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Corporate Partnership
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The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

2

The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

Nathan Zhivov

International Transport Forum,
Paris

Working Group Paper
2018

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Foreword
Transport infrastructure is a major enabler of economic development. In the drive to refurbish or build
more, governments worldwide have turned to the private capital market to help finance it. The primarynarrative behind this push is that there huge stocks of private capital available, while public financing
capabilities are said to be limited and insufficient.
The almost exclusive vehicle of private investment in transport (and social) infrastructure are
Public-Private Partnerships (PPPs). In the context of PPPs, two important aspects have received little
attention.
First, sufficient attention has not been given to the role of suppliers. The focus of, governments andIntergovernmental Organisations has been on resolving the challenges to private investment from theviewpoint of investors; a key part is reducing uncertainty they face and enabling them to price risk more
efficiently (establishing infrastructure as an asset class).
Yet looking at the investors only gives an incomplete view of the total cost of the risk transferred fromthe public to the private sphere. In PPPs investors transfer some of the major risks they are not
comfortable bearing (e.g. construction risk) to design, construction, maintenance, and operations
contractors.
As investors, suppliers too face uncertainties and can’t price risk efficiently. In such a case, the base costof the initial investment (and of subsequent services) will be much higher than they could be, and notjust the cost of their financing.
Uncertainty arises from the difficulties to accurately estimate the cost of construction, maintenance,
operations, and financing. But it also stems from “unknown unknowns” (the so called Knightian
uncertainty), for instance changes in weather patterns or paradigmatic technological shifts the timing
and impact of which are unclear but will influence what infrastructure is needed and where.
So what can policy makers do to reduce the cost of inefficient risk pricing of suppliers? Where does thisput PPPs? How can public decision makers reconcile long-term uncertainty with private investment ininfrastructure? Who should bear long-term uncertainty in projects, the public or the private sector?
These were some of the guiding questions for a Working Group of 33 international experts convened by
the International Transport Forum (ITF) In September 2016. The group, which assembled renowned
practitioners and academics from areas including private infrastructure finance, incentive regulation, civilengineering, project management and transport policy, examined how to address the problem of
uncertainty in contracts with a view to mobilise more private investment in transport infrastructure. As
uncertainty matters for all contracts, not only those in the context of private investment in (transport)
infrastructure, the Working Group’s findings are relevant for public procurement in general.
The synthesis report of the Working Group was published in June 2018. The report is complemented by aseries of 19 topical papers that provide a more in-depth analysis of the issues. A full list of all Working
Group papers is available in Appendix 1.

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Acknowledgements
The author is grateful to a series of people across various organisations that made this case study
possible.
To Dejan Makovšek (ITF) for the endless discussions, feedback, debate and tutelage on the respective
merits of project finance and incentive regulation. Without his support, the understanding and analysis in
this case study would not have been possible.
To Scott Dickson and Axel Jaegle, commercial specialists at the United Kingdom (UK) government’s
Infrastructure and Projects Authority, Martyn Andrews, director of corporate finance at the UK Water
Services and Regulatory Authority (Ofwat), and Darryl Murphy, formerly, partner, corporate financeinfrastructure at KPMG, for providing detailed factual information about the mechanisms involved in theThames Tideway Tunnel project and fact-checking initial drafts.
To Stephen Perkins (ITF) and Daniel Veryard, (formerly ITF), for feedback on initial drafts.
To Evelyn Loh for her insights on quality incentives, work on the institutional structure for the Thames
Tideway Tunnel and support throughout this and countless other projects.

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Table of contents

Executive summary ................................................................................................................................ 6
The tunnel .............................................................................................................................................. 8
Compliance with European Union directives is a key motivation ........................................................ 10
Circumstances motivated a unique model........................................................................................... 11
Thames Water was unavailable ....................................................................................................... 11
The UK government decided to use private finance ....................................................................... 11
Risks and uncertainties could have increased finance costs beyond reasonable levels ................ 12
A hybrid approach ................................................................................................................................ 12
Mechanisms to incentivise financeability and efficiency simultaneously ............................................ 13
More detailed planning than is usual for a PPP .............................................................................. 14
Construction split into parcels to generate competition ................................................................ 16
Use of target price contracts with risk/reward sharing mechanisms ............................................. 17
Adapted incentive regulation with competitive elements and risk sharing arrangements ........... 18
Government support package ......................................................................................................... 20
Sequencing of other measures resulted in a low WACC bid ........................................................... 22
Criticisms and challenges ..................................................................................................................... 23
Project selection was controversial ................................................................................................. 23
Thames Water’s role is controversial .............................................................................................. 24
Central importance of the P80 estimate for efficiency ................................................................... 24
Institutions are important when considering replication ..................................................................... 25
Conclusion ............................................................................................................................................ 25
Notes .................................................................................................................................................... 26
References ........................................................................................................................................... 27
Appendix 1. Research questions and outputs ...................................................................................... 30© OECD/ITF 2018

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Executive summary
What we did
Good incentives drive good outcomes. Effectively designing and implementing incentives for companies
to finance and deliver complex infrastructure at a price and quality that represents value for money tocitizens remains an ongoing challenge for governments. Shift too much risk to the private sector andcompanies insert large risk premiums, causing the price to skyrocket. Shift not enough and companies
allow cost overruns, resulting in the same outcome.
PPPs, economic regulation and alliancing have all involved different ways of trying to deliver complex
infrastructure efficiently. This paper closely examines one government’s innovative, hybrid approach thatdraws on the lessons of all of them. For the Thames Tideway Tunnel (TTT), the UK government has
designed and implemented a series of mechanisms that seek to effectively allocate risk, create incentives
to drive efficiency and ensure value for money for the citizen.
This paper examines the approach being used to finance, construct and operate the TTT. It sets out
information about the tunnel itself, its motivations and how circumstances created the need for a hybrid
approach. The paper summarises the hybrid approach and analyses the incentive features of thatapproach, including criticisms. It concludes with some observations about the hybrid approach’s value
and the ability to apply it in other contexts, such as transport infrastructure.

What we foundThe overall structure and mechanisms of the TTT’s hybrid approach are a useful and innovative
contribution to the field of infrastructure development. Substantial care has been taken to combine goodpractices from incentive regulation, project finance and alliancing to design measures that are capable ofproviding incentives for the private sector to finance and deliver large, new infrastructure efficiently.
At the same time, the competitive tender process yielded a record low private sector rate of return formonopoly infrastructure. This is a positive turnout. On the other hand the target price for construction
was set at 80% probability that the project will be built on cost. This may be prudent from theperspective of achieving ex ante certainty of cost but not necessarily the best option from theperspective of the ultimate cost the consumers will need to pay.
While the specific target price and government support levels may raise concerns, the broader hybrid
model may be capable of delivering the best possible value from private financing of large andpotentially risky public infrastructure investment. Opportunities for replication of the model will be,
however, confined to jurisdictions with an ability to undertake detailed planning and a sophisticated,robust regulatory capacity.

