My Lords, the draft regulations before the Committee today are aimed at helping the delivery of
necessary, large or complex water or sewerage infrastructure projects. They are designed to help to contain and minimise the risks associated with their delivery to customers of water or sewerage companies, known as undertakers, and also to UK taxpayers. Containing and minimising these risks should correspondingly provide better value for money associated with delivering such projects. It should also help to ensure that undertakers’ customers continue to receive the required or desired level of existing water or sewerage services.
These regulations would enable the Secretary of State or Ofwat to specify by notice an infrastructure project where either is satisfied that two conditions have been met. The first is that the infrastructure project is of a size or complexity that threatens an undertaker’s ability to provide services to its customers. The second condition is that specifying the project would be likely to result in better value for money than if the project was not so specified, taking into account charges to customers and any government financial assistance.
Once specified, an undertaker would then be required to put the specified infrastructure out to tender and a separate Ofwat-regulated infrastructure provider would be designated to finance and deliver the project. These large, complex infrastructure projects raise issues of determining the cost of their financing coupled with a construction risk that is far greater than that normally associated with an undertaker’s typical capital investment.
Enabling an undertaker to tender competitively an infrastructure provider for a large or complex project provides an objective means of testing whether the financing costs of such a project are appropriate or reasonable. Without that tendering process, competitively determining the cost of capital for those types of project would not be possible. The ability to create ring-fenced Ofwat-regulated infrastructure providers between undertakers and large or complex projects would also help to ring-fence their associated higher risks, and should result in more effective risk management for these projects.
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Enabling the creation of infrastructure providers would prevent the threat of a large or complex infrastructure project affecting the ability of an undertaker to provide its day-to-day services for its customers, avoiding any resultant extra costs that would ultimately be borne to some extent by those customers.
There have been two public consultations on the regulations. An initial 12-week public consultation was carried out between February and May 2011, seeking views on proposals for new regulations. Thirteen replies were received and a summary published on Defra’s website in September 2011. The second consultation ran for four weeks between 5 November and 4 December 2012. Its purpose was to inform stakeholders representing interests likely to be affected by the proposals; it included draft regulations and a corresponding impact assessment.
The latter consultation was issued by e-mail to 73 contact addresses previously contacted for the 2011 consultation and included the Mayor of London, London MPs with a known interest, EFRA committee
MPs, water and sewerage companies, Ofwat and the Consumer Council for Water. Seven responses were received and a summary published on Defra’s website in March 2013.
We have noted the range of views and comments received on the proposed legislation and relating to the proposed Thames tideway tunnel project in London. In particular, we note concerns that provision to enable separate infrastructure providers might allow undertakers to avoid obligations to provide necessary infrastructure themselves within their own financial structures, and so enable the continuation of high levels of dividend payments to shareholders.
It is important to note that the regulations would enable only the Secretary of State or Ofwat to require an undertaker in England to tender competitively an infrastructure provider. This would be only for large or complex projects that they consider would threaten an undertaker’s ability to meet its statutory service provision obligations, and where this would provide better value for money for both customers and taxpayers. This would never be a decision for undertakers, so would not provide an incentive for them to avoid their obligations.
The current water industry regulatory framework is designed so that Ofwat can regulate undertakers so that they do not make excessive payments to shareholders. Customers’ bills are kept as low as possible while recognising that the companies must attract appropriate investment to meet future needs.
Following due consideration of the public consultation, we have decided to proceed with these regulations for the reasons that I have outlined. The ability to enable undertakers to tender competitively an infrastructure provider to finance and deliver a large or complex project will be a useful tool, even if rarely exercised. Enabling the ring-fencing of important infrastructure projects will help to attract necessary private capital at a transparent and competitive price, helping to protect the interests of both undertaker customers and UK taxpayers.
I know that many noble Lords have firmly held views on the merits or otherwise of the Thames tideway tunnel and I look forward to our debate this afternoon, during which I expect that many of these views will be put forward. However, I ask the Committee to bear in mind that the regulations before it today could apply not only to the Thames tideway tunnel but to any large or complex sewer or water infrastructure projects in future. I commend the draft regulations to the Committee.