Ofwat, the economic regulator for the water sector in England and Wales, is now allowing the sector to promote more competition through direct procurement, meaning that water companies can now go to the market for project financing. In its Water 2020 report, Ofwat states a shared vision that relies on everyone in the sector “working together, listening to customers and tackling long-term challenges” – but how will this vision from Ofwat unfold in practice?
The introduction of direct procurement means water companies can go to the marketplace not just for design and construction of very large projects with a value of £100 million or more, as they’ve always done, but also for project financing. And this opens up the opportunity for new consortia to deliver the industry’s biggest and most exciting projects.
Building large, new infrastructure is a costly and risky business, and Ofwat is more than aware that eventually the customer foots the bill. So raising project-specific finance from new investors and consortia could change the dynamics of the market, leading to commercial innovation and ultimately better value for end users.
An example of this model already being used and closely watched is the £4.2 billion Thames Tideway ‘super-sewer’, London’s second biggest infrastructure project after Crossrail, which is being funded through a combination of increases in Thames Water customers’ bills together with a £2.8 billion investment from Tideway, whose investors have invested £1.2 billion of equity.
The bit that’s missing in these changes is who is sitting above the water companies and the regulator? Who’s taking a broader view of what’s the best direction for large-scale projects that are in the national interest? We’ve seen worthwhile projects that are initially deemed “too difficult” getting delivered because they are front and centre in the national interest; because they become essential.
The UK Government has pushed along Thames Tideway because otherwise there would have been fines under EU regulations. So introducing a mechanism that forces larger projects through to direct procurement is something we’d really like to see. If there are big reservoir projects needed that cut across water companies’ boundaries, direct procurement would prove a good model, and plenty of lenders are prepared to take project finance risk.
There’s a market there ready to finance – but we also need the mechanism to push them through. Looking at projects from an investor’s angle could open up new and attractive propositions, and we may even see a raft of inter-sector investment opportunities come to the forefront within a few years, or new funding models emerging.
There are certainly early signs of significant change ahead. And market participants need to be planning for these changes now for the Ofwat vision to be delivered.
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