smaller scale investments to apply downward pressure on costs and to reveal information about costs and efficiency.

The NAO’s new investigation will follow-up on its 2014 report, Thames Tideway Tunnel: early review of potential risks to value for money.