Water and Effluent Treatment Magazine
Issue link: https://fhpublishing.uberflip.com/i/579379
A licence to invest • Having licensed Bazelgette Tunnel to finance and deliver the Thames 'super sewer', Ofwat is keen to adopt the model elsewhere. Is there potential for this arrangement on other projects in the industry? Andrew Don finds out. O fwat will shortly make its initial proposals on the potential for licens- ing private investors for major water projects, Thames Tide- way Tunnel (TTT)-style, Andrew Don reports. The £4.2bn TTT project, licensed to the Bazalgette Tunnel consortium, represents cutting-edge innovation in terms of financing a complex water project. TTT will see a major new sewer beneath parts of London built to reduce overflows of untreated sewage into the Thames. Competitive procurement brought the impact on customers down from original estimates of £70- 80 a year to the current £20-25 estimate. Ofwat points out it is the first time in the sector that the cost of capital – the rate of return that lenders or investors require to support investment – has been set through a competitive process. The water regulator clearly sees potential for this type of arrangement for a handful of other major projects. Implications These would be schemes that could be delivered under the new regulatory framework – the Flood and Water Management Act 2010 – allows for projects that are "of a size and complexity that threatens the undertaker's ability to provide services for its customers". A competitive procurement process to appoint infrastructure providers, with everything regulated by Ofwat under a project licence, is seen as a solution to such risk. Ofwat put out a discussion paper over the summer. It says it is not officially a consultation – "at this stage we're looking for ongoing discussions and ideas", it says. It plans to make initial proposals this December on how this kind of model can be applied. Appetite Of course, there are risks, as with any type of large and complex project, but most agree that in the TTT's case, the arrangement offers Thames Water customers great value for money with a low 2.5% cost of capital which creates an appetite to explore this type of model further. The risks involved include project complexity and length, but, as Fitch Ratings Infrastructure Group senior director Federico Gronda told WET News, these can be mitigated, for example, by strong and beneficial contractual provisions. These include the regulatory mechanisms in place designed to minimise adverse effect of market volatility to finance construction, and backstop support from government in case cost overrun exceeds 30% of the base costs. Amar Qureshi, major projects director at Thames Water, has no doubts about the model. "The key point is it is designed to be used for large, complex projects and will enable the incumbent undertaker to effectively continue its core service while this large complex project is undertaken. In any case where you have a large complex project and it represents value for money, then the model can absolutely be replicated," he believes. Qureshi makes the point that the model could be used for projects that are at least £300-£500M, but relative to the size of the incumbent water and sewage undertaker. What is clear, and Qureshi confirms this, is that there is lots of capital available which needs to be deployed on a long- term basis and so a good investment opportunity will always attract investors. Key driver Tunnels and extensions to networks that discharge into urban areas, and new and expanded reservoirs are projects that could be suitable. The outcome for customers would need to be beneficial both financially and in terms of service provided. The key driver has to be value for money. Competition among bidders is what delivers this. "Where you can provide value for money for customers you should certainly explore use of this model, Qureshi believes. Marc Barone, managing director, water, UK & Ireland at AECOM, design partner for the TTT, points out the financing model is not fundamentally different to the Public Private Finance / Private Finance Initiative (PPP/PFI) project finance model that has been successfully employed in the UK for the past decade or so on projects including expansion of the London Underground and armed forces accommodation. Indeed, the UK has a handful of operational wastewater treatment works projects that were funded through private finance. The News+ OCTOBER 2015 WET NEWS 7 key difference in TTT was the size of the deal and the complex structuring involving four equity providers and a consortium of lenders to provide the required financing. Barone believes the successful financing of TTT should set a precedent, and open the possibility of further deals in the sector. He believes it is "a fallacy" to assume that a bigger deal can introduce higher returns. "Attractive returns are available from small-to-medium-size deals," he says. And the project has shown that it is possible that pension funds can successfully invest in infrastructure – particularly significant because the project bears construction risk, something that pension funds have traditionally been keen to avoid. Last word However, Nicola Walker, associate at global legal firm Clyde & Co, experts in infrastructure, says it is only in "rare" circumstances that an alternative model is likely to be used. It is also debateable whether TTT establishes a coherent model which is likely to be replicated because some of its features derive from the particular characteristics of the transaction – for example, the particular nature of the construction risks, and billing arrangements for customers. "It involved considerable complexity including procurement being conducted by Thames Water and the government support package, so the cost of procurement will have been high," Walker says. TIMELINE September 12 2014: Decision on application for development consent order for TTT taken July 14 2015: International Public Partnerships announces Bazalgette Tunnel, comprising INPP, Allianz, Amber Infrastructure Group, Dalmore Capital, DIF and Swiss Life Asset Mangers appointed preferred bidder for the TTT August 24 2015: Ofwat grants Bazalgette Tunnel its licence as a new regulated utilities business, separate from Thames Water 2016: Main works preliminary construction begins 2023: Works scheduled to be completed Tunnels, network extensions that discharge into urban areas, and new or expanded reservoirs could be suitable projects