Comment: prospects for major project finance

Ofwat is continuing to promote the use of project financing structures outside of utility procurement as a way of unlocking as much as £50bn of finance for around 30 new large projects, some in the form of a 25 year concession. It has released A major projects guide for investors.

The opportunity, it said, included: guaranteed revenues; no exposure to competitive or market stranding risks; capped liabilities; in some cases the ability to collect revenues directly from customers; enhanced regulatory protections; and growth from future projects.

Ofwat continues to argue that project finance will lower costs relative to conventional regulated utility costs of capital. It also mentions “investment positive” support from the Government. If that were to include some tangible forms of project guarantee as was offered for Thames Tideway, that would indeed drive down the cost of capital for major projects.

But general support for infrastructure investment in water, simply through the use of project finance, may not change the risks and therefore the cost of delivery. Special purpose project finance companies will need to employ engineering, financial and legal advisors to identify and price the risks and interface with the utility that will ultimately use the asset. These extra fees will have to be absorbed on top of the underlying cost of financing the project. The promise of extra benefits to investors from this form of finance may not be sufficiently attractive to make the procurement better value for money, especially as the UK is competing for water project finance with similar structures around the globe.

Ofwat’s hope that project finance "can result in better value for customers by driving down costs and increasing innovation, while maintaining quality" is as yet unproven.