Ofwat has published new guidance on what factors it will take into account in determining whether an infrastructure project should be specified for delivery under the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013.

Photo: Thames Tideway Tunnel - completion of final section 

The regulator has issued the guidance following consultation in March 2024 – it supersedes the guidance Ofwat issued on 8 May 2015.

The Regulations were made with the purpose of allowing third party infrastructure providers to finance, design, build, maintain and operate large new infrastructure, in circumstances where the relevant water companies would be unable to do so without a detrimental effect on the rest of their businesses.

Specification means that the infrastructure project must be put out to competitive tender, rather than being delivered by the relevant water company in the course of carrying out its statutory duties.

The Thames Tideway Tunnel was the first large project to date to be delivered by a third party infrastructure provider under the Regulations. Of the 30 major projects accepted in Ofwat’s PR24 final determinations, three are proposed to be delivered via the SIPR model in addition to Thames Tideway Tunnel (TTT) project - the only project to be delivered through SIPR to date

The Regulations require Ofwat to publish guidance that it will follow in determining whether to specify an infrastructure project and whether to vary or revoke such a specification.

A specified project includes the financing and delivery of the infrastructure project. Delivery may include design, construction, maintenance and operation of the project. If a project is specified:

• the relevant water or sewerage company is prohibited from carrying out the project itself,except for any preparatory work set out in a preparatory notice;
• the infrastructure project (including its financing) must be competitively tendered; and
• the relevant water company must consult the Secretary of State for Environment, Foodand Rural Affairs and Ofwat concerning the terms on which the infrastructure project is to be put out to tender.

The new guidance sets out the factors that Ofwat will have regard to in deciding whether the successful bidder in a procurement for a specified project should be designated as an infrastructure provider under the Regulations.

Once designated, Ofwat may issue the designated infrastructure provider with a project licence, and the licenced infrastructure provider becomes subject to regulation under the Water Industry Act 1991.

Alongside an overview of the current regulatory framework for specified infrastructure projects in England, the guidance sets out the factors Ofwat will take into account:

• before specifying an infrastructure project;
• before varying or revoking a notice specifying an infrastructure project;
• before designating a company as an infrastructure provider; and
• before varying or revoking a notice designating a company as an infrastructure provider.

The first part of the test is whether the infrastructure project is "of a size or complexity that threatens the undertaker’s ability to provide services for its customers".

When first specifying the TTT project, the Secretary of State at the time said that "whether the size or complexity condition is satisfied in any particular circumstances is a matter of fact and degree. A variety of risks may affect whether an incumbent undertaker will have the ability to provide services to its customers if it undertakes an infrastructure project."

The Secretary of State considered the following risks as being particularly relevant in deciding whether to specify the TTT project:

• scale risk, arising from the size of the project in the context of the whole of the incumbent undertaker’s business;
• construction risk, arising from the nature of the project’s construction works in the context of the works usually undertaken by the incumbent undertaker;
• management risk, arising from the type and scale of management resource necessary to manage the project in the context of the management resources necessary to manage the rest of the incumbent undertaker’s business; and
• regulatory risk, arising from the duration of the project in the context of the usual duration of capital works in the incumbent undertaker’s business.

The updated guidance says Ofwat will take into account the issues facing the individual water company, which will include looking at:

• current and expected operational performance, including any specific operational performance challenges highlighted in recent Annual Performance Reports;
• the water company's other investment needs over the price review periods during which the project will be delivered;
• the company's actual financing structure and financial position including its ability to raise the capital required for the project in addition to its other current and future investment needs; and
• the impact raising the requisite capital for the project would have on the company's financial metrics and credit rating.

Click here to download the guidance in full