Thames Water is coming under ongoing pressure with regard to the funding needed to financé the costs of building the Tideway Tunnel – last week MP Simon Hughes and format Ofwat Director-General Sir Ian Byatt questioned the proposals, while articles in the Guardian, the Times and the Financial Times also flagged up serious concerns on the subject.

 In a joint letter to the Financial Times last week, the MP and Sir Ian described the costing of the project as “casual and scarcely under control”, commenting that “the water industry is no stranger to over-engineered and gold-plated projects.” They want a proper investigation of alternative ways of dealing with storm water overflows to be carried out under the supervision of industry regulator, Ofwat, not just by Thames Water, the monopoly supplier.

They also say that Thames Water has paid substantial dividends to its parent company “on an ever growing scale.”, and that “regulated water companies are allowed to charge prices as though they were freestanding companies; but this carries an obligation to put aside funds when they are faced with substantial investment, especially on big projects.”

The former industry regulator and Liberal Democrat MP suggested that if Thames Water is unwilling to make a rights issue, its ultimate owners, Macquarie, should be expected to return funds to the utility. Failing that, the utility should go into special administration (allowing for continued service to customers), with another company or financier allowed to take over its activities.

The response came in reply to a earlier letter in the FT from Sir Peter Mason, Chairman of Thames Water saying that other international cities such as Paris faced with a similar problem of a legacy sewer system that has run out of capacity are implementing similar solutions to the proposed Thames Tideway Tunnel –which have been public sector projects in every case. His letter states:

“ …long and deep tunnels through complex geology are generally not financeable in the private sector. In the UK, under new legislative provisions from 2010, the Thames Tideway Tunnel is expected to be delivered by a special-purpose ring fenced vehicle. All major project costs, including finance, will be competitively sourced. It is this company, not Thames Water, that is expected to benefit from contingent financial support from the government for exceptional project risks that the private sector regulated water industry was not set up to absorb.”

The Times newspaper also separately published a letter from the MP and Sir Ian on 5^th November, while Simon Hughes writing in The Guardian on Saturday said serious questions must now be asked about whether the structure some parts of the privatised water industry is the right one to deliver essential services, citing Thames Water as standing out as “a particularly disturbing case.”

Thames Water has also come under fire from other sectors of the press about the proposed supersewer, whose costs have risen from £1.7bn when the project was first conceived to its current estimate of £4.1bn.

In an article in The Observer yesterday, commentator Will Hutton described Thames Water as “ crippled with debt” which has “jumped from £1.8bn to £8bn over the past decade under its foreign owners.” He commented:

“Thames Water has done what the regulator asked but no more. It has not been concerned to make the water system more resilient, with, say, back-up reservoirs to guard against climate change … Nor has it managed its affairs so that it has spare capacity for the unexpected or for a big project like the Tideway tunnel.”

Will Hutton also expressed concerns about the Government’s new infrastructure guarantee saying that the following four crucial reforms are required before the guarantee scheme is launched.

• Ofwat should have much greater powers with regard to water companies' balance sheet strategies: borrowing plans should only go forward with its prior approval and it should be able to launch periodic stress tests.
• As public service companies, all British water companies should pay corporation tax as a percentage of turnover, with proper deductions for investment and depreciation, but no allowances for any financial transaction with a tax haven.
• Non-executive directors of utilities should be made legally responsible for ensuring that the utility's first obligation is to discharge its purpose as a utility rather than to be financially engineered to induce high shareholder returns.
• The Government should take a golden share in each company that accepts a guarantee.

An article in the Financial Times yesterday suggested that the water companies – specifically Anglian Water, Thames Water and Yorkshire Water had come under fire “for reducing their tax bills to nothing, or just a few million pounds, despite earning hundreds of millions of pounds in operating profits.”

The FT said that tax deferrals ( granted for the utilities’ £multi-billion AMP5  2010 to 2015) meant that neither Anglian Water or Thames Water had paid corporation tax in the 2012 financial year. Yorkshire Water commented that it was “happy to play a part in any future debate” if it was felt that rules needed to be changed.

The FT was referring to detailed coverage in The Observer over the weekend, ahead of questioning by the House of Commons Public Accounts Committee this afternoon of Google, Amazon and Starbucks over their tax affairs and avoidance of UK corporation tax. The Observer newspaper has been conducting a detailed investigation into issues surrounding corporate tax avoidance.