Thames Water has started the process to identify UK and potential international investors to fund construction of the proposed £4.2 billion Tideway Tunnel.

As a Nationally Significant Infrastructure Project, the Tunnel, one of the largest construction projects of its type in Europe, is currently still the focus of a Planning Inquiry by the Planning Inspectorate. 

Work will be split geographically into three main works construction contracts worth a total of around £1.6 billion – west (£300m – £500m), central (£600m – £950m) and east (£500m – £800m).

The Planning Inspectorate Panel completed its examination of the application on 12th March 2014. Deadline for submission of its recommendation to the Secretary of State, who will make the decision on whether to grant or to refuse development consent, is 12th June.

In a process led by the investment bank UBS Thames Water will formally advertise for potential investors in May.

A number of international investors from as far afield as China, Europe, Canada and Australia are already involved in ownership of Thames Water. The Abu Dhabi Investment Authority owns a 9.9% stake while the China Investment Corporation owns a further 9%.

Thames Water already has a shortlist of world-class construction companies to build the Tunnel in place, with the work to be split geographically into three main works construction contracts worth a total of around £1.6 billion – west (£300m – £500m), central (£600m – £950m) and east (£500m – £800m).as follows:

West

• Bam Nuttall, Balfour Beatty, Morgan SindallJV
• Costain, Vinci, Bachy JV
• Dragados, Samsung JV
• Ferrovial Agroman, Laing O’Rourke JV

Central

• Bam Nuttall, Balfour Beatty, Morgan SindallJV
• Costain, Vinci, Bachy JV
• Ferrovial Agroman, Laing O’Rourke JV
• Skanska, Bilfinger, Razel Bec JV

East

• Bam Nuttall, Balfour Beatty, Morgan SindallJV
• Bechtel, Strabag JV
• Bouygues Travaux Publics
• Costain, Vinci, Bachy JV
• Hochtief, Murphy JV

The water company will establish a new Special Investment Vehicle, described as a “dedicated perpetual utility company” under the requirements of the Flood and Water Management Act 2010.

“A high quality, rare and historic investment opportunity”

A presentation to potential investors in February by Mike Gerrard, Managing Director of the Thames Tideway Tunnel described the project as ““a high quality, rare and historic investment opportunity”, explaining that it was a unique £1bn equity opportunity to invest in a new UK regulated utility company, with the investment to be remunerated and  dividend yield during construction.

Government Support Package will “further protect investors”

Mike Gerrard told attendees that a Government Support Package would “ further protect investors” with  sharing / mitigation of exceptional risks and the total investor funding requirement capped at a pre-defined maximum. Investors would not need to bring project delivery expertise and that an experienced project team, project manager and management team would be transferred to the Infrastructure Provider (IP) – the new company -  on award of a Licence by Ofwat. However, bidders would be able to propose alternative management approaches post Award.

The experienced project team would have sufficient resources and systems to manage the delivery of the Project on a day-to-day basis from day one, with key members of the project team transferring to the IP and ongoing support for the IP by project management contractor CH2M Hill. The project team is expected to be 20-30-strong on a full time basis by Round 1 and around 100 by Licence Award with all major posts filled.

Investors to determine WACC – not Ofwat

Investors will also benefit from a bespoke regulatory framework for the IP during construction period. The Weighted Average Cost Of Capital (WACC ) earned by the IP on the regulatory capital value (RCV) during the construction period will be bid by investors and not determined by Ofwat. There will also be no amendments to the revenue provisions of the Project Licence during the construction period.

There will also be a revenue adjustment for the real cost of debt (outside a pre-defined cap and collar) to limit the new company’s exposure to market cost of debt movements.

Thames Water’s outline timetable for the Tunnel anticipates fully costed bids for the work before the end of 2014, with the Licence Award and construction contracts award due in 2015. Construction on the project is due to start in 2015 and will involve 24 construction sites across London.