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What we recommend
Share or retain (not transfer) difficult-to-quantify, high-impact, low-probably risks and uncertainties
Constructing and operating the TTT involves dealing with several unlikely but potentially serious
consequences. Such risks and uncertainties are difficult to manage and insure against. Allocating them tothe infrastructure provider could have increased risk premiums, without any improvement in risk
management. Equally, allocating them to public sector alone would have removed any incentive for the
infrastructure provider to try. As a result, throughout the TTT’s structure, the UK government has sharedthese risks with the infrastructure provider, making it liable for them to a limited extent, giving it an
incentive to manage them to the extent it can.
Attempt the TTT with the right institutions
It seems that investors have been willing to invest because of Thames Water’s detailed designs and theUK’s experienced, mature and trusted institutions, which will be responsible for handling unexpected
events. They seem to trust that Thames Water has identified many of the material construction risks andthat, should unexpected events occur, the relevant institutions will deal with them in a manner that iseither not detrimental to investors or at least fair. It is not clear how well the TTT’s mechanisms would
apply in the absence of these factors or how quickly or easily they could be developed in industries orjurisdictions that do not already have them.

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The Thames Tideway Tunnel (TTT) is using an innovative hybrid approach to infrastructure development.
Care has been taken to combine good practices from incentive regulation, project finance and alliancing
to design measures that are capable of providing incentives for the private sector to finance and deliver
this large new infrastructure project efficiently and at a reasonable cost, while discouraging the moral
hazards that can come with relieving private parties of risk.
This paper examines the approach being used to finance, construct and operate the TTT. It sets out
information about the tunnel itself, the motivations for building it and how circumstances created theneed for a hybrid approach. The paper summarises the hybrid approach and analyses its incentive
features, including criticisms. It concludes with some observations about the hybrid approach’s value andthe ability to apply it in other contexts, such as transport infrastructure.

The tunnel
Due for completion in 2027, the TTT will be a 7.2-metre wide and 25-kilometre long sewer under the
tideway of the Thames River in London, UK. The TTT is the largest water and sewerage infrastructure
project in the UK since the industry was privatised in 1989 (National Audit Office, 2017, p. 35). It will startat the Acton Storm Tanks in London’s west and head towards the east of the city. Most of the TTT will bebuilt beneath the Thames River, following the river’s course downstream from near Hammersmith Bridge
to Limehouse, taking surge flows currently discharged into the river at points all along the route. The TTT
will then divert north-east to the Abbey Mills pumping station near Stratford. There it will link with the
Lee Tunnel, which connects to the Beckton sewage treatment works. The TTT will commence 30 metres
underground, gradually descending through uncertain ground conditions to 66 metres underground.
Many important buildings and parts of London’s infrastructure lie along the TTT’s path, including London
Underground rail lines (Bazalgette, 2016b, 2016c; Financial Times, 2016; National Audit Office, 2014;
National Audit Office, 2017).
The TTT is expected to substantially reduce instances of raw sewage spilling into the tideway (National
Audit Office, 2014, p. 5). London has a combined sewerage system that collects and transports both rainwater runoff and raw sewage (National Audit Office, 2014, p. 7). These combined sewers are designed tospill into the tideway when they reach capacity, such as during a heavy rain event (National Audit Office,2014, p. 7). Along the tideway, there are 57 Combined Sewer Overflows (CSOs) for this purpose (National
Audit Office, 2017, p. 12). CSOs spilling into the tideway prevent backing up of the sewerage system andoverflows from manholes. In turn, this prevents raw sewage from flooding roads and buildings in built up
areas of London (National Audit Office, 2014, p. 7). Along its path, the TTT will connect with 34 CSOs,
diverting combined rainwater runoff and raw sewage from spilling into the tideway (National Audit
Office, 2017, p. 14). The TTT is expected to reduce spill events from 40-107, depending on the year
(39.5 million cubic metres per year), to a maximum of four per year (2.35 million cubic metres per year)(National Audit Office, 2017, pp. 18, 23; Thames Water, 2006, p. 27; Bazalgette, 2016b).

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Figure 1. Map of the TTT route

Source: Bazalgette (2016b).

Figure 2. How the TTT works

Source: Bazalgette (2016b).

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The TTT is expected to cost GBP 4.2 billion (2016 prices), made up of two components (National Audit
Office, 2017, p. 8): GBP 3.2 billion to construct the TTT and GBP 1.0 billion to connect CSOs to the tunnel.
Additional consumer charges will fund the TTT. They are forecast to peak in the early 2020s at GBP 20-25
annually (2016 prices) for the average household (National Audit Office, 2017, p. 8).
Several stakeholders are involved in the TTT, including:Consumers, who will fund the TTT.

The UK Government, which has ultimate responsibility for compliance with environmental
protection legislation, namely the European Union’s Waste Water Treatment Directive
91/271/EEC (the EU directive).



The Water Services Regulatory Authority (Ofwat), the independent economic regulator for thewater and sewerage sectors in England and Wales. Ofwat regulates the charges consumers pay
to the private companies responsible for planning and building monopoly water infrastructurein the UK.

Thames Water, the private company responsible for water and sewer services in the tideway.

Bazalgette Tunnel Limited (Bazalgette), a special purpose vehicle whose investors include
Allianz, Dalmore Capital, Amber Infrastructure, Swiss Life Asset Managers and International
Public Partnerships (Financial Times, 2015a).1 Bazalgette owns the TTT, co-ordinates the TTT’s
financing and construction, and will ultimately operate it.

Compliance with European Union directives is a key
motivation
There are several reasons for diverting raw sewage from the tideway. These include fewer sewage spills,
improving the tideway’s environmental quality and ensuring sufficient strategic sewer capacity toaccommodate London’s growth for at least the next hundred years (National Audit Office, 2017, p. 5).
Despite these, it seems that the key motivation behind the TTT is complying with the EU directive.
The EU directive was adopted in 1991, with large cities expected to comply by 2000. London’s substantial
use of CSOs is not compliant with the EU directive. In 2001, Thames Water and various UK government
agencies commenced the Thames Tideway Strategic Study, which considered how to deal with the issueof raw sewage spills into the tideway (Haigh, 2015, p. 4). The study considered a range of options to deal
with sewage spills (Thames Water, 2005, p. 35) and in February 2005 recommended the TTT as thepreferred solution. One month later, the European Commission wrote to the UK government regarding
complaints about sewage spills. In 2006, the European Commission issued a reasoned opinion that the
UK was not complying with the EU directive with respect to London. In 2007, the UK government
announced support for the TTT as the preferred solution (National Audit Office, 2014, p. 17).
In 2010, the European Commission launched enforcement action. Two years later in 2012 the Court ofJustice of the European Union confirmed that the substantial use of CSOs along the Thames did not

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comply with the EU directive. No fines have been issued to date. However, the continued use of CSOs
places the UK government at risk of a lump-sum penalty and daily fines (National Audit Office, 2017, p.
4). These could total hundreds of millions of pounds each year, until compliance is achieved (National
Audit Office, 2017, p. 12). The TTT is expected to resolve this. The European Commission has informallyagreed that reducing spill events to a maximum of four per typical year is compliant with the EU directive(National Audit Office, 2017, p. 19).

