Our case studies provide a sample of the work and projects that we have been involved in. The projects have been successful in their development and delivery due to the work of many individuals and organisations.
More Than A Tunnel – Thames Tideway
Mega projects require new ideas and the development of existing concepts to create a delivery model that surmounts the many obstacles they face.
In the case of the Thames Tideway Tunnel, multiple stakeholders (including Thames Water, Ofwat, HMG, the EA and the investor community) and many other public bodies and commercial organisations with an interest in, or affected by, the proposal all came together in support of that vision and gradually aligned their interests to a common purpose.
This culminated in a bespoke regulatory environment, a sound (but untested) delivery model and a ready-to-go new utility, with ambitions to raise the bar in all areas associated with infrastructure development and delivery – design, construction, health and safety, procurement and implementation – to make the TTT a tunnelling project that is much more than it seems.
The need for, and background to the TTT, are now well understood. But essentially, the Thames Tideway Tunnel (25km, 7.2 meters in diameter with a volume of 1.24m m3) runs from Acton to Abbey Mills, where it connects with the already constructed Lee Tunnel. The purpose of the two schemes is to prevent the discharge of up to 39 million tons of sewerage into the River Thames every year.
There are many strands to getting a mega project off the ground but the focus of this case study is the innovative and ground-breaking delivery model that was required to be developed to attract financing (up to £4.2 billon) on a value for money basis for the construction of the project.
The delivery model
A project of this scale and complexity has challenged everyone involved to think differently. Crafting a vision that Thames Water, HMG, Defra, IUK and Ofwat could buy into was critical to establishing an effective delivery model. Stakeholders came to the project with a shared objective, but each had its requirements and issues. The stakeholder group all worked together to understand and align objectives to create a clear pathway to deliver this procurement.
Traditional models for infrastructure delivery were considered, assessed and adopted, adapted or dismissed, and new ideas were actively encouraged to create a new delivery model to meet all the stakeholders’ objectives.
The eventual approach was to employ a delivery team to create a project that was “ready to go” on the date of Licence Award. The model resulted in a suite of developed contracts that presented outstanding value for Thames Water’s customers, where all aspects of the risk and return profile were tested to ensure the result was balanced and fair, yet still attractive to investors.
The innovative approach to infrastructure delivery that the Infrastructure Provider or the IP represents continues the tradition – laid down by our Victorian ancestors – of finding new and better ways to finance and deliver major capital projects. The delivery model had the following key features:
- A licence from Ofwat, and the tool-kit that a new utility needs to deliver the project
- A resourced special purpose company, ready to go – Thames Water set up a new, fully resourced company (Thames Tideway Tunnel Ltd, or TTT Co), complete with board and management team, with a total staff complement of around 400 with all the necessary skills to deliver – a world class team to deliver a world class project
- The contracting structure, in place – Thames Water launched more than 70 procurements to put in place the necessary works and services contracts – again ready to start on Licence Award. These contracts were tendered under the Utilities Contracts Regulations
This covered all aspects of the project, from early works such as site clearance to health and safety, monitoring, insurance, marine, IT/IS, SCADA and to the main tunnelling works contracts.
The main tunnelling works have been divided into three packages (West Main Works Contract, Central Main Works Contract and East Main Works Contract) to create package sizes that were readily biddable by a wide field of contractors to spread implementation risks. Each of the three different geologies through which the TTT must be bored requires a different type of tunnel boring machine. The downside exposure to failure of any contractor was mitigated by a strong JV on each package, a robust security package and a “win one only” rule, which means that failure on one package would have a limited contagion effect.
All three main works contracts are based on the New Engineering Contract 3 Engineering & Construction Contract (NEC3 ECC) (Option C) terms and conditions, including 50/50 pain/gain sharing to incentivise and align effective cost control. This form of contract is widely used in the construction industry, including on the 2012 Olympics and Crossrail.
A project licence issued by Ofwat
A project licence was developed by Ofwat, and is based on the well-established water industry regulatory framework in England and Wales (the project licence). As the part of the IP procurement (discussed below), the new equity investors engaged with Ofwat and had an opportunity to make proposals to deliver more value for customers. Once the investors had satisfied Ofwat that they met the regulator’s requirements, a public consultation was launched that ran in parallel to closing out the project and financing documents.
Planning permission in place
The planning permission for the scheme (the DCO) and access rights to all necessary land was applied for by Thames Water in 2013 and granted in September 2014. This application was the largest planning permission ever sought, involving more than 100,000 pages of documents and drawings.
A ready-made outline design and operating techniques
An outline design had been prepared and reviewed over the previous seven years using CH2M Hill as design manager, and the EA worked with the other stakeholders to develop the operating techniques for the scheme of improvements to London’s sewerage network.
A marketable risk/return profile
Thames Water, Ofwat and HMG agreed an investment profile that was designed to attract investment from the widest possible investor pool, and that offers a risk/return profile broadly comparable to that of an investment in a business-as-usual regulated water utility. The driving factor was creating a balanced model that would serve to attract the right investors. Ofwat has built on existing regulatory approaches, which it knows have worked effectively, such as the use of a regulatory capital value. The benefits of outperformance, as well of the risks of overspend, will be shared by customers and the IP.
The approach centred on the weighted average cost of capital bid by the successful investors, which is fixed throughout construction and the system acceptance period, during which the TTT is proven – in total a period of up to 13 years from Licence Award. In addition, the revenue building blocks in the project licence are fixed during the construction period.
