Investors in privatised British utilities should not benefit from taxpayer bailouts, the outgoing chairman of the London super sewer project has said.
Sir Neville Simms, chairman of the Thames Tideway Tunnel and a City veteran, says global investors who put money into domestic water, energy and infrastructure providers should know their funds are at risk and cannot expect “complete protection”.
He also dismisses concerns that letting a major utility collapse would damage Britain’s reputation on the world stage, at a time when Thames Water has warned it will run out of cash as soon as December. In that scenario, the company would effectively be nationalised and placed into special administration, forcing the Government to step in until new buyers could be found.
But when asked whether the situation risked spooking international investors, Sir Neville says: “I hope that people see this is how markets work.
“Investing is not a guaranteed return to all people at all times. It’s an investment. The money takes a risk and sometimes the risk pays off extremely well. Sometimes, it pays off poorly.
“International investors know they are placing money at risk when they come here and those are the sort of judgments they have to make.”
Furious Thames Water shareholders accused Ofwat of rendering the utility “uninvestable” earlier this year, as they criticised the regulator over its refusal to allow the debt-laden company to ramp up customer bills.
They also claimed that an inability to make sufficient returns would harm investor confidence in UK infrastructure.
However, in an interview with The Telegraph, Sir Neville says: “There is no complete protection for investment.
“I would expect investors – certainly the ones I’ve known over the years – still think that the UK is generally a safe place to do it. And the water industry hasn’t been a bad place to do it up to now.”
He adds: “I believe in free markets. That is free capital, capital at risk, and recognising those risks when you make the investments.”
The chartered engineer, who will retire on Monday, also says he is confident that Thames Tideway’s investors would be protected if Thames Water – which collects money on their behalf – ran out of money.
He previously helped to pioneer the private financing of public infrastructure in Britain, both as chief executive of road builder Tarmac and as an adviser to John Major’s government in the 1990s.
He also helped to lead the building of the Channel Tunnel and the Thames Barrier, served as chairman of Carillion and International Power and most recently has overseen the £4.5bn Tideway project.
The scheme – dubbed the capital’s super sewer – has involved boring a 15-mile tunnel beneath central London. It is designed to carry off sewage that currently flows into the River Thames when the city’s existing Victorian-era drainage systems are overwhelmed.
The tunnel is now complete and is being tested ahead of its handover to Thames Water, which manages London and the South East’s water infrastructure, next year.
Sir Neville says the Tideway Tunnel – widely viewed as one of the UK’s most successful infrastructure projects in recent years – should be used as a model for major schemes in future.
It was built and financed by a consortium of private lenders. But Sir Neville says the scheme was able to command strong investor confidence because it was effectively underwritten by the Government, which provided guarantees that taxpayers would step in if costs overran by more than 30pc.
This model, a modified version of the private finance initiatives (PFIs) used by previous governments to build schools and hospitals, also allowed investors to begin recouping their money while construction was in progress via a levy on household bills. And despite early fears that this levy could reach as much as £80 per year in the 2020s, Sir Neville says Tideway, the special-purpose holding company set up to deliver the project, had in fact achieved the much lower estimate of around £25.
This compares to previous PFI schemes that did not count towards the Government’s net debt measure and saw private companies bear all the risk.
“[PFIs] got bigger and bigger, and the risks got bigger and bigger, and so neither the contractors or the financial consortia wanted to take them on,” Sir Neville says.
“Here, you had the government saying, ‘We are the guarantor of last resort’ up front, so that just changes confidence levels all round.”
This made borrowing for the Tideway scheme cheaper. Other major projects that received no upfront taxpayer support, such as the Hinkley Point C nuclear power station, have faced large financing costs.
“The money becomes cheaper,” Sir Neville says. “The bill payers pay less at the end of the day, the contractors keep the shirts on their back – rather than being beaten into the ground – and investors make an acceptable return.
“It’s something that I applaud and have been glad to support, and it has been one of the fundamental reasons this project has been such a success.”
Tideway also managed costs carefully by breaking the project into chunks and assigning each section to a different team. Contractors were paid promptly but in stages and were expected to meet stretching targets.
Sir Neville says the Government should consider using a similar model to Tideway to fund a wave of new infrastructure projects across the UK.
A similar suggestion was voiced earlier this year by Alex Vaughan, chief executive of construction giant Costain, who suggested adopting it for the construction of the long-delayed, £9bn Lower Thames Crossing.
Sir Neville also urges ministers to rethink how the Government values large infrastructure projects, arguing that their benefit to future generations is not properly accounted for by the Treasury.
“One of the problems that we have had as a nation, frankly, is not actually preparing for our grandchildren,” he says.
“We live off Victorian infrastructure. Now, yes, the Victorians were great for us. They built all this stuff for us, whether it was the railways or the sewers or all those things. They actually gave us that legacy.
“But we don’t tend to do that. We tend to build for us and we sort of forget the other part of the equation.
“I don’t think they give enough credit to the long-term benefit. It’s fairly natural not to do that, to be fair – we all do it, we’re all quite short term in our own spending habits.
He adds: “But the Government should have a more Victorian attitude towards infrastructure and think a little bit more about what we should be doing and what we should be leaving behind.”
In this vein, he thinks the decision by the last government to cancel the northern leg of the High Speed 2 railway to save money will turn out to be a historic mistake.
“There’s no doubt it was very short-sighted to curtail it,” he says. “ Personally, I think it should be revived. And I think it will be revived. The question is, when and how and by [whom]?”
Reflecting on retirement, Sir Neville, who is now a great-grandfather, jokes that he often exhausts his wife by pointing out all the various roads, bridges, power stations and underpasses he helped to build.
“They’re all still there,” he says. “And I did them 60 years ago!”
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