Circumstances motivated a unique model
It appears the UK Government originally planned for Thames Water to develop the TTT (UK Government,
2007, p. 41) and even engaged in legal disputation to achieve that outcome (Financial Times, 2015b).
Had that occurred, the TTT would be a large capital expenditure project within Thames Water’s existing
regulated business. It would have been subject to an incentive regulation regime, which involves giving
the companies rewards and penalties to induce them to achieve desired goals, just like the rest ofThames Water’s regulated business. Incentive regulation regimes do not regularly deal with such large
capital expenditure programmes, but they can. For example, in 2009, the Australian Energy Regulator,
operating under a standard incentive regulation regime, approved a capital expenditure programme of
AUD 6.6 billion (2008-09 prices) (AER, 2009, p. 144), a similar value to the TTT. However, at least two
circumstances meant that this was not feasible for the TTT:
already very high gearing made finance from Thames Water unavailablethe scale of risks and uncertainties had a major impact on financing costs.

Thames Water was unavailable
While incentive regulation could have accommodated Thames Water financing, constructing andoperating the TTT, it was unavailable. Thames Water lacked the necessary financial flexibility due to highgearing. Even a limited financial involvement in the TTT would have hurt its creditworthiness (Moody's
Investor Service, 2012, p. 6). As a result, Thames Water does not and will not finance or own any part of
the TTT. Also, Thames Water is not involved in the TTT’s construction beyond selecting construction
contractors and connecting its own network to the TTT. Thames Water’s unavailability required the UK
government to structure the TTT project differently to how it was originally planned.

The UK government decided to use private financePublic finance appears to have been an option for the TTT. There is evidence the UK government
considered financing and constructing the TTT, with the intention of selling it after commissioning.
However, the government considered taxpayers would receive better value for money using private
finance and therefore rejected the public finance option (Financial Times, 2015b). As a result, it became
necessary to ensure that mechanisms for delivering the TTT would attract private finance at a reasonable
cost.

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Risks and uncertainties could have increased finance costs beyond
reasonable levels
Constructing the TTT carries substantial risks and uncertainties. High-impact low-probability construction
risks were a particular concern. Often, the private sector can efficiently manage construction projectdelivery and construction risks. However, the TTT must tunnel through ground conditions that cannot beknown perfectly in advance under a large complex city in relatively close proximity to buildings and otherchallenging infrastructure. As a result, while unlikely, it is conceivable that constructing the TTT could
have large negative impacts that are difficult to quantify accurately. For example, there is an unlikely but
real risk of catastrophic scenarios. TTT tunnelling works could flood the London Underground or causesignificant public buildings to collapse (Haigh, 2015, p. 5). Such risks and uncertainties are difficult tomanage and insure against.
Contagion was a further concern. The UK government considered that if Thames Water or any otherexisting utility developed the TTT within its own business, the risk premiums from that project might
negatively affect the whole utility’s credit rating, cost of debt and cost of equity. Further, if government
support to an existing utility became necessary, it would be hard to know how to limit that to the TTT
project alone (National Audit Office, 2014, pp. 10, 26; UK Government, 2014, pp. 8, 11).
As a result of these risks, private finance for the TTT might have been unavailable, or only available
subject to high risk premiums (Haigh, 2015, p. 5). Consequently, it was necessary to develop mechanismsthat would attract private finance to the TTT’s somewhat risky profile, keeping in mind the industry was
already subject to incentive regulation.

A hybrid approach
There are at least five key components to the financing, construction and operation of the TTT:
1. Thames Water (with Ofwat oversight) developed detailed planning and cost estimations prior totendering for construction contracts.
2. Thames Water ran competitions to select companies to construct the TTT. It used “target price”
construction contracts, which involve the contractor sharing a proportion of any
underspend/overrun with the special purpose vehicle that finances the TTT (the infrastructure
provider). There is also a bonus pool all construction contractors would share in for delivering
the whole project below budget/early.
3. Ofwat has developed a modified incentive regulation framework that regulates the consumer
charges the infrastructure operator receives during both the construction and operation phases.
It regulates the customer charges that fund the TTT. These are based on actual construction
costs and use a competitively determined rate of return for the whole construction phase. The
regulatory framework also includes consumers sharing a proportion of any underspend/overrun
with the infrastructure provider.

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4. The UK government has developed a government support package (GSP), under which UK
taxpayers would absorb the impact of specified risks with the infrastructure provider.
5. Thames Water also ran a separate competition to select an infrastructure provider to finance the
TTT.
Figure 3. The hybrid approach: Institutional aspects

These mechanisms take elements used previously in public PPPs, incentive regulation, project financeand alliancing. Competitive tendering is common for PPPs; risk/reward sharing mechanisms are common
in incentive regulation; special purpose vehicles are commonly used in project finance; and joint bonus
pools to align parties’ incentives are an important aspect of alliancing. As a result, the TTT uses a hybrid
approach.

Mechanisms to incentivise financeability andefficiency simultaneously
The rate of return for private finance is always greater than it is for public finance. However, it may bepossible for private investors to deliver better value for money overall. As expenditure related tooperating the TTT is a small proportion of its overall cost, extracting efficiencies in the construction phaseis central to delivering value for money to consumers.
The UK government and Ofwat have sought to extract efficiencies during the construction phase toensure the TTT is constructed efficiently and at a private-finance rate of return that is affordable toconsumers (Ofwat, 2015c, p. 7; Ofwat, 2015a; UK Government, 2014, p. 10). However, there can be atension between extracting efficiency and achieving a low rate of return, especially for complex© OECD/ITF 201813

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infrastructure like the TTT. Investors will increase required rates of return as uncertainty increases. Given
the complexity and uncertainty surrounding the TTT, reducing uncertainty meant protecting investors
from certain risks. However, risk protection reduces the incentive to even try to manage these risks (i.e. a
moral hazard). In turn, it can lead to inefficient cost overruns which undermine the benefits of lower
rates of return.
This section discusses how the UK government, Ofwat and Thames Water sought to address thischallenge. It describes in detail the various mechanisms that make up the hybrid approach. In particular,
it highlights the various mechanisms’ incentive characteristics and describes how the hybrid approachseeks to achieve three things simultaneously:

provide investors with certainty and risk protection to make private finance viable at rates ofreturn affordable to consumers



counter any weakening of incentives for effective risk managementdrive efficiency through competition and efficiency-incentive mechanisms.

