London super sewer 'should be scrapped in favour of cheaper projects'

Former Ofwat chief says combination of storm tanks and better drainage would stop sewage running into Thames

The London super sewer should be abandoned in favour of smaller, cheaper projects to clean up the Thames, according to a veteran water regulator.

Thames Water, the UK's largest water company, wants to build a £4.2bn, 16-mile (25km) sewer from Acton to Abbey Mills to stop raw sewage flooding into the Thames during heavy rains. But Sir Ian Byatt, the director general of Ofwat from 1989 to 2000, argues that Thames Water and the government have failed to investigate cheaper alternatives.

"The whole idea of a massive tunnel is not the best way to deal with the problem. What I call the big shiny monster should be abandoned," he told the Guardian.

Instead he argues for a combination of smaller, cheaper projects, from storm tanks to better urban drainage, to stop sewage running into the Thames. "What matters is not a particular project, but dealing with the problem.

"All the developments in sustainable urban drainage, which are being looked at and developed and used in America, more work should be done on that."

Raw sewage pours into the Thames from London's Victorian sewer system once a week on average. Thames Water argues that a tunnel is the best way to deal with this problem, which they are obliged to tackle under the EU urban wastewater treatment directive. Their proposal, the Thames Tideway Tunnel, would be almost as wide as three double decker buses, and almost half the cost of the London Olympics.

Earlier this month the Planning Inspectorate opened a six-month investigation into whether the project should go ahead, but the final say lies with the government.

Although ministers are not expected to take a decision until summer or autumn 2014, the government made clear in 2011 that the tunnel was its "preferred solution". Byatt argues it should think again because the costs "seem disproportionate to the benefits available".

He also accused Thames of failing to maintain the existing network, with the intercepting sewers designed by the pioneering Victorian engineer Joseph Bazalgette running "dangerously close" to overflow. The amount of water leaking into the London sewer system was twice the industry average, he said.

"Sewers are always leaky… you expect a certain amount of infiltration [water leaking into the sewer] but the Thames rates are about double the rate you get in other companies. And that suggests – although it needs further investigation – that Thames haven't been doing what they should have done to look after their network."

Earlier this month Ofwat accused Thames of "underspend" on sewer flooding, failing to invest in new sewage treatment and not maintaining its waste water network.

Phil Stride, head of the Thames Tideway Tunnel at Thames Water, rejected the charge that the water company had failed to invest in the network. "London's sewers are in very good condition," he said, adding that the tunnel was "the most cost-effective [solution] and the only solution to meet environmental standards set by the Environmental Agency and the timetable set by the government"..

Thames also faced charges of ripping off the taxpayer earlier this year when it revealed it had paid no corporation tax.

The water company, which serves 14 million customers from Gloucestershire to Kent, is owned by a consortium led by the European arm of the Australian bank Macquarie Group. According to Byatt's analysis, Thames has paid out £2.2bn in dividends in the past six years, a figure Thames Water disputes.

This money should have been put aside to pay for London's sewage overflow problem, instead of being "repatriated" to "unknown offshore destinations", he said.

"If you have a lot of investment ahead of you … you put aside money so you can use it. You don't pay it out in dividends."

He is worried the taxpayer will end up underwriting the cost of the "risky" project: "The contractors are often very good at this job, the government is often not and then the risk ends up in the taxpayer's face."

This concern is shared by Simon Hughes, the MP for Bermondsey and Old Southwark, who is urging the government "not to write a blank cheque for Thames Water".

Byatt said: "It is no good saying that because Thames have paid out dividends and are highly geared that they can't afford the project. They can afford it and if they can't afford it I believe they should be put into special administration as Railtrack was" – referring to when the government refused to bail out the rail company in 2001, putting it into hands of government-controlled administrators. "You cannot run the utility sector as if companies were too big to fail."

The former regulator is arguing for a return to Victorian-era dividend payment schemes, meaning an increase in shareholder payouts would trigger money back for customers. "The customer should gain from the company doing well."

Thames Water rejected the idea it could have solved the sewage problem in the capital if it had not paid dividends.

"That wouldn't have been a sustainable thing to do," Stride told the Guardian. "Ofwat sets price limits for efficiently run companies if they can meet their statutory commitments. Part of financing their function is being able to pay reasonable returns to the shareholder and that is what we have been doing."

Water bills

One of the arguments for selling off the water industry – one of the big privatisations of the Thatcher government – was that companies would find it easier to raise funds to clean up the UK's sewage-clogged beaches and polluted rivers. But the architects of privatisation may not have imagined so many water companies would end up loaded up with debt in the hands of private equity investors.

Kemble Water, a consortium of private investors led by the Australian bank Macquarie, paid £8bn for Thames Water in 2006. Since then, Thames Water's debts have tripled to £9bn. An elaborate debt strategy – offsetting the interest payments on its debts against its tax liability – has helped Thames cut its corporation tax bill to zero in recent years, although it made £145m pre-tax profits in the last financial year. Now the company wants its customers to pay up: it wants to add a £29 charge on water bills next year to help pay for the super sewer.

• This article was amended on Monday 23 September 2013 to make it clear Thames Water disputes Sir Ian Byatt's analysis that it has paid out £2.2bn in dividends in the past six years.


Jennifer Rankin

The GuardianTramp

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