The UK’s spending watchdog fears water companies are not equipped to deliver nine new reservoirs and have underestimated the cost by £52bn.
In a new report into the privatised water industry, the National Audit Office (NAO) raised significant concerns over the sector’s ability to run competitive tenders and manage and deliver contracts.
It comes as companies plan to spend £290bn on infrastructure and investment over the next 25 years, but regulator Ofwat estimates a further £52bn will be needed to deliver up to 30 water supply projects, including nine reservoirs.
Gareth Davies, head of the NAO, warned that urgent action was needed and the sector needs to attract an unprecedented amount of investment.
“Given the unprecedented situation facing the sector, Defra and the regulators need to act urgently to address industry performance and resilience to ensure the sector can meet government targets and achieve value for money over the long term for bill payers,” he said.
The report said the new projects, which will see construction start over the next 15 years, were “critical” to the nation’s future water supply but the NAO fears the sector lacks the skills to deliver them.
“Ofwat recognises that such projects need greater certainty than the five-year price cycle offers. It also recognises that the water companies have delivered very few projects of this size and scale in the last 30 years and therefore do not necessarily have the depth of skills or experience to do so in the volume now expected,” it said.
“Given the scale and the early stage of all of these projects, there remains considerable uncertainty.
“Ofwat told us there is also a risk that water companies may not currently have the procurement skills to run a competitive tender and manage and deliver contracts for this scale and duration, as this is very different from their day-to-day operations.”
Ofwat told the NAO it expects water companies to use third parties to design, build, finance and operate 24 of the 30 projects, but retain the projects under the water companies’ own regulatory licences. It expects three of the 30 projects will have a separate licence and be regulated separately from the water companies.
The NAO criticised all three regulators – Ofwat, the Environment Agency and the Drinking Water Inspectorate – for not having a clear understanding of the condition of water infrastructure and the funding needed to maintain it.
It said the average rate of replacement for water assets was 125 years but if the current pace is maintained, it will take 700 years to replace.
“The regulators do not have a shared understanding of the condition of water and wastewater assets, and the level of funding needed to maintain them,” it said.
“Ofwat expects companies to maintain assets through base expenditure. Despite overspending on operational expenditure over the last four years, companies have done less work on specific areas of asset health than Ofwat’s expectations.”
It said water companies’ spend is expected to increase by 70 per cent over the next five years (2025–2030) compared with the previous five years (2020–2025).
“Defra and the water sector’s regulators have not encouraged water companies to spend what they need to deliver the performance expected. The sector now faces significant environmental and supply challenges,” it concluded.
“To meet these challenges, it will need to attract investment and spend at a rate not seen before. The regulators must understand the scale of the challenge in terms of cost and deliverability and the condition of assets across the sector, ensure the sector raises the investment needed and meets government outcomes, and achieve value for money for bill payers.”