Project Aquatrine - the largest PPP water project to have made it off the drawing board in the UK - is a three-stage water and wastewater scheme worth £2.3bn (US$4.28bn) across Ministry of Defence (MoD) properties around the British Isles, writes Alex Black.

The project is being delivered as three separate contracts: Package A (covering the Midlands, Wales and south-west England), Package B (Scotland) and Package C (north and east of England).

Package A was signed in May 2003 with BREY Utilities – a consortium comprising Yorkshire Water, Earth Tech Engineering and Kellogg Brown & Root, and Package C was signed in October 2004 with C2C (Severn Trent and Costain).

Package B was signed as a 25-year contract with Thames Water Nevis – a wholly-owned subsidiary of RWE Thames Water – that agreed to provide water and wastewater services to more than 550 MoD sites in Scotland, including RAF Lossiemouth, RAF Kinloss and the naval base on the Clyde.

The overall Aquatrine concept was initiated following the UK government's 1998 Strategic Defence Review which concluded, among other things, that the MoD should seek to engage private sector expertise to run the ‘non-core’ aspects of its daily running.

This would enable it to concentrate on its core objectives: the procuring and running of defence and military hardware.

Aquatrine – and Package B in particular – was a big step towards outsourcing responsibility for the MoD's requirements and legislative duties and allowing water and wastewater services across its UK estate to be managed on a corporate basis, rather than a site-by-site basis, as was previously the case.

As a PPP, Project Aquatrine transfers the responsibility and risk for the operation and maintenance of the MoD’s UK water and wastewater assets and infrastructure to private sector providers, allowing the MoD to take a ‘strategic approach’ to the improvement and provision of these services.

The transaction

At the end of 2003, the MoD announced that Thames Water Nevis had beaten off competition from two consortia: one made up of Brey Utilities, Yorkshire Water Services, