Thames Water customers will have paid more than half a billion pounds on top of their water bills once a new 25km sewage tunnel under London’s River Thames comes into operation next year, a project they will spend the entirety of its expected 125-year lifespan Have to finance lifespan.
London’s so-called ‘super sewer’ is funded by a surcharge on Thames Water customers’ bills, currently £26 per year per household. The utility’s 16 million customers have paid £430 million in the eight years since construction began and will have paid £540 million by March 2025, when the tunnel is expected to be operational, a study into the project’s accounting says.
The study comes as testing for the £4.5bn tunnel – a cost comparable to the £3.5bn forecast a decade ago – is expected to begin next week, with the removal of the deep underground Walls that kept it separate from the existing system while the new concrete caverns were built.
The project, called Tideway, will be the biggest improvement to the capital’s wastewater network in 150 years. It will divert the majority of wastewater from 34 combined sewer overflow pipes in the middle section of the river to a sewage treatment plant in south-east London.
The review of Tideway’s funding model – which serves as a blueprint for other major infrastructure projects in the UK such as the new Sizewell C nuclear power station – comes amid widespread concerns about a financial crisis engulfing Thames Water, the UK’s largest water supplier.
Thames Water’s parent company told bondholders earlier this month that it was in default, increasing fears that it could be nationalized again. The utility wants to increase its customers’ bills by up to 56 percent by 2030, making any surcharges for Tideway even more controversial.
Water utilities argue that higher bills are necessary to invest in new infrastructure and combat pollution, an issue that has become a lightning rod for popular anger.
David Hall, a visiting professor at Greenwich University who calculated the £540 million figure, said the project would “make consumers pay three times as much”.
“First they pay almost £0.5bn upfront, more than the entire equity invested by Thames Tideway shareholders, then they pay for the return on shareholder loans and then out of current debt.”
Thames Water does not own Tideway. When the 7.2 meter diameter tunnel was planned – in response to a 2010 EU directive to reduce wastewater runoff – Thames Water refused to inject new capital into the project. The water company’s shareholders at the time, which included Australian asset manager Macquarie, argued that its debts were too high and the risks of tunneling near major landmarks such as Parliament House were too great.
Instead, the British government and Thames Water agreed to create an entirely new company that would be privately funded and regulated by Ofwat. The name Bazalgette comes from the engineer who designed London’s sewage system 125 years ago. This company now operates as Tideway.
Tideway said its financing model had “proven to be effective, with private sector investment upfront and costs spread across many millions of households.”
To attract long-term institutional investors, the government acted as a hedge against some of the financial risks, including cost overruns. However, these “have not been utilized and are not expected to be utilized when the project is completed,” Tideway said.
Macquarie did not immediately respond to a request for comment.
Thames Water contributed around £1.1 billion towards the tunnel’s construction costs, while Tideway’s investors – including Allianz, Dalmore Capital, Amber Infrastructure and DIF, which sold their shares in 2022 – contributed £509.7 million Invested equity and loaned the tunnel The company had a turnover of £764.5m when it was founded in 2015.
Since then, shareholder loans have risen to 886 million pounds, for which those investors have agreed an interest rate of 8 percent until maturity in 2064, the accounts show.
In total, shareholders have received £298.1m over the last eight years: £243.6m in interest and £54.5m in capital repayments until March 2023 in lieu of dividends, Tideway said.
The rest of Tideway’s £4.2bn of debt is held with commercial banks or through other intercompany loans.
Although Thames Water will be responsible for above-ground infrastructure such as new parks along the river, Tideway will retain ownership of the tunnel and shafts, which will be inspected every ten years, some using drones.
Tideway’s organization and management are expected to be reduced in line with its operations starting next year and the company will ultimately have a smaller management team, although it declined to specify a time frame. From 2030, Ofwat will pay consumer bills for the bulk sewer in regular five-year periods.
The nine directors on Tideway’s board were paid a total of £6.6m in the year to March 2023; According to Tideway, the amount has increased from £2.95 million in 2022. Directors include Ruby McGregor-Smith, the former CEO of government contractor Mitie, and John Holland-Kaye, the chief executive of Heathrow Airport.
Mark Sneesby, who left as chief operating officer at Tideway in September 2021, received £1.25m from a long-term investment plan in the year to March 2023, up from £533,000 the previous year. Sneesby – who joined Tideway from Thames Water in 2014 – did not immediately respond to a request on LinkedIn seeking comment.
Andy Mitchell, the managing director of Tideway, was paid an extra £2.2m last year on top of his basic salary of £468,000 last year, taking his total package to over £2.7m up to March 31 last year, i.e almost £2.7 million to £9 million since its launch in 2014.
Tideway said that “the compensation reflects the milestones achieved in the construction of the tunnel and reflects the complexity and importance of implementing one of Europe’s largest infrastructure projects.”
“The project is the UK’s single most significant effort to tackle sewage pollution and ends the harmful effects of sewage pollution on the river,” it said. Despite challenges such as high inflation and the pandemic, “costs to water customers remained within the forecast range established at the beginning of the project.”
Thames Water declined to comment