On the Waterfront – Private Sector Funding for UK’s Flood Defences

The Government has committed £2.3bn over next six years to increase flood resilience. These are big numbers and are mostly unfunded. Private sector funding is required bridge the gap. We show how to obtain £1bn of private sector funding:

Utilitarian benefit (Net Gain: £300m)
Extreme flooding impacts utility companies in water, telecoms and electricity supply sectors. The Environment Agency estimates that the replacement value of flood defence assets it maintains is £606m. Yorkshire Water spent over £56m for claims against flood damage during 2015/2016 flooding. It makes economic sense for Utility companies to own and develop these assets. These flood defence assets could be privatised or transferred through a sale and leaseback. The utility companies should be given powers to recoup the costs through customer bills under the supervision of their regulator. Assuming a 50% take-up, we estimate a gain of £300m.

Plainly obvious (Net Gain: £300m)
The total value of Britain’s housing stock has passed the £6 trillion mark for the first time after gains of £385 billion in 2015 estimates Savills. For all new developments, Developers should pay a levy towards funding for local flood defences as part of planning application process. The levy should be fixed and variable. Fixed levy is based on the market value of the housing stock of the development, and the variable levy is based on the value of the housing stock built on flood plains. In 2015-2016, 150,000 house were built at an average value £200k. A levy of 1% would create an inflow of £300m

Pfizer’s appetiser (Net Gain: £85m)
Pfizer’s contribution to the Sandwich tidal defence is a good example of public-private partnership. The Sandwich Town Tidal Defence Scheme is a partnership between the Environment Agency, Pfizer and Kent County Council. Some areas of Sandwich had a low standard of protection, only 1-in-20 chance of tidal flooding every year. The Environment Agency developed a tidal flood-defence scheme to provide a 1-in-200 standard of protection to 488 homes and 94 commercial properties in Sandwich. Pfizer and Kent Council contributed nearly 50% of the overall costs. Global companies located in flood plain areas should be targeted and make a business case to share the costs with the Government to increase local flood resilience to cope for a 1 in 100-year flood from rivers (or 1 in 200-year flood from the sea). Pfizer’s contribution to the Sandwich tidal defence is a good example of public-private partnership because it made economic sense for Pfizer not to relocate 700 staff located on a 320-acre site, which was susceptible to a 1 in 20-year flood. The government should target to recoup 50% of the £170m spent on flood defences (as outlined in the Autumn Statement) by large companies impacted by flooding.

Insure and be damned (Net annual gain: £300m)
The launch of Flood Re insurance (www.floodre.co.uk) in 2016 is timely. Although it is not a panacea for managing flood risks, it is an important part of the solution that includes further flood defence investment and construction, implementing greater resilience in the upkeep of flood damaged property and most importantly cessation of construction on flood plainsAround 40 insurance companies, including Flood Re, offer annual protection up to £2.1bn. These companies need assets to hedge their liabilities. The Government should issue a £300m Treasury-backed Flood Defence Infrastructure Senior Bond, which pays a variable coupon and with a 25-year maturity with an annual cash yield of 5%.

Government policy has brought flood risk strategy to a high standard. The current Flood Resilience Review is a good opportunity to revisit these structures and uses innovative methods to fund flood defences. Failure to implement these measures will result in a missed opportunity for the country as a whole.

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