Can the water industry afford major capital schemes?

In the budget Chancellor Alistair Darling announced he is commissioning an investigation into the cost of civil engineering works for major infrastructure projects, building on “existing evidence” of “potentially high costs” of UK schemes compared to the rest of Europe.

Affordability of water bills is likely to become a big issue over the next few years. Already Thames Water is seeing sustained opposition to its Tideway Tunnel proposals from the likes of Hammersmith Borough Council who are concerned about the ability of its residents to afford the bill increases needed to fund the massive investment.

Over the last 20 years, water and sewerage bills have increased by over 40% in real terms. One aspect is that the cost of bad debt is rising and now accounts for about £12 on each customer’s bill. In areas like the far SW water bills are already a major political issue. With the large investment required to meet the challenges posed by Ofwat’s strategy for delivering sustainable water the situation is likely to get worse. It will only increase the incentive for water customers who avoid paying their bills even though they could afford them.

This poses a real challenge for all of us in the water sector. Major capital schemes have often been seen as the preferred option given the way the regulatory and financial framework is tilted in favor of capital schemes. Finding significantly lower cost alternatives perhaps involving more Opex, will require a step change in innovation and that we attract bright young graduates into the industry – neither looks likely at the moment.