Public-Private Partnership Policy Casebook/Tideway Tunnel

This case study reviews the Thames Tideway Tunnel project as a collaborative work of Shalini Avasarala, Qiang Chen, Rian Williams. The casebook is a product of the George Mason University graduate program, as an assignment for the Public-Private Partnership Policy course under the leadership of Dr. Jonathan Gifford. It explores case elements such as key actors, event timeline, risks, financial and institutional structures, policy issues, and takeaways.

Summary
The Thames Tideway Tunnel is a PPP that will result in a 25 kilometers (16 miles) long sewer tunnel under the tidal section of the River Thames. It is a unique project in that it is considered "one of the largest infrastructure projects underway in any European city," at a cost of £4.2 billion. Its construction was officially begun in 2016.

The tunnel is part of a larger River Thames improvement plan, referred to as the Thames Tideway Scheme. This scheme seeks to address concerns of deteriorating River Thames water quality due to the workings of London's Victorian era sewage system, designed and completed in the mid-1800s. This sewage system has fail safes for when rainfall and sewage reach over-capacity, using Combined Sewer Overflows (CSOs) to empty excess into the Thames instead of backing up and exiting through original entry points in homes and city streets. However, untreated sewage compromises the River Thames and poses a public health risk, as increased population density in London as well as more frequent large rain events have led to increased sewer system overflows. In addition to the domestic public health concerns this poses, the European Commission has determined the UK's system of allowing untreated sewer to flow into the Thames is in violation of the EU's Urban Waste Water Treatment Directive, applying elements of political pressure for a solution.

Thames Water, a private water utilities company and the water provider for London, has been a "central actor in the development of [a solution project]", determining through a study and various rounds of consultation that the Thames Tideway Tunnel (TTT or 'super sewer'), would be the best solution for increasing sewerage capacity and reducing overflows. The Bazalgette Tunnel Limited (Bazalgette) is a special-purpose company created to finance, construct, and operate the tunnel, as Thames Water's financial standing made it incapable of pursuing or operating the project without impacting its creditworthiness ratings.

Though the tunnel was initially estimated and confirmed for an expected 2024 completion date, COVID-19 related delays have pushed the completion date to early 2025. Concerns with the project include its cost, necessity, if the tunnel is the best solution approach, and -- considering the scope and length of the project – if potential disruptions to London’s communities and public spaces are justifiable or avoidable.

Annotated List of Actors
Thames Water Utilities Ltd.

A large private utility company that is responsible for the public water supply and waste treatment in Greater London, the Thames Valley, Gloucestershire, Surrey, north Wiltshire, and other parts of England. Thames Water serves as the UK’s largest wastewater and water services company and awarded Bazalgette Tunnel Ltd the contract to build the Tideway Tunnel.

Thames Water customers

Thames water customers will pay for this tunnel through their sewage bills. Customers both in London and outside of London will see their bills increase by approximately 80 pounds by 2020.

Thames Tideway Tunnel Ltd

This company owns the tunnel itself and was formed specifically for this project.

Bazalgette Tunnel Limited

Bazalgette Tunnel Ltd owns Thames Tideway Tunnel Ltd and serves as the “infrastructure provider.”

Government

The government’s role here is to provide a financial guarantee in case or any unexpected or unanticipated risks or costs come up during construction. There is no base funding that is coming from the Treasury.

Ofwat

Also known as the Water Services Regulation Authority. Ofwat is responsible for economically regulating privatized water and sewage in Wales and England.

Amber Infrastructure

Investor in the project.

Dalmore Capital

Investor in the project.

DIF

Investor in the project.

Allianz

Investor in the project.

Timeline of Events
The timeline of the Thames Tideway Tunnel can date back to the start and completion of the original sewer tunnels in 1859 to 1875, as the aging London sewage system infrastructure needs updating to better serve the modern community.

In 1991, the EU Urban Waste Water Treatment Directive was passed and required compliance by 2000. As the London sewer system's CSOs are not in compliance with the directive due to the discharge of untreated sewage into the river, the UK government and Thames Water pursued research for a solution. The Thames Strategic Study began in 2001 and was published in 2005, recommending improvements such as, "upgrades to five of London’s tidal sewage treatment works... constructing the Lee Tunnel to avoid the worst CSO… [and] the Thames Tideway Tunnel". The UK government publicly supported the Thames Tideway Tunnel as the "preferred solution" in 2007. This coincided with EU follow up action concerning EU Directive compliance: the European Commission notified the UK of its dissatisfaction concerning untreated sewage spilling into the river in 2006, then "launched enforcement action" in 2010 and officially confirmed through the Court of Justice of the European Union in 2012 that UK was in violation and at risk for penalties and fines until compliance was achieved.

In domestic affairs of pursuing the now proposed Thames Tideway Tunnel solution, consultation phases began in 2010. Consultations had different phases for different targeted approaches. The first phase sought to educate the public on the issues, solutions considered, and reasoning for the Thames Tideway Tunnel plan. Potential routes and dig sites were also discussed, question and answer sessions were held, and suggestions and submissions from interested and impacted parties were accepted. The second phase began in late 2011 and lasted until 2012 and targeted the local communities and impacted demographics in shortlisted route and work site areas for feedback and response. The feedback gained in consultations was used to refine the Thames Tideway Tunnel plans.

In 2015, contractors and investors were confirmed and announced, and by November 3, 2015 the contract and operating license was awarded to Bazalgette from Ofwat, the "chief project assessor" which acts as a regulatory body that "[manages] licenses and negotiations of tariffs" for both Thames Water and Bazalgette. Bazalgette, going forward, would be the infrastructure provider and would "provide finance, oversee delivery, and operate [the Thames Tideway Tunnel]".

The Lee Tunnel -- which was contracted in 2010 and began construction in the same year, and was considered the first step in the Thames Tideway Scheme (of which the Thames Tideway Tunnel is a part of) as "the first tranche of work" and is a "deep storage and conveyance tunnel," -- was completed in Jan 2016. Thames Tideway Tunnel construction then began, also in 2016. Completion of the Tunnel was originally estimated to occur in 2024, but in 2020, delays and complications related to the COVID-19 pandemic increased costs by £233 million and pushed the completion date into early 2025.

Maps of Locations


The above map shows the proposed route and work sites of the Thames Tideway Tunnel. The route and sites were confirmed and retained following the consultation processes and final refinement of project plans before the start of construction.

Risk Matrix
The estimated cost of this project is 4.2 billion pounds - excluding extra costs brought on by the COVID-19 pandemic - and will be financed by Thames Water’s commercial and residential customers through increases in their sewage bills. For a project as large as this, the cost of finance is a substantial portion of the overall cost, because consumers will be paying interest on the invested capital over the next several decades. Therefore, the government believes it will need a separate financial package to support and secure funding at reasonable cost. The challenge and risk here is the government’s ability to design their support package with a price tag that is attractive enough to the private sector to encourage competitive bidding for the project. This transfer of risk to the public sector needs to be properly managed. The problem here comes from the fact that any government financial support to investors gives the effect of reducing their exposure to certain risks, making them less likely to have an incentive to manage those risks. Therefore, making it more likely those risks actually happen.

In the case of the Tideway Tunnel, any materialized risks that lead to increased costs would be passed on to the consumer. The original cost of the project was estimated to be 1.7 billion pounds. Since then, it has been estimated to be closer to 4.2 billion pounds. Thames Water estimates that there is a strong chance that the ultimate final cost of the project will more or less be 4.2 billion pounds. Thames Water customers will pay running costs once the project is completed. Therefore, it is critical that Ofwat and the government make sure there is less pressure on all elements of cost so that customers do not pay more than needed for this tunnel.

There is a possible incentive for Thames Water to make Ofwat spend more during the planning stages than needed as Thames Water receives a return on investment (ROI) that is approved by Ofwat. The gravity of planning risk and the ability to control it relies on political sensitivity surrounding the project, the planning process, and the quality of planning done by Thames Water.

Another potential risk is that the completed tunnel does not operate as planned and consequently, does not accomplish specific goals or benefits set out in the planning stages. This could result in fines on the government, and depending on the circumstances financial consequences for Thames Water or Bazalgette Tunnel Ltd.

Some other risks to account for are natural disasters that could cause damage to the surrounding environment, delaying the project and adding additional costs. However, the government support package mentioned above could insure the project against these remote risks and the taxpayer, or consumer in this case, would bear all the cost should this risk happen.

Contract Type
The contract type is design, building and maintenance contract. A newly created company Bazalgette Tunnel Limited (BTL, trading under the name of Tideway) is the licensed infrastructure provider (IP) for its design, build, commission and maintain the Thames Tideway Tunnel (“TTT”). This Special Purpose Vehicle (SPV) is comprised of four shareholders: insurance company Allianz; independent fund management company Dalmore Capital Limited; global infrastructure fund INPP together with the insurance company Swiss Life (managed and advised by Amber Infrastructure); and the independent fund management company DIF. Tideway awarded the main works contracts to three contractors with each one responsible for design and constructing one the three tunnel sections.