A government support package to manage extreme/ exceptional risks
Contingent financial support will be provided by government for exceptional project risks that cannot be borne by the private sector on terms offering value for money to Thames Water’s customers. This support is referred to as the government support package or GSP. Notwithstanding the support this gives the project, it is important to stress that this is certainly not a government guarantee. In broad terms, the GSP addresses the following circumstances:
i) Where insurance claims exceed the limits of specified insurance policies, the government will meet the liability above those limits. In addition, if certain project insurances become unavailable in the market and are essential for the project to continue, the government will consider providing that cover
ii) Should the IP be unable to access debt capital markets because of national or international economic or political events, the government may provide a committed revolving facility on commercial terms
iii) Where exceptionally large cost overruns above the threshold out-turn occur and the IP is unable or unwilling to source additional private sector capital, the government may invest equity in the project
iv) Where certain significant, prescribed events occur, the government may discontinue the scheme and pay compensation to debt and equity investors. Fees will be payable by the IP to the Secretary of State under the GSP to reflect the value of these security arrangements. In addition to HMG approval, the GSP has also received state aid clearance from the European Commission.
The IP procurement
The package – the delivery model, TTT Co, the suite of construction contracts – was sold to the market through a procurement process that focused on price (i.e., the WACC), discouraged changes to the suite of contracts, and tested deliverability of the financing requirements. From launch to Licence Award took just 13 months – a timeline that would be the envy of any PPP project, and testament to the delivery model’s effectiveness and the appetite of the investor market. Central to making this happen was a dedicated and experienced deal team (comprising Thames Water, Ofwat, HMG and TTT Co), who worked to ensure the delivery model provided a balanced and appropriate risk allocation, but that still allowed for market engagement on areas of importance to potential investors.
Potential investors submitted expressions of interest in the project, many of whom went on to form consortia to bid for the TTT to ensure they had the right blend of experience, expertise and resources to meet the requirements of stakeholders.
This procurement went through a number of rounds where consortia were given the opportunity to due diligence the project and refine their bids. This included detailed sessions with the management and project teams from TTT Co.
Those teams at TTT Co played an essential role in providing confidence to potential investors that the right team was in place to carry the project forward on Licence Award, and confirmed our view that we had put together a world-class team to deliver the project.
This competitive process resulted in the appointment of an IP that fully understood the detail of the project and had invested in the ideals and vision of everyone who has worked to develop the TTT. The eventual winner was Bazalgette Tunnel Ltd – owned by Amber Infrastructure, Allianz, Dalmore Capital and DIF, and now branded as Tideway.
Now that the procurement phase has been completed, the two sister utilities (Thames Water and Tideway) will go on to implement the project. Tideway will be responsible for designing and building the TTT, and Thames Water will continue to implement a £1.2bn series of land purchases, enabling works and upgrades to the existing sewer network to accommodate the TTT.
In addition to the normal contracting structures, Tideway, Thames Water, the main works tunnelling contractors and the system integrator (SCADA) contractor are all part of a stand-alone construction alliance agreement where all parties are incentivised to work collaboratively to identify and implement economies of scale and enhance best practice to deliver successful outcomes for the programme as a whole in a way that delivers value for money in both the construction phase and the operations phase.
This model has real pain/gain levers to ensure that everyone, irrespective of their scope of works, is fully aligned to the programme’s overall objective to deliver a world-class solution while delivering even better value for money to Thames Water’s customers.
Legacy for Infrastructure Development
Beyond the direct legacy for the TTT, the delivery model and the vision behind it (including the GSP) is something that has made the industry sit up and take note. There is no doubt that the procurement was an unqualified success – both in terms of delivering in just 13 months for pricing, which surpassed expectations, and in attracting the attention of investors who do not normally accept construction risk.
This has meant the costs to Thames Water’s customers for the TTT is now estimated to be between £20 and £25, in today’s prices – much lower than the previous worst-case estimate of £70–80.
We occupied various senior positions within the client team for the project. Amar Qureshi, as Commercial Director was responsible for the development of the Delivery Model and negotiations with the investors. He also was responsible for the procurement of the Main Works Contracts, at the later stages, together with TTT colleagues. Mike Pugsley, as Head of IP procurement was responsible for the running of the IP procurement, reporting to the Finance Director for TTT. Seb ensured that the procurement was project managed effectively, covering the due diligence, the extensive data room and the mechanics of the procurement itself.
This case study first appeared in Project Finance International, October 2015.
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“I worked with Thames Water closely on the high profile Thames Tideway Tunnel. The project presented numerous challenges to each of the key stakeholders. Short effective lines of communication were introduced to ensure against delays to an already time constrained-project. I worked directly with Amar and found commercially he was robust and fair – I enjoyed dealing with him. He also demonstrated a real commitment to ensuring the entire team – client and contractors – were aligned in their goals and to the health, safety and well-being of the teams on the ground – both of which are great to see in practice.”
Mark Coleman FCIOB, MIDE, IExpE Group MD the Coleman Group
Mark heads the Coleman Group which offers specialist services in Demolition, Engineering, Remediation and Specialist Cutting. He is responsible for all key areas of the business spread, across business, finance, safety and delivery. He works closely with all the people within the company to ensure that the Group is leading the industry in key areas such as innovation, systems and procedures and company culture.