More detailed planning than is usual for a PPPRegularly, PPPs use a “design and build” type contract, where bidders are required to develop detailed
designs for the project. In turn, the purchaser does not supply bidders with particularly detailed designs(Yescombe, 2014). Thames Water took a different approach. With oversight from Ofwat, it developed
detailed plans and costings for the TTT prior to commencing the construction competitions (National
Audit Office, 2014, p. 10). The construction contractors will undertake some further planning. However,by the time the construction competition commenced, the designs for the TTT were very detailed. In
compliance with the standards of the Association for the Advancement of Cost Estimation (AACE) for
tendering, Estimate Class 2 was used (Ofwat, personal communication, 2017). Also, under Ofwat’s
oversight, Thames Water produced a cost estimate with an 80% probability of actual costs being lower
than the estimate (a P80 estimate) (UK Government, 2014, p. 4). Greater detail about project plans
reduces uncertainty, which reduces risk and the need for construction bidders to have large contingency
budgets. As a result, it placed downward pressure on price.
Removing a lot of the design responsibility from bidders may be considered controversial. Having suchdetailed plans may have removed the opportunity for bidders to provide more innovative solutions. Thisis an advantage associated with giving bidders less detailed plans. However, in this case, the gains frominnovation may have been realised by the Thames Tideway Strategic Study, which considered numerous
options for dealing with raw sewage flowing into the tideway. Also, the evidence of PPPs producing
innovative outcomes is mixed, limiting this concern to some extent. Instead, the detailed plans on thiscomplex project may have provided the contractors with a better platform to efficiently price risk. In
turn, it may have led to a better price than a typical design and build contract, where the initial design isless developed and, hence, the bidders have the responsibility of gauging risks associated with detailed
design solutions. Arguably, even greater benefits might have been available by providing bidders with aneven more detailed design (Makovšek and Moszoro, 2017).

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Figure 4. AACE cost estimate classification matrix

Source: AACE International.

Thames Water’s detailed plans and costings also appear to have provided some other cost-related
benefits. While major construction is yet to commence, cost escalation has been limited to date.
Estimates increased between the original outline plans and Thames Water’s early detailed plans,
especially due to increased contingencies. But they have remained relatively stable or decreased since.
This is due, in part, to (National Audit Office, 2017, p. 24):

more detailed planning resulting in refined modelling allowing the tunnel to be shortened by
9 kilometresOfwat scrutinising and challenging the plans, placing downward pressure on some of Thames
Water’s proposed costings.

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Figure 5. Changes in estimated TTT cost over time

Source: National Audit Office (2017, p. 30).

Construction split into parcels to generate competition
As mentioned earlier, the TTT is the largest water and sewerage infrastructure project since the industry
was privatised in 1989. If Thames Water had procured the TTT as a single construction contract, few
firms would have been able to put forward a realistic bid. To avoid this, Thames Water split construction
into three parcels (west, central and east). Each parcel broadly reflects a different depth and groundconditions over the course of the tunnel (Bazalgette, 2016c).
Splitting construction into parcels increased the number of companies/consortia that could realisticallybid for any single parcel. This may have increased competition for the construction contracts, placing
downward pressure on prices.
An alliancing agreement and joint incentive mechanisms were put in place to try to deal with thepotential disadvantages of splitting construction into parcels. In particular, having multiple contractors
may have limited incentives for effective co-ordination across the project and created interface problems
at the boundaries of each construction parcel. To give contractors incentives to work together to ensure
the overall project succeeds, all construction contractors share in a GBP 1.6 billion bonus pool if thewhole TTT is delivered early or below the target price (Construction News, 2013).

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Figure 6. TTT sections and ground conditions

Source: Bazalgette (2016c).

Use of target price contracts with risk/reward sharing mechanisms
Fixed-price turnkey contracts, where contractors absorb the full cost of any overruns, give contractors
strong incentives to seek out efficiencies and deliver projects within budget. They have been used in
PPPs and elsewhere to incentivise contractors to manage risk and deliver projects on time and withinbudget. However, bidders need detailed, accurate information to quantify risk accurately and set theirprices efficiently. Complex projects that include hard-to-quantify risks and uncertainties are less likely togive bidders this information. Therefore, using a fixed-price turnkey contract in complex or uncertain
scenarios may lead to bidders inefficiently increasing contingencies and, in turn, higher contract prices(Makovšek and Moszoro, 2017).
Thames Water seems to have taken these factors into account by using “target price” contracts. Under
these, winning contractors are given a target price to aim for in relation to their section of the TTT. The
contracts also include a risk/reward sharing mechanism. If a contractor delivers its section below thetarget price, it is rewarded with 50% of the underspend. Symmetrically, a contractor must absorb 50% of
any costs above the target price (Construction News, 2013). These mechanisms are very similar toefficiency incentive mechanisms that incentive regulation frameworks commonly used.
We are unaware of any empirical evidence comparing project outcomes under fixed-price andtarget-price contracts. However, using a target price reduces risk for construction contractors, reducing
their need for large contingencies and enabling them to be satisfied with lower rates of return. In turn,these mechanisms place downward pressure on bid prices. However, target price contracts also diluteincentives to manage risks during construction, which can increase the ultimate cost. The risk/reward
sharing mechanism seeks to manage this. By providing higher returns for below target/early completion
and requiring contractors to carry some risk, it seems to incentivise contractors to seek cost savings
despite the potential for risk sharing. In turn, contractors may be more likely to rely on risk sharing
mechanisms primarily for circumstances beyond their control.

