Ofwat has today published a paper explaining the reasons behind its decision to grant a Waiver Notice to Infrastructure Provider Bazalgette Tunnel Ltd on procurement provisions for a number of contracts related to Thames Water £4.2 billion Tideway Tunnel project.

 The water industry regulator’s Waiver Notice dis-applies the requirement on Bazalgette Tunnel Ltd (now known as Tideway) to conduct a regulated tender process in certain circumstances. Schedule 1 to the Waiver Notice lists the following contracts in respect of which the waiver applies:

• the three main construction contracts and the System Integrator Contract;
• the contract for the services of an Independent Technical Assessor;
• two framework agreements – one dealing with occupational health and the other dealing with access control and security.

The three main construction contracts in the Waiver Notice are worth a total of up to £2.3 billion as follows:

West: Joint venture of BAM Nuttall Ltd, Morgan Sindall Plc and Balfour Beatty Group Limited: £300m - £500m

Central: Joint venture of Ferrovial Agroman UK Ltd and Laing O'Rourke Construction: £600m - £950m

 East: Joint venture of Costain Ltd., Vinci Construction Grands Projets and Bachy Soletanche:£500m - £800m

 Ofwat awarded a project licence to Bazalgette Tunnel Ltd (now known as Tideway) in August 2015 to carry out all activities apart from those which Thames Water will carry out under the Preparatory Work Notice for the Tunnel.

Waiver Notice dis-applies obligation to apply procurement provisions under SIP Regulations

Ofwat issued the Waiver Notice under the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 (the SIP Regulations) dis-applying to a limited extent Tideway’s obligation to apply the procurement provisions set out in the Regulations.

The SIP Regulations apply a procurement regime to the Project which Thames Water or Tideway as the designated licensed IP must follow in circumstances where the Utilities Contracts Regulations 2006 or the Public Contracts Regulations 2015 do not impose a requirement to conduct a competitive tender process.

 However the SIP Regulations also allow Ofwat to issue a notice to dis-apply the regime in relation to the licensed IP.

General questions raised in consultation about whether Thames Water complied with relevant procurement requirements

The regulator consulted on the Waiver Notice as part of a wider consultation on Ofwat’s intention to issue a project licence to Tideway. Ofwat points out in the paper that out of six responses received, only two referenced the Waiver Notice.

The first response was from Thames Water supporting the issue of the Waiver Notice. The second respondent did not support the issue of the Waiver Notice, instead raising a number of general questions about whether Thames Water had complied with the relevant procurement requirements in its procurement of the IP.

 After the consultation, Ofwat exercised its discretion to issue a Waiver Notice in respect of:

1. specified construction related contracts; the project management contract (PMC) and a Management Services Agreement (MSA);
2. all contracts below a specified threshold value;
3.  all contracts that fall within some general exemptions that are available to utilities under the UCR

 Ofwat: customers protected because specified contracts were subject to a competitive process

 Commenting on its decision, Ofwat said it was satisfied that customers would be protected because the specified contracts were all subject to a competitive process conducted by Thames Water under the UCR – the water company  procured all the contracts on behalf of the IP.

In some instances, the contracts were novated to the IP by Thames Water, once the IP had been appointed, and in other instances the IP entered into the contracts itself, following its appointment.

 Thames Water consulted Ofwat and Government prior to adopting a procurement strategy that was designed to facilitate the procurement of the construction contracts and the procurement of the IP taking place in parallel.

Cost information gleaned from construction contracts enabled IP bidders to bid WACC

The alternative to this approach would have been for Thames Water to first procure an IP and for the IP to then procure the construction and other contracts. Ofwat said it had agreed with the parallel approach because:

• bidders for the IP were asked to bid a weighted average cost of capital (WACC) and without cost information gleaned from the procurement of the construction contracts this would have been difficult;
• if Thames Water had first procured the IP on the basis that the IP would then procure the construction contracts it would not have been possible to award the construction contracts in 2015 to enable construction to begin in 2016.
• This would have prolonged the period of non-compliance with the Urban Waste Water Treatment Directive and exacerbated the consequences of non-compliance.

Waiver Notices for Project Management Contract & Management Services Agreement

Ofwat also granted a Waiver Notice in respect of the Project Management Contract (PMC) and Management Services Agreement(MSA) for the Tunnel. The PMC has been entered into between Tideway and CH2MHill Inc. and the MSA has been entered into between Tideway and Thames Tideway Tunnel Limited, a subsidiary of Thames Water set up as a dedicated project team that would transfer to the IP following licence award.

CH2M was initially appointed by Thames Water in 2008 following a competitive procurement process to provide project management services to Thames Water for the Tideway Tunnel.

The regulator said that in order to provide continuity and a transfer of necessary skills, Thames Water negotiated a new contract with CH2M and the IP was required, as part of the procurement process, to enter into the new contract with CH2M. Ofwat commented:

 “We considered that the continued involvement of CH2M in the management of the project was efficient and likely to result in value for money for customers. We therefore agreed that the IP should not be required to tender for a PMC provided that the terms of the contract that the IP was required to enter into with CH2M had been subject to an independent bench marking exercise and only core skills and experience were transferred to the IP under that contract. This was done and we were consequently satisfied that customers would be protected and the arrangement represented value for money.”

In Ofwat’s view, this enabled the IP to start delivering on its obligations immediately after appointment. The regulator also said that if the IP had been obliged to procure its own PMC, the competition for an IP may have been distorted if CH2M Inc., as the incumbent service provider, had joined the consortium of one particular bidder. The proposed arrangement meant CH2M was made available to all bidders on an equal footing.

Issuing Waiver Notice wil result in enhanced customer value for money

 In its conclusion, Ofwat said that if the Waiver Notice had not been issued, the IP would have been obliged to conduct a fresh tender process in respect of the construction contracts and would have had to procure a PMC, commenting:

“We do not consider that this would have provided value for money for customers and consider that issuing the Waiver Notice in respect of the contracts listed in schedules 1 and 2 to the notice will ensure that the project benefits from continuity, technical expertise, bidder certainty and improved commercial terms, resulting in enhanced customer value for money.”

Click here to read the paper in full.