Thames Water has published details about the potential procurement, designation and licensing of the infrastructure provider which will be needed for the construction of the Thames Tideway Tunnel Project – with an estimated value of £4.2 billion.

The utility has published the information (in the form of a Prior Information Notice) in order to obtain market feedback and gauge potential market interest prior to the start of the formal procurement process.

Thames Water said it wanted to make the market aware of the potential opportunity in relation to the role of an infrastructure provider for the Project and to commence a market engagement exercise in relation to the role. The Project has been developed by Defra, Ofwat, TWUL and the Environment Agency to meet the UK's obligations under the Urban Waste Water Treatment Directive.

The company is now seeking to engage with interested parties to confirm the chosen approach to the procurement of an infrastructure provider, to advance the parties' understanding of the role of the infrastructure provider and to obtain market feedback.

Interested parties will be encouraged to form consortia and submit Pre-Qualification Questionnaire responses as consortia unless individual entities are able to meet the PQQ criteria on their own.

The notice sets out the intended structure and role of the infrastructure provider, which is likely to include:

• financing of the Project, which would be based on a revenue stream generated by regulatory building blocks similar to those for a water and sewerage company. These would be modified to meet the specific requirements of the infrastructure provider such that an Regulatory Capital Value is built up over the construction period to which a weighted average cost of capital (WACC) would be applied to generate an income stream equivalent to return for finance. It is intended that the WACC would be bid for the construction period and would be set by Ofwat thereafter;
• the design and construction of the Project, pursuant to three main tunnelling works construction contracts which are currently being procured by TWUL and would be entered into by the infrastructure provider once designated and licensed. The Invitation to Negotiate for the first of the construction contracts was issued on 4 December 2013. The infrastructure provider would be required to enter into the three construction contracts and manage the design and construction of the Project;
• project management of the design and construction contracts. The infrastructure provider would be required to enter into a project management services agreement with CH2M Hill, TWUL's existing project manager, to utilise the services of the existing project team who would transition across to the infrastructure provider on designation;
• the ownership of the Thames Tideway Tunnel and associated infrastructure once constructed; and
• operation and maintenance of the Thames Tideway Tunnel and associated infrastructure from the end of the construction period (which commences on the acceptance date). Prior to the acceptance date of the Tunnel and associated infrastructure, the infrastructure provider would also be responsible for the operation and maintenance of certain specified components of the assets.

The utility is now inviting potential applicants to record their interest in the project.

In December the Department of Environment Food and Rural Affairs issued its draft reasons for specifying the proposed Thames Tideway Tunnel as a ‘specified infrastructure project' for public consultation. If the Project is subsequently specified by the Secretary of State as a ‘specified infrastructure project', Thames  would be required to tender the Project and would itself be prohibited from carrying out the Project.

The utility would select the preferred tenderer and Ofwat would then be expected to designate the preferred tenderer as an infrastructure provider with responsibility for the design, construction, ownership, maintenance, operation and financing of the Project. Ofwat would also then be expected to grant the infrastructure provider a project licence. Scheduled date for start of the contract award procedures is 17^th April 2015.

“A unique investment opportunity within core UK utility infrastructure”

Thames Water described the role of infrastructure provider as representing “a unique investment opportunity within core UK utility infrastructure.” The infrastructure provider would be a new regulated utility formed to provide infrastructure to address the problem of sewage discharges into the river Thames – the provider would be the operator of the Thames Tideway Tunnel and associated infrastructure and would be responsible for periodic maintenance of such assets.

The infrastructure provider would be funded by customers to build, finance and maintain a new overflow tunnel, which will carry the sewage from Acton to Abbey Mills, where it will re-enter the existing network and will be treated by Thames Water.

The revenue of the infrastructure provider to deliver the Project would be set through regulatory building blocks similar to those for the existing water and wastewater companies - modified to meet the specific requirements of the infrastructure provider.

A “robust capital expenditure programme for the Project” is being developed

The PIN says that a “robust capital expenditure programme for the Project” is currently being developed by Thames, including key features which would be in place at the time of completion of the procurement process:

• extensive design and development work already undertaken and procurement of the construction contracts would be largely completed;
• an infrastructure provider management function that has been established and is operational, along with related systems and processes, with project management consultants already appointed; and
• an opportunity to invest in an on-going project with contractors already tendered by the time the infrastructure provider is procured.

Thames Water says that the iinfrastructure provider would have a risk/return profile that investors in the water sector are accustomed to throughout its life, reflecting the following factors:

•  the infrastructure provider would be in a historically stable political, legal and tax environment;
•  the infrastructure provider model is based on the well-established UK water regulatory framework;
• tenderers for the infrastructure provider role would be required to bid their WACC for the construction period of the Project;
• the infrastructure provider would be entitled to a running yield available throughout the life of the infrastructure provider with dividend payments permitted throughout the construction period. Payment of dividends would be subject to the financing structure and performance and success in delivery of the Project; and
• operational risk for the Project would be in line with or below that typical of operating assets of other WASCs.

Provider to benefit from “a modified regulatory regime based on well-established UK water regulatory framework”

The PIN says that while the infrastructure provider would be responsible for the construction of the Thames Tideway Tunnel and associated infrastructure, it would also benefit from “a modified regulatory regime based on the well-established UK water regulatory framework set out in the project licence.” Construction cost overruns would be shared with contractors, with investors required to fund costs up to a pre-specified maximum threshold amount. Overall cost overruns would be shared with customers through regulatory mechanisms.

Government support package available in construction phase

On the possibility of Government funding, the Notice states:

“In addition to the revenue provisions in the project licence, the Government may provide contingent financial support to the infrastructure provider for exceptional project risks where this offers better value for money for customers and taxpayers. This support would be in the form a government support package (GSP) during the construction phase. The GSP, in combination with the other measures described in this notice, would aim to fulfil the duties imposed on the Secretary of State by the Water Industry Act and ensure that the Project can raise private sector finance while meeting State Aid and other requirements.”

Interested parties will be encouraged to form consortia and submit Pre-Qualification Questionnaire ("PQQ") responses as consortia unless individual entities are able to meet the PQQ criteria on their own. TWUL will not, however, require consortia to be established as entities at the PQQ stage. Should there be any changes to consortia members after PQQ, the consortia as amended, would be required to demonstrate that they still meet the PQQ criteria.

Interested parties who wish to register their interest in the opportunities available in the Project and/or to register their interest in taking part in the market consultation exercise will need to move quickly - the deadline for registering interest is 4:00 pm on Friday 31.1.2014.

Registered Waterbriefing readers can down load the PIN in full  here. Registration with Waterbriefing is free.