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Adapted incentive regulation with competitive elements and risk
sharing arrangements
In its standard incentive regulation framework, Ofwat determines charges based on the regulatory
capital value of the infrastructure rather than how often it is used (this is similar to the way anavailability-based PPP shields investors from demand risk and gives them substantial certainty that they
will receive a return on their investment). At the commencement of each regulatory period (usually five
to seven years), Ofwat forecasts the efficient cost of each major cost category (building block) for
financing, constructing and operating the infrastructure to determine the efficient revenue for that
period. It then converts this total revenue into charges that individual consumers pay.
Ofwat also uses efficiency-incentive mechanisms to reward concessions for underspending in relation to
Ofwat’s forecast during the regulatory period, allowing them to keep a proportion of any underspend
and setting penalties for overruns. There are also mechanisms to amend Ofwat’s revenue forecasts toreflect significant cost changes that are beyond the concession holder’s control.
During the TTT’s construction phase, many standard incentive regulation mechanisms will apply. The
infrastructure provider’s revenue will be based on actual construction costs, and it will receive revenue
during construction.2 There are also incentive mechanisms that apply to each year of construction and toproject delivery overall. For each year of construction, Ofwat has used the P80 estimate to set targets forconstruction costs. The infrastructure provider may retain 40% of any year’s underspend and will notreceive revenue corresponding to 40% of any year’s overrun (Ofwat, 2015a, pp. 23-24).
Figure 7. Regulatory revenue building blocks during construction

Source: Oxera (2015).

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At the overall project level, there are penalties for overspending the total P80 estimate and for latedelivery.3 There are also mechanisms to adjust targets to deal with cost increases resulting from changed
circumstances, which are beyond the infrastructure provider’s control.
For longer delays, Ofwat has discretion over the rate of return, which is likely to be lower where thedelay is within Bazalgette’s control or influence or it has not effectively managed or mitigated the delay’seffect (Ofwat, 2015c, pp. 9-10).
The regulatory framework also includes specific measures that reduce or remove the risk Bazalgettecarries. Specifically, Ofwat can adjust annual construction cost targets to take account of material
movement in financial markets and specific trigger events, which are largely beyond Bazagette’s control(Ofwat, 2015a, pp. 13, 18).4,5
Project-specific adaptions

While many aspects of the regulatory framework are standard, there are several project-specificadaptations. First, the construction phase is a single regulatory period, even though it will last more thanten years (much longer than a standard regulatory period). This avoids any regulatory risk investors
might have faced during construction in committing investment to the TTT without knowing theregulated rate of return for a subsequent regulatory period (National Audit Office, 2014, p. 10).
Regulators normally review market evidence and exercise judgement to determine the efficient rate of
return for particular infrastructure. However, for the TTT Thames Water’s financing competition
provided a market-tested rate of return (the WACC bid), considered to be a reasonable reflection of theefficient rate of return for the TTT. As a result, Ofwat is using the WACC bid as the regulated rate of
return during the construction phase (Ofwat, 2015d, p. 54).
There are also less detailed adaptations to deal with the high-impact low-probability risks that are central
to financeability concerns. These primarily focus on major project-wide overruns. The incentive
mechanisms described above apply to project expenditure up to 130% of the target price (GBP 4.1 billion
2014/15 [Ofwat, 2015d, p. 62]). This price point is known as the Threshold Outturn. Bazalgette may apply
to Ofwat for additional revenue to fund expenditure beyond the Threshold Outturn (Ofwat, 2015a, p. 9).
Ofwat has discretion to determine what additional revenue, if any, it considers appropriate andreasonable, taking into account factors including whether the additional expenditure could or shouldhave been avoided by prudent management action (Ofwat, 2015a, p. 10).6 Allowing the infrastructure
provider to potentially recover some costs in the event of a large overrun may somewhat diluteefficiency incentives, however, it seems unlikely that Bazalgette would make less of an effort given that
Ofwat’s large margin for discretion makes revenue applications uncertain. Revenue applications are only
available for very large overruns, through which time Bazalgette would already have lost GBP 400 million
via the efficiency incentive mechanism. As a result, they seem more likely to be used for overruns thatare genuinely beyond Bazalgette’s control.
Regulatory framework during operation

Once the post construction review is completed, Ofwat expects the TTT to be broadly subject to thesame incentive regulation regime that it administers for other water and sewer service providers (Ofwat,
2015c, p. 13).

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Figure 8. Regulatory revenue building blocks after construction

Source: Oxera (2015).

Government support package
The UK government developed a government support package (GSP) during the financing competition.
Through the GSP the UK government agrees to take on certain risks until the TTT has been delivered,subject to certain conditions. It is the central mechanism the UK government has used to protect private
parties from responsibility for difficult-to-quantify, high-impact low-probability risks and uncertainties,
and place downward pressure on price. The GSP has six components, set out below.
Support for claims beyond insurance coverage

The supplemental compensation agreement in the GSP stipulates the UK government provide theinfrastructure provider with insurance or in some cases discontinue the project if it faces liabilities thatare greater than its insurance coverage or if insurance becomes unavailable (Hiagh, 2015, p. 5; Ashurst,
2015b, p. 18). The agreement includes a confidential schedule. It specifies types of insurance and levelsof coverage Bazalgette must hold before the UK government will make supplemental compensation
available (Ashurst, 2015e, pp. 30-35). These requirements – especially regarding levels of coverage –incentivise Bazalgette to take out as much insurance as is available at efficient prices to cover the
specified high-impact low-probability risks, but this aspect of the GSP also recognises that some risks will
be uninsurable in the marketplace.

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Measures to deal with a possible global financial crisis

The market-disruption facility of the GSP is designed to deal with any repeat of the lending constraints
that occurred during the global financial crisis. If all of the following conditions are met, the UK
government will make a debt facility of up to GBP 500 million available (Ashurst, 2015c, pp. 2, 4, 10, 12):Circumstances that materially prejudice Bazalgette’s ability to issue bonds.

Bazalgette wishes to issue bonds worth more than GBP 100 million.



The circumstances mean subscribers have not taken up or are reasonably unlikely to take up atleast 75% of the bonds that Bazalgette has attempted to issue or wishes to issue.

The circumstances have been ongoing for ten continuous business days and are reasonably
likely to continue.

The parties agree the above circumstances exist or an independent panel determines they exist.

The mix of conditions means the disruption facility is only likely to be used in circumstances beyond theparties’ control.
Government equity injection or project discontinuation for large cost overruns

The contingent equity support agreement provides for circumstances where construction costs are
expected to exceed the Threshold Outturn (30% above the target price or GBP 4.2 billion). If all of thefollowing conditions are met, Bazalgette can ask the UK government to provide it with equity finance(Ashurst, 2015a, p. 14; Linklaters, 2015, pp. 40-42):
Bazalgette predicts an overrun beyond the Threshold Outturn and puts in place a mitigation
plan.



An independent technical advisor verifies that the overrun cannot be avoided, despite amitigation plan.

Bazalgette has used reasonable endeavours but failed to obtain more finance from existing orother investors.