Meanwhile, the System Integration contract has been awarded to infrastructure support service provider, Amey OWR Ltd., which will be responsible for providing process control, communication equipment and software systems for operation, maintenance and reporting across the Thames Tideway Tunnel system. The contractors were selected through a separate and highly competitive tender process run by Thames Water.

Cost
In July 2015, upon the financial close, the cost of Thames Tideway Tunnel Project is estimated to be £4.2 billion at 2011 prices, with probability of 80% that the cost will be £4.2 billion or less. Of the whole £4.2 billion cost, £1.1billon will be expenditure of Thames Water Utilities Limited (“TWUL”) (2014/2015 prices) and £3.144 billion (2014/2015 prices) regulatory baseline cost will be the expenditure of the IP (“Tideway”). This baseline cost is calculated based on management’s detailed assessment of cost including:


 * Direct Works of £1,855million (Main Works Contractors, System Integrator and Program Wide)


 * Indirect costs of £669 million (resources, insurances, facilities, IT)


 * Contingency of £526 million

The total value of the three construction contracts is £1.676 billion, and this cost is the major part of main works cost. A £233 million was estimated adding to the previous forecasted cost due to Covid-19.

Financial Structure
The financial sourcing TWUL responsible accounts for 24% of the cost, and Tideway needs to provide 76% of the project cost. The TTT project financial structure is as follows:



For the major part that Tideway responsible, the company shareholders have committed £1.3 billion and a further £1 billion has been committed through a Revolving Credit Facility (RCF). Furthermore, the project has secured a 35-year loan from the EIB of £700 million as well as issuing bonds totaling £350 million. The share of financing that each investors of Tideway accounts for is: Allianz (34.26%), Amber (21.32%), Dalmore (33.76%) and DIF (10.66%).

The revenue (benefits) during the project implementation includes:


 * RPI-linked revenue collected from Thames Water’s wastewater customers with fixed real WACC until 2030. Average increases to roughly £20–25 per annum of water bill will be applied to 13.8 million sewage customers of TWUL. A £7 surcharge was already included in customer’s 2015 bills to cover project costs incurred by Thames Water.  The surcharge charge will increase incrementally as the tunnel is constructed.


 * Broad insurance program in place


 * Benefits from a support package provided by the UK Government. The government support package worthy of 18 million consists of six core contract documents designed to support the Tunnel project should exceptional, highly unlikely risks happen, which the private sector could not cover at an acceptable cost, or at all. The six core contract documents are: supplemental compensation agreement, market disruption facility, contingent equity support agreement, discontinuation agreement, special administration offer agreement and shareholders direct agreement.

Institutional Structure
Following recent changes to the established UK water industry legislation, Tideway is the first project to be specified by the UK government as a large water project that should be delivered by a new company, the Tideway. Tideway’s business as a regulated utility company is to design, build, commission and maintain the TTT, a simple asset with a 120 year design life. In delivering the infrastructure and services, multi governmental departments, private entities and organizations are involved. The delivery model is showed in the following framework and responsibility of each entity in implementing this project and relationship between entities in the project are provided as follows:



OFWAT: The Water Services Regulation Authority which is a non-ministerial government department. It is the body responsible for economic regulation of the privatized water and sewerage industry in England. In this TTT project, it awards license to the Tideway regulate this infrastructure provider. The License sets out Tideway’s principal duties, other obligations and the building blocks for Tideway’s revenue prior to 2030.

TWUL: Thames Water Utilities Ltd, known as Thames Water, is a large private utility company responsible for the public water supply and waste water treatment in most of Greater London, Luton, the Thames Valley, Surrey, Gloucestershire, north Wiltshire, far west Kent, and some other parts of England. It is the sponsor of the TTT project. The split of works as between Tideway and Thames Water during the construction and operation periods will be governed by the Interface Agreement and Operation and Maintenance Agreement respectively. Also, under the Revenue Agreement Thames Water will collect from its wastewater customers the revenue Tideway is entitled to under its license.

CH2M: As program manager of the project, it contracts the Program Management Contract (PMC) from the Tideway, with the later as the client.

Insurers: Several insurers were used to provide insurance policies for the project and the IP. Tideway has procured a comprehensive set of insurance policies in line with market’s best practice. Additionally, Tideway has procured a contingent support package from DEFRA who acts as insurer of last resort for extreme risks that cannot be efficiently insured by the insurance market (see Government Support Package).

Lenders: In this project, several lenders provide funding and investment for the IP to implement the project, including Allianz, Dalmore Capital Limited, Amber infrastructure and DIF.

Main Works Contractors: Including three Joint Ventures (JV) that are responsible for designing and building each of the three sections of the tunnel. The commercial relationship with the three consortia that will deliver the bulk of the tunnel will be managed via NEC3 contracts. Finally, an alliance has been created between Tideway, the three Main Works Contractors, the System Integrator, and Thames Water with the aim to ensure co-operation between all delivery stakeholders. This relationship is regulated by the Alliance Agreement.

DEFRA: Department for Environment, Food & Rural Affairs, is the government department responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities in the United Kingdom of Great Britain and Northern Ireland. In this project, it will provide government support package (e.g., cover for insurable events above the amount the market is ready to provide, financing to fund the shortfall otherwise it must discontinue the project in the event of cost overruns above the “Threshold Outturn” and £500 million committed liquidity facility in case of market disruption) to the PI.

Infrastructure Provider (IP): The newly created SPV, Tideway, is Responsible for design, building and maintenance of the whole project. It has direct interaction with all the six institutes during implementing the project. It assumes the most risks and responsibility for delivery of this project.

Clear Identification of Policy Issues
Policy issues and general criticisms of the project typically stem from the following issues: potential disruption of the project due to scope and construction; the cost and financing of the project; and the usefulness of the project compared to other solutions' benefits. Thames Tideway Tunnel, as a large and long-term project that is estimated to impact London citizens in an active project period of 8 to 9 years -- and then aims to serve London in perpetuity for a minimum of at least several decades if not longer, has invited much scrutiny and discussion since its early proposal days.

Because the Thames Tideway Tunnel was proposed to supplement the current London sewerage system, the route and length of the tunnel runs underneath a large distance of the city. This, in addition to the complexity of the project and the planned 24 hour work schedule in order to deliver the project on time, drew concerns of noise pollution and construction impacting property value and business capacity, worsening quality of life in areas near work sites. Traffic congestion due to construction vehicles transporting materials and waste, as well as ecological impacts of the increase in CO2 emissions due to the increased traffic and traffic time, was also a concern by opponents to the Thames Tideway Tunnel plan. These concerns were addressed by the consultation phases, which attempted to educate the public and take into account public opinion in order to better refine plans and diminish future impacts on surrounding communities. Traffic criticisms were countered by the use of water barges on the river for construction transportation. The work sites are also built in a way to attempt minimizing sound pollution, especially at night. The impact of these measures can be argued in their effectiveness, but they are the countermeasures taken by Bazalgette in attempts to diminish negative impacts.

The original cost of the Thames Tideway Tunnel project has increased at various points of the project and have incurred criticisms of the cost of the project as too high or wasteful. These criticisms align with concerns of budget estimations mismatching to cost realities by the end of the project, and relate to the concerns of customers funding the project through water utilities fee increases (which began impacting customer bills as early as 2015 through a gradual increase), at an estimated £20-25 per household. Taxpayer backing of the UK government's government support package (GSP) is also a potential point of criticism, as the costs and risks of the project can be viewed by the public and opponents as insured by citizens if the involved private entities and their insurance become unable to cover costs and uncertainties relating to the project. The counter to this criticism is the requirements in the GSP that require the private firms to hold insurance coverage to ensure the GSP is for low probability but uninsurable high-risk events, and involved parties are relatively certain the GSP will not be used.

Thames Water being incapable of financing, constructing, or operating the project has also drawn criticism, as "Thames Water’s choices, not external circumstances, led to its financial position," which left it unfit to take on the project. Though Thames Water and Bazalgette are "legally and financially [separate]," they closely engage and interact, "with Thames Water being both the supplier and customer of [Bazalgette]," which may act as countermeasures to the criticism that Thames Water's lack of direct construction and operation of the tunnel improperly tasks entities that are unfamiliar or lack specialization in London's water infrastructure with the project. It does not address the criticisms that the complexity of this structuring obfuscates and complicates responsibility and oversight -- Thames Water's lack of investor presence in the project while maintaining a position to tender construction contracts also draws concerns of lack of incentive or pressure on Thames Water for pursuing the most cost-efficient yet high-quality options for the project.

There are also criticisms of the tunnel being a less efficient solution than other potential approaches. Other solutions proposed to address the issue of rain and the amount of sewerage created by a large populace overburdening the current sewer system focus on sustainable urban development solutions and sustainable drainage solutions (SuDS). Decreasing and delaying rainwater runoff that enters the sewer system would increase capacity for sewerage. It would also be eco-friendly, as SuDS planning includes increasing permeable surfaces through measures such as green roofing, green walls, incentivizing developers to lessen paving over green space, and design housing that is compatible with the use of rainwater tanks. Furthermore, following the Flood and Water Management Act 2010, SuDS are increasingly incorporated and pursued by actors and supported by the UK government. However, Thames Water and proponents have argued lessening rainfall addition to overflows does not address the concerns of a large and growing population outpacing the sewer capacity.

