28 September 2016

This article was first published in the September 2016 edition of New Civil Engineer journal.

So what is to become of the five year National Infrastructure Delivery Plan (NIDP), and its £483 billion investment plans? When commitment to the NIDP is needed more than ever, is there any light at the end of the tunnel following Brexit?

I am concerned that Brexit will be a major distraction. However, it is its impact on the availability of private sector finance where I have had cause to think about solutions as opposed to the obvious challenges. I think we can draw significant comfort from the water industry and a relatively recent, complex (and therefore not well understood) success story; the finance of the Thames Tideway Tunnel (TTT).

Large "one-off" infrastructure projects often have little or no precedent to accurately assess construction risk, outturn costs and contingency requirements. Whilst funders are attracted to long term contracts and the secure revenue streams that regulated utilities can provide, they are not generally well disposed towards these risks.

The £4.2 billion TTT project is no exception. Whilst it will ultimately be paid for by levies on the bills of Thames Water customers, finance was achieved due to the innovative model that has been devised to fund construction.

The private infrastructure provider is made up of six infrastructure equity investors (including pension funds) and was appointed following a competitive tender process by Thames Water. It is investing £1.275 billion which will be used to pay for construction works before bank debt funding is drawn down.

One reason equity investors were able to get comfortable with construction risk was the provision of a third limb of funding via customer bills using a mechanism similar to the water utility investment model. Revenue from this funding stream increases as the project progresses and the value of the built asset increases. This means there is revenue stream for investors from day one.

Another was a package of support measures provided by Government including being insurer of last resort and financial support in the event of debt market disruption or if cost overruns go beyond certain prescribed levels. The risk of overruns was also managed innovatively within the supply chain using pain share gain share mechanisms to which all key stakeholders are party.

This funding solution will not be suitable for all types of infrastructure. Funders of the TTT clearly took significant comfort from the recent experience and success of similar London tunnelling projects such as Crossrail. This approach will not be as attractive to projects involving new technology; for example new nuclear or offshore renewable energy. However, it may well provide a partial solution to other publicly funded infrastructure projects. Let's hope this tunnel can provide some light!

This article was written by Norris Riley.

Key contact

Lloyd James

Lloyd James Partner

  • Construction and Engineering
  • Energy and Utilities 
  • Infrastructure

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