If the UK government elects to provide equity, it must provide sufficient equity to cover predicted
overruns, even if Ofwat grants a lesser amount of additional revenue. Regardless of whether the UK
government elects to provide equity finance, Bazalgette must continue to seek further finance and must
apply to Ofwat for additional revenue (Ashurst, 2015a, pp. 4-5, 15, 18). Alternatively, the UK government
can elect to discontinue the project (Ashurst, 2015a, p. 15). There does not appear to be a limit on the
UK government restarting the project with another company.
Given the requirements for independent verification of overruns and the possibility of applications for
additional revenue, it seems that for overruns beyond Bazalgette’s control, the contingent equity
support agreement would not be used. Rather, the overrun would be verified and additional revenue
granted, allowing Bazalgette to obtain additional private finance. Further, the prospect of having the UK
government as an additional shareholder may discourage calls on the contingent equity support
agreement, regardless of the source of the overrun. However, the contingent equity support agreement
provides coverage for cost overruns, including those the regulator refuses (Ashurst, 2015a, pp. 4, 14-15).
Viewed in isolation of other incentive mechanisms, this may somewhat dilute the incentive for
Bazalgette to take all steps within its control to keep costs below the Threshold Outturn.

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Government buy-out option for extended insolvency

The special administration offer agreement provides for circumstances where Bazalgette is in insolvency
administration for more than 18 months (Ashurst, 2015d, p. 2). In such circumstances, the UK
government can elect to offer to purchase Bazalgette at any price it chooses or discontinue the project(Ashurst, 2015d, p. 6; Haigh, 2015, p. 5). As with the contingent equity support agreement, there does
not appear to be a limit on the UK government restarting the project with another company.
Compensation for debt and equity holders for discontinuation

The discontinuation agreement includes potential compensation for equity and debt holders in the event
the UK government decides to discontinue the project. Senior debt holders would receive all of theprincipal and accrued interest, but equity holders would receive the lesser of (Moody's Investor Service,
2015, p. 21):

total compensation minus senior debt compensation (potentially zero)the equity return amount they would have received had the project been delivered at thetarget price.

Information transfer

The GSP includes a liaison agreement between the UK government, Bazalgette and Thames Water.
Among other things, the agreement provides for the transfer of information that allows the UK
government to monitor the TTT’s progress and take early action if any issues arise.

Sequencing of other measures resulted in a low WACC bid
The financing competition was one of the last steps in setting up the TTT project. By the time investors
were competing to finance the project, many other aspects had been completed or were approachingcompletion, including costings for the tunnel. The GSP and regulatory framework were also in place orclose to completion. As a result, bidders were competing to provide a rate of return rather than apurchase price and were doing so with a much greater degree of certainty and risk protection than isusually the case for a PPP. The winning WACC bid had a 2.5% real rate of return (Ofwat, 2015d, p. 54).
This was the lowest WACC for any regulated utility in the UK. It was also below Ofwat’s 3.3% estimate for
the TTT and its 3.6% 2014 decision for regulated water and sewer providers (Oxera, 2015, p. 1).
Arguably, this is a reflection of both the hybrid approach taken for the project and the absence of risk
allocated to bidders in the financing competition.

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Criticisms and challenges
Both the TTT itself and the hybrid approach have been subject to criticism, especially in relation towhether they will ensure consumers receive value for money. The following section summarises some of
the key criticisms.

Project selection was controversial
This discussion paper focuses on mechanisms that can incentivise the private sector to finance, constructand operate large, complex infrastructure efficiently. As a result, it does not focus on issues relating toensuring the efficient selection of particular projects. However, a brief summary of the project selection
issues relating to the TTT is necessary to acknowledge that project selection issues are ever present andto provide factual context.
The Thames Tideway Strategic Study, Ofwat’s technical advisors and the UK government consideredseveral alternatives to the TTT. These include (National Audit Office, 2014, p. 21; National Audit Office,2017, p. 13):

separating rain water runoff from sewage within the sewer systempreventing rain water runoff from entering sewers



installing sustainable drainage solutions (SuDS), which reduce the rate at which rain waterrunoff enters the sewers

building one or two smaller or shorter tunnels.

Several Thames Water and UK government studies concluded that none of these alternatives or
combinations of them was preferable to the TTT. They found that alternative options were likely to beeither less effective than the TTT in meeting dissolved oxygen standards and reducing spills or equallyeffective but more expensive (National Audit Office, 2017, p. 23). For the SuDS option, there wereconcerns about its viability, given the complexity of needing a broad range of stakeholders to cooperate(National Audit Office, 2014, p. 23).
These findings have been somewhat controversial. Reputable critics have suggested the TTT is notnecessary due to upgrades to London’s sewer system completed in 2015. They also note the UK’s
decision to leave the European Union which, when implemented, will remove the obligation to comply
with the EU directive (National Audit Office, 2017, p. 15; Financial Times, 2016). Some consider thatalternatives were not adequately tested – especially combinations of alternatives – and benefits wereoverstated due to unrealistic modelling assumptions. They also consider the UK government should haveupdated its analysis in the period between endorsing the TTT in 2007 and project commencement(National Audit Office, 2014, pp. 22-24).
The National Audit Office (NAO) seems to largely disagree with these views (National Audit Office, 2017,p. 26). It found only one alternative to the TTT that was similar in cost and timing and which came close
to complying with the EU directive: a shorter tunnel. However, as a shorter tunnel would not divert
sewage from half of the unsatisfactory CSOs, it was not a viable option in any case. The NAO found that
there may have been scope for a narrower tunnel. However, the UK government considered that doing
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growth (National Audit Office, 2017, p. 26). Also, the UK Government conducted reviews of the TTT in2012 and 2013, which found the evidence supporting the TTT was still valid (UK government, 2015, p. 3).

Thames Water’s role is controversial
Thames Water being unavailable to finance, construct and operate the TTT has drawn substantial
criticism. A former Ofwat director-general noted Thames Water’s choices, not external circumstances,
led to its financial position. Therefore, the UK government should have required Thames Water todevelop the TTT, even if that necessitated an equity injection or a period of insolvency administration
followed by new owners (National Audit Office, 2014, p. 26; Byatt, 2014, p. 14). Ofwat disagrees. It
considers that any water and sewerage business would have struggled to develop the TTT within its
existing business because of the risks involved. It further considers that it does not have the power torequire Thames Water to finance, construct and operate the TTT itself (National Audit Office, 2014, pp.
10, 26; UK Government, 2014, pp. 8, 11).
Thames Water’s unavailability also caused other issues. Specifically, it ran the construction competitions,but it is not an investor in the project. While Thames Water’s technical expertise likely assisted, it does
not have strong incentives to pursue the best price-quality mix for the TTT (National Audit Office, 2017,p. 35). They would have been stronger if it were an investor in the TTT. Also, Thames Water’s
unavailability has resulted in ultimate responsibility for financing, constructing and operating the TTT
falling to a group of investors without specific expertise in the water and sewage industry. It is impossible
to know whether these factors will ultimately impact the TTT’s efficiency.

