My Lords, this has been an interesting debate on a number of issues relating to the draft regulation and indeed to the Thames tideway tunnel. I thank the noble Lord for his views and his insightful interventions. I thank him for agreeing that the general approach we are taking is reasonable. That is perhaps the most important thing to come out of today, and it is extremely helpful. I will come back to his specific points in a moment.
As I indicated in my introduction, it is important that these regulations should be considered separately from the specific Thames tideway tunnel project in London. In summary, the regulations enable the creation of infrastructure providers regulated by the Water Services Regulation Authority, Ofwat, to finance and deliver large or complex water or sewerage infrastructure projects. They provide for the procuring, licensing and regulating of an infrastructure provider that is separate from a water or sewerage company. They set out how the Secretary of State or Ofwat can specify to which projects the regulations would apply and how they designate the company that is to become an infrastructure provider. The regulations are intended to apply to all such large or complex water or sewerage projects that may be proposed in the future, where their application would be considered to result in better value for money for both customers and taxpayers.
I turn specifically to the Thames tideway tunnel, and I think the noble Lord has already made similar points. Climate change, population growth and higher customer expectations of environmental standards and supply resilience are anticipated to require larger and more complex infrastructure than the existing regulatory regime was designed to provide for. For example, changing rainfall patterns are expected to result in wetter winters and drier summers—who would believe it after last summer?—and to aggravate water scarcity conditions in the south and the east. This may lead to an increased requirement for potentially complex arrangements for transporting water.
Moreover, heavy rainfall events are likely to become more frequent—that we can all believe. In London, these events will further strain an already overtaxed sewerage system, leading to more overflows of untreated wastewater, containing raw sewage, into the Thames. Even after ongoing upgrades to sewage treatment works and the Lee tunnel are completed by the end of 2015, just over 18 million tonnes of wastewater will enter the Thames every year from London’s combined sewer overflows when storm-water capacity is exceeded. These overflows currently occur on average about once a week and have a significant environmental impact on the river. They
increase the likelihood of fish kills, create a higher health hazard for the users of the river and damage the aesthetic appeal of the Thames.
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The proposed Thames tideway tunnel is an example of a large and complex high-risk infrastructure expected to be constructed within the next 10 years. It is also one of the top 40 priority infrastructure investments within the national infrastructure plan 2011. Its construction would intercept storm sewage overflows and ensure that the River Thames meets water quality objectives established by the 2006 Thames tideway strategic study, preventing deterioration and ensuring that the Thames remains at moderate status.
The works would also ensure that the UK met its legal obligations under the urban wastewater treatment directive. On 18 October last year, the Court of Justice of the European Union found the UK to be in breach of the directive in London since 31 December 2000 by failing to have adequate collection and treatment facilities in place, despite our clear commitment to major improvements to London’s sewage collection treatment systems. We are currently in contact with the Commission regarding the measures considered necessary to comply with the terms of the court judgment. The court accepted that the Thames tideway tunnel represents a solution to the problem of the collection system in London. The implication, therefore, is that the tunnel represents a means to come into compliance with the judgment. The urgency of the project is increased by the need to comply with this judgment.
The project is large, complex and high-risk. It requires engineering and construction skills that have been rarely deployed by UK water and sewerage undertakers, certainly in recent years. We consider projects such as these to be better suited for delivery under a separate and parallel regulatory regime, rather than under the existing single regulatory regime for water and sewerage undertakers.
I turn to the noble Lord’s questions. He suggested that Ofwat should be able to manage the finances of a Thames Water and a Thames tideway tunnel combined. I think the point here is that the risk profiles of a standard water company business on the one hand and of a tunnel construction project such as this on the other are significantly different. Pricing against both is, therefore, different. We feel that the tunnel is better priced as to risk in the market as it stands.
The noble Lord raised the recent comments of the Ofwat chairman. Like the noble Lord, we agree with Mr Cox that there must be full transparency in the finances of all water and sewerage companies so that Ofwat can do its job and customers can obtain any benefits resulting from cost savings. The specified infrastructure project regulations would enhance such transparency. They enable water or sewerage companies to tender competitively—as I said earlier, Ofwat-regulated infrastructure providers that finance and deliver large or complex infrastructure projects. This IP tendering process provides an objective means of testing whether
the financing costs of such projects are appropriate and reasonable. Without this tendering process, provided by the SIP regulations, competitively determining the cost of capital for a project would not be possible.
The noble Lord asked, effectively, why are the Government not making sure that Thames Water pays all the tax that it should? Thames Water Utilities Limited does pay its tax. All UK companies are allowed to claim capital allowances when they spend on capital investment programmes. That, I feel sure, was the same under the previous Government. Tax relief is allowable against the capital expenditure incurred, which reduces the tax payable, with the aim of encouraging investment by companies. Water and sewerage companies have significant capital programmes in comparison with their revenues. They therefore benefit from tax allowances proportionately more than other companies.
HM Revenue and Customs remains vigilant in ensuring that companies operating within the United Kingdom pay the tax that they are legally obliged to pay.
The noble Lord asked about executive remuneration. Thames Water is a private company and is responsible for setting its own remuneration policy which is approved by its shareholders in the normal way. Ofwat’s regulatory remit is to ensure that customers get a fair deal with good service at a fair price. Ofwat has ensured that water companies, including Thames Water, have kept price rises in line with inflation. Fair and stable returns for the water companies have enabled £108 billion of investment since privatisation to significantly improve service to customers while ensuring that bills are kept down as much as possible.
If water companies fail to provide the levels of service expected by their customers and required by their licences, Ofwat can and does take action, clawing back more than £550 million following under-performance since 2005. Thames Water has met its annual leak reduction target for the seventh year running, is delivering £1 billion of investment and continues to maintain its high drinking water quality.
In conclusion, these regulations would enable the risks and costs associated with these projects to be more transparently captured; better contain the risks and costs of financing these projects, helping to prevent those costs transferring to an undertaker’s other ongoing business and less risky infrastructure projects; help to minimise total final project costs by requiring undertakers to tender competitively an infrastructure provider to finance and deliver these projects; provide an objective means of testing whether the financing costs of a project are appropriate or reasonable; and, finally, enable any government financial assistance for such projects to be targeted at a sole project rather than at a specific undertaker with its range of services.
With those comments, I hope your Lordships will agree to have considered these regulations.