RLAM participates in historic green infrastructure project


Gail Counihan, Responsible Investment Analyst

22 May 2018

Meet Millicent and Ursula – the stars of the biggest infrastructure project the UK water industry has ever undertaken. Millicent and Ursula are the tunnel boring machines that will be instrumental to the construction of the Thames Tideway Tunnel, a £4bn infrastructure project that will deliver a 25km long sewer underneath the River Thames. The tunnel will add essential capacity to the capital’s Victorian era sewers, preventing almost 40 million cubic meters of raw sewage overflow into the Thames every year. 
Millicent – named after Suffragist leader Dame Millicent Fawcett - is configured for the softer earth around central London and to the west. Ursula - after Audrey ‘Ursula’ Smith, a British cryobiologist who discovered the use of glycerol to protect human red blood cells during freezing - is built for the tougher sand and chalk, east of Blackfriars.  Four additional boring machines and 4,000 employees are shared between 24 construction sites and will transform the capital’s waste system into one that will cope with the demands of London’s population growth for at least the next century. 
The chief engineer of London’s original sewers – Sir Joseph Bazalgette – future-proofed his designs by taking the most densely populated area of London, allocating each person the most generous allowance of sewage possible, and then doubling the original diameter. The burgeoning scale and mounting cost of the project prompted widespread ridicule at what was meant to be a simple infrastructure project. His countered by asserting, ‘Well, we’re only going to do this once and there’s always the unforeseen’. He foresight allowed the system to cope with the post-war population explosion that was facilitated by high-rise blocks in the 1950s and 1960s. The sewers were heralded a major triumph of the time, relieving the capital from repeated cholera epidemics and kick-starting the cleansing of the River Thames.   Fast-forward more than 150 years, and the Thames is one of the cleanest rivers in the world that flows through a major city, even though it still sees more than 40 million cubic meters of raw sewage overflow every year. 
The key aim of the tunnel is to prevent this sewage from entering the Thames in the first place – delivering the environmental ‘additionality’ that we always like to see from the green projects that we finance.  Operationally, the project employs one apprentice for every 50 full-time workers, and one ex-offender per 100 workers. Each tree that needs to be removed will be replaced by two trees, and the project will keep HGVs off the road by using the river itself to transport building muck. But crucially, in lending to the project, we have not compromised on any credit enhancements in exchange for these tangible environmental benefits.   The project is ring-fenced, which ensures funding can only be spent on the construction of the tunnel itself, mitigating a familiar weakness with more generic green bonds. The construction phase of the project is also de-risked, with revenues earned as soon as construction starts, as well as further support from the government in the event that construction costs pass a certain threshold. And vitally, we are able to lend to strong environmental projects, with meaningful credit enhancements, and seek to achieve attractive returns compared with unsecured bonds from utility peers.
The Thames Tideway Tunnel is an example of a project with tangible environmental benefits and meaningful credit covenants – supporting our view that bespoke, integrated ESG and credit analysis can help to deliver superior risk-adjusted returns for our clients.

Meet Millicent and Ursula – the stars of the biggest infrastructure project the UK water industry has ever undertaken. Millicent and Ursula are the tunnel boring machines that will be instrumental to the construction of the Thames Tideway Tunnel, a £4bn infrastructure project that will deliver a 25km long sewer underneath the River Thames. The tunnel will add essential capacity to the capital’s Victorian era sewers, preventing almost 40 million cubic meters of raw sewage overflow into the Thames every year. 

Millicent – named after Suffragist leader Dame Millicent Fawcett - is configured for the softer earth around central London and to the west. Ursula - after Audrey ‘Ursula’ Smith, a British cryobiologist who discovered the use of glycerol to protect human red blood cells during freezing - is built for the tougher sand and chalk, east of Blackfriars.  Four additional boring machines and 4,000 employees are shared between 24 construction sites and will transform the capital’s waste system into one that will cope with the demands of London’s population growth for at least the next century. 

The chief engineer of London’s original sewers – Sir Joseph Bazalgette – future-proofed his designs by taking the most densely populated area of London, allocating each person the most generous allowance of sewage possible, and then doubling the original diameter. The burgeoning scale and mounting cost of the project prompted widespread ridicule at what was meant to be a simple infrastructure project. He countered by asserting, ‘Well, we’re only going to do this once and there’s always the unforeseen’. His foresight allowed the system to cope with the post-war population explosion that was facilitated by high-rise blocks in the 1950s and 1960s. The sewers were heralded a major triumph of the time, relieving the capital from repeated cholera epidemics and kick-starting the cleansing of the River Thames.   Fast-forward more than 150 years, and the Thames is one of the cleanest rivers in the world that flows through a major city, even though it still sees more than 40 million cubic meters of raw sewage overflow every year. 

The key aim of the tunnel is to prevent this sewage from entering the Thames in the first place – delivering the environmental ‘additionality’ that we always like to see from the green projects that we finance.  Operationally, the project employs one apprentice for every 50 full-time workers, and one ex-offender per 100 workers. Each tree that needs to be removed will be replaced by two trees, and the project will keep HGVs off the road by using the river itself to transport building muck. But crucially, in lending to the project, we have not compromised on any credit enhancements in exchange for these tangible environmental benefits.   The project is ring-fenced, which ensures funding can only be spent on the construction of the tunnel itself, mitigating a familiar weakness with more generic green bonds. The construction phase of the project is also de-risked, with revenues earned as soon as construction starts, as well as further support from the government in the event that construction costs pass a certain threshold. And vitally, we are able to lend to strong environmental projects, with meaningful credit enhancements, and seek to achieve attractive returns compared with unsecured bonds from utility peers.

The Thames Tideway Tunnel is an example of a project with tangible environmental benefits and meaningful credit covenants – supporting our view that bespoke, integrated ESG and credit analysis can help to deliver superior risk-adjusted returns for our clients.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.