Central importance of the P80 estimate for efficiency
The target price derived from the P80 estimate is extremely important to the ultimate efficiency of the
TTT’s delivery. It is the foundation upon which the efficiency incentive/risk sharing mechanisms are built.
As a result, Bazalgette has strong incentives to deliver the TTT on time at the target price, regardless ofwhether that represents the efficient outcome. In turn, the target price must be as accurate as possible.
If the target price is too aggressive, it could discourage investment, lessening competition tobuild/finance the TTT or contribute to potential incentives for poor construction quality (discussed
below). If the target price is too conservative, it could be too easy to beat, locking in abnormal returns toinvestors at the expense of consumers.
The financing-competition results indicate this may be a real concern. The WACC bid was very low, andthere appears to have been no shortage of competitors to construct or finance the TTT. Also, many ofBazalgette’s investors are pension funds (Bazalgette, 2016a). These investors generally seek lower risk
investments. It seems unlikely such investors would bid such a low WACC if they considered there was
genuine uncertainty they may lose up to GBP 400 million due to costs above the P80 estimate.
Therefore, it appears the P80 estimate is more likely to be conservative than aggressive. However, Ofwat
considers the target price a solid estimate of the efficient costs of building the TTT (Ofwat, personalcommunication, 2017).
Potentially, a more balanced approach would imply a still greater extent of construction risk-sharing withthe state, but this could have infringed on the project’s on/off the public balance sheet status, which was
one of the objectives in this project.

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Institutions are important when considering
replication
There are ongoing attempts to replicate the TTT’s hybrid approach. Cities such as New York areconsidering using it to develop their own infrastructure (Financial Times, 2016) and investors haveapproached the UK government to develop further infrastructure. However, replication may provedifficult. The mechanisms in the TTT’s hybrid approach can be copied. But there are institutional factorsthat seem to have provided the foundation that made the hybrid approach possible. These include:

The UK has extensive skills and almost three decades of experience in both incentive regulation
and PPPs.

Long-standing incentive regulation and PPP approaches and practices.

 Investor trust in the above.
In particular, it seems that investors have been willing to invest in the knowledge that the UK’s
experienced, mature and trusted institutions will be responsible for handling unexpected events. They
seem to trust that should such unexpected events occur the relevant institutions will deal with them in amanner that is either not detrimental to investors or at least fair. It is not clear how well the TTT’s
mechanisms would apply in the absence of these factors or how quickly or easily they could be
developed in industries or jurisdictions that do not already have them. Specifically, it is difficult todetermine how the approach would operate in relation to transport infrastructure, such as motorways,
where incentive regulation is less common and investors are less accustomed to how it affects theirinvestment returns.

Conclusion
The TTT demonstrates an innovative approach to infrastructure development. It takes mechanisms froma range of fields to embed efficiency incentives and attract private financing at a reasonable cost, while
discouraging the moral hazard that can come with relieving private parties of risk.
As with all approaches to developing infrastructure, specific decisions within the hybrid approach raisegenuine issues of concern. In particular, it is unclear whether the project would be better with Thames
Water as an investor. Also, it is unclear whether the P80 estimate Ofwat used for the target price – andthe strong cost reduction-incentives built on it – will operate as it should and drive efficiency or instead
lock in abnormal profits. We will not know whether the hybrid approach is a more efficient way ofdeveloping infrastructure until construction is complete and the TTT is well into its operation phase.
Regardless of this uncertainty, the overall structure and mechanisms of the TTT’s hybrid approach are auseful and innovative contribution to the field of infrastructure development. It is clear that substantial
care has been taken to combine good practices from incentive regulation, project finance and alliancing
to design measures that are capable of providing incentives for the private sector to finance and deliverlarge, new infrastructure efficiently. The model appears likely to deliver the best possible value fromprivate financing for such a large and potentially risky public infrastructure investment. Opportunities for
replication of the model will, however, be confined to jurisdictions with a sophisticated and robust
regulatory capacity.

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Notes

th

1 Sir Joseph William Bazalgette was the civil engineer responsible for the creation of London’s sewerage system in the 19 Century
2 This would be unusual for a PPP (Financial Times, 2015b), but not for incentive regulation, and provides investors with greater liquidity.
3 If the actual overall project spend exceeds the target price, Bazalgette will not receive revenue for 10% of that overrun (Ofwat, 2015a, p. 24).
For minor delays, Bazalgette will receive a minimum one percentage point rate-of-return reduction (Ofwat, 2015c, p. 8).
4 The regulatory framework includes a Financing Cost Adjustment that operates where actual financing costs vary by more than 50 basis points
from the bid WACC. In those circumstances, Bazalgette’s revenue will be adjusted to share a proportion of the increased/decreased costs with
consumers (Ofwat, 2015a, p. 13).
5 Ofwat’s annual targets can be amended to take account of the following trigger events if they have an impact greater than GBP 10 million and
2% of the Annual Base Case Forecast, including (Ofwat, 2015a, p. 18):material project scope changes; changed legal requirements; materialchanges to the project’s technical requirements.
6 It also has discretion over the rate of return and incentive mechanisms that would apply to such additional expenditure (Ofwat, 2015c, p. 11).
Bazalgette may appeal against Ofwat’s determination to the Competition and Markets Authority (Ofwat, 2015a, p. 10).

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Appendix 1. Research questions and outputs
Introduction: Getting the basics right
What are the economic characteristics of infrastructure?
What is infrastructure and what are operations? What are
the models of private participation in infrastructure andthrough which significant private investment actually takes
place?

Makovšek, D. (2018), “What is Private
Investment in Transport Infrastructureand Why is it Difficult?”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Can private investment improve productive efficiency?
Makovšek, D. (2018), “The Role of
Improve project selection? Close the infrastructure funding Private Investment in Transport
gap? Have other positive effects when it is private?
Infrastructure”, Working Group Paper,

International Transport Forum, Paris(forthcoming).
What have the private investment trends in transport Mistura, F. (2018), “Quantifying
infrastructure been over the last 20 years? How much Private and Foreign Investment inof that was foreign private investment?
Transport Infrastructure”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).
Defining the challenge: How uncertainty in contracts matters
How does uncertainty affect risk pricing? Beyond
investors, do suppliers in PPPs also have issues withrisk pricing? How does its transfer to the private
sector affect competition? What does uncertainty
mean for the public vs. private cost of financing?

Makovšek, D. and Moszoro, M. (2018),“Risk pricing inefficiency in public–
private partnerships”, Transport
Reviews, 38(3), 298-321.

Is uncertainty also an issue in long-term
services/operations contracts?