Narrative of the Case
From the start, there was controversy surrounding the project. Questions regarding cost, duration, disruption, whether this was the proper solution for London and Thames Water customers were cast about. Customers were angry when they found out they were going to be funding the large cost of this tunnel through increases in their bills.

Individuals who lived near or along the proposed sites were apprehensive about noise, disruption, and loss of space due to the construction. As a way to combat these concerns and apprehension, Thames Water created a “Code of Construction Practice” to outline how they would try to minimize impacts on the public in the area and also let individuals know that they would practice these standards at all their sites.

There were some individuals who preferred an option different to the tunnel. This option was an excavation of an urban drainage system that would be under the streets of London. This was the more sustainable option; however, it was three times the cost of the tunnel.

Takeaways and Points of Discussion
This TTT project is not a typical P3 project. TWUL the sponsor, rather than a public organization, is a private utility company responsible for the public water supply and wastewater treatment. Under the public requirements, TWUL agreed to invest £1.4 billion on preparatory works and construction of the Lee Tunnel (similar as TTT, is part of the Thames Tideway Scheme). However, TWUL was unable to bear the full costs itself. So, it set about designing a completely novel way to deliver a major project. The introduction of the Flood Water & Management Act in 2013 allowed the utility to tender new infrastructure to a third-party financier. TWUL tendered for an independent infrastructure provider (IP), with its own license from regulator Ofwat, to undertake the rest of the work (in this case, the Tideway wins the bid).

Increasing utility bills to repay this large capital cost may draw public backlash. As mentioned before, a £7 surcharge was already included in customer’s 2015 bills to cover project costs incurred by TWUL. The customers have been charged for something they cannot yet see. Furthermore, the annual utility bill is estimated to increases to roughly £20–25 per annum after the project completion (a 6% increase, current UK nationwide water and sewerage bill is £396.60 a year). People may be reluctant to pay additional cost for the service that are not perceptible in their daily life (e.g., environmental cost saving).

However, as mentioned earlier in this study, London’s sewage system dates back to the Victorian era. The Thames Tideway Tunnel will provide a more efficient system while also protecting the Thames. Once the tunnel is fully operational, it will intercept 95% of the sewage that flows into the Thames and will capture dangerous debris and sediments that accumulate after long periods without rainfall. This tunnel will also prevent the number of sewage spills. Most importantly, however, the Tideway Tunnel will make the Thames a cleaner river.

In addition, there is also an added economic benefit through this project. This project created over 4,000 jobs and is estimated to create more in the coming years. Therefore, this project contributes several benefits to the people of London and the greater England area.

As for points of discussion:

1) In relation to the policy issue of Thames Water customers 'footing the bill,' what are potential perspectives on the matter? What are potential criticisms of or support for the decision?  What alternatives exist, or why was this a legitimate approach to funding the project?

2) Regarding criticisms of Thames Water being unable to pursue the project directly due to its financial standing, was the role Thames Water played in the project problematic or unavoidable?

Additional Readings
[https://wrlc-gm.primo.exlibrisgroup.com/permalink/01WRLC_GML/19u1omk/cdi_proquest_miscellaneous_2388006226 Nathan Zhivov. “The Thames Tideway Tunnel: A Hybrid Approach to Infrastructure Delivery.” Discussion papers (International Transport Forum) (2018): 0_1–34. Print.]

[https://wrlc-gm.primo.exlibrisgroup.com/permalink/01WRLC_GML/19u1omk/cdi_crossref_primary_10_1177_0042098017736713 Loftus, Alex, and Hug March. “Integrating What and for Whom? Financialisation and the Thames Tideway Tunnel.” Urban studies (Edinburgh, Scotland) 56.11 (2019): 2280–2296. Web.]

[https://wrlc-gm.primo.exlibrisgroup.com/permalink/01WRLC_GML/19u1omk/cdi_informaworld_taylorfrancis_310_1080_13604813_2019_1689730 Grafe, Fritz-Julius, and Hanna Hilbrandt. “The Temporalities of Financialization: Infrastructures, Dominations and Openings in the Thames Tideway Tunnel.” City (London, England) 23.4-5 (2019): 606–618. Web.]