Beck et al. (2018), “Uncertainty inLong-term Service Contracts:
Franchising Rail Transport
Operations”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

What is the competition for large transport
infrastructure projects in the EU Market? Is there adifference between traditional procurement and
PPPs?

Roumboutsos, A. (2018),” Competition
for Infrastructure Projects: Traditional
Procurement and PPPs in Europe”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

30© OECD/ITF 2018

THAMES TIDEWAY TUNNEL: A HYBRID APPROACH TO INFRASTRUCTURE DELIVERY | WORKING GROUP PAPER | ITF

Addressing uncertainty for suppliers: the construction phase as example
Adversarial vs. collaborative procurement – iscollaborative contracting the future?

Eriksson et al. (2018), “Collaborative
Infrastructure Procurement in Sweden
and the Netherlands”, Working Group
Paper, International Transport Forum,
Paris (forthcoming).

What lessons in dealing with risk and uncertainty
were learnt in Danish mega projects from Storebaelt
to Femernbaelt?

Vincentsen, L. and Andersson, K. S.
(2018), “Risk Allocation in MegaProjects in Denmark”, Working Group
Paper, International Transport Forum,
Paris (forthcoming).

What can governments do in the short run to reduce
inefficient pricing of risk by construction contractors?

Kennedy et al. (2018), “Risk Pricing in
Infrastructure Delivery: Making
Procurement Less Costly”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Addressing uncertainty in long-term contracts in the absence of continuous pressure for
efficiency
What is the public sector organisational Holm, K.V. and Nielsen, T.H. (2018),
counterfactual on which private investment should “The Danish State Guarantee Modelseek to improve?
for Infrastructure Investment”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).
Partial fixes to the Private-Public Partnership approach
How would an organisational structure consisting of
PPPs come close to a network-wide management
approach? What benefits would it yield?

Vasallo, J. (2018), “Public-Private
Partnerships in Transport: Unbundling
Prices from User Charges”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Should the public or the private side bear the cost of
long-term uncertainty? How could we design a PPP
contract to avoid hold-up due to incomplete
contracts?

Engel et al., (2018), “Dealing with the
Obsolescence of Transport
Infrastructure in Public-Private
Partnerships”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

© OECD/ITF 201831

THE DANISH STATE GURANTEE MODEL FOR INFRASTRUCTURE INVESTMENT | WORKING GROUP PAPER | ITF

Long-term strategic approach
How do the PPP and regulated utility model (RAB)
compare in terms of efficiency incentives?

Makovšek, D. and D. Veryard (2016),“The Regulatory Asset Base andProject Finance Models”, International
Transport Forum Discussion Papers,
No. 2016/01, Paris.

What basic considerations underlie the choice
between a PPP and RAB approach?

Hasselgren, B. (2018), “Risk allocationin Public-Private Partnerships and theRegulatory Asset Base Model”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

Which are the preconditions a country would need to Alchin, S. (2018), “A Corporatised
take to establish a RAB model on a motorway
Delivery Model for the Australian Road
network? Is user-charging a must?
Network”, Working Group Paper,
International Transport Forum, Paris(forthcoming).
From the investors’ point of view, does a RAB need to
be fully reliant on user-charging?

Francis, R. and Elliot, D. (2018),“Infrastructure Funding: Does it
Matter Where the Money Comes
From?”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

Incentive regulation can also yield perverse
incentives. Can the capex bias be managed?

Smith et al. (2018), “Capex Bias andAdverse Incentives in Incentive
Regulation: Issues and Solutions”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

Does it make sense to pursue hybrid solutions
between PPP and RAB?

Zhivov, N. (2018), “The Thames
Tideway Tunnel: A Hybrid Approach to
Infrastructure Delivery”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

32© OECD/ITF 2018

THAMES TIDEWAY TUNNEL: A HYBRID APPROACH TO INFRASTRUCTURE DELIVERY | WORKING GROUP PAPER | ITF

Uncertainty and private investment mobilisation in transport infrastructure
What lessons can we draw from recent attempts tomobilise private investment in infrastructure in theaftermath of the global financial crisis?

Makovšek, D. (2018), “Mobilising
Private Investment in Infrastructure:
Investment De-Risking andUncertainty”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

Synthesis

ITF (2018), Private Investment inTransport Infrastructure: Dealing with
Uncertainty in Contracts, Research
Report, International Transport Forum,
Paris© OECD/ITF 2018

33

CPB

CPB

CPB

Private Investment inTransport Infrastructure
Dealing with Uncertainty
in Contracts

The Role of Private
Investment in Transport
Infrastructure

Risk Pricing in
Infrastructure Delivery:
Making Procurement Less
CostlyCorporate Partnership
Board

The Thames Tideway Tunnel
A Hybrid Approach to
Infrastructure Delivery

Corporate Partnership
Board

4

2

This paper examines the how theThames Tideway Tunnel, a major
infrastructure project in the United
Kingdom, is financed, constructed
and operated. It analyses to what
extent the approach used forthe project is applicable in othercontexts, for instance transport
infrastructure projects. The paper
is part of a series of 19 papers
and a synthesis report producedby the International Transport
Forum’s Working Group on
Private Investment in Transport
Infrastructure.

6

CPB

CPB

CPB

Dealing with the
Obsolescence of Transport
Infrastructure in PublicPrivate Partnerships

Risk Allocation in
Mega-Projects in Denmark

Risk allocation in PublicPrivate Partnerships andthe Regulatory Asset Base
Model

Corporate Partnership
Board

Corporate Partnership
Board

8

Corporate Partnership
Board

10

12

CPB

CPB

CPB

The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

The Danish State Guarantee
Model for Infrastructure
Investment

Infrastructure Funding:
Does it Matter Where theMoney Comes From?

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

16

14

18

CPB

CPB

CPB

Public-Private Partnerships
in Transport: Unbundling
Prices from User Charges

A Corporatised Delivery
Model for the AustralianRoad Network

Collaborative Infrastructure
Procurement in Sweden and
the Netherlands

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

22

20

24

CPB

CPB

CPB

Competition for
Infrastructure Projects:
Traditional Procurement
and PPPs in Europe

Capex Bias and Adverse
Incentives in Incentive
Regulation: Issues andSolutions

Uncertainty in Long-term
Service Contracts:
Franchising Rail Transport
Operations

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

28

26

30

CPB

CPB

CPB

Quantifying Private andForeign Investment inTransport Infrastructure

What is Private Investment
in Transport Infrastructureand Why is it Difficult?

Mobilising Private
Investment in Infrastructure:
Investment De-Risking
and Uncertainty

Corporate Partnership
Board

Corporate Partnership
Board

32

1

Corporate Partnership
Board

Corporate Partnership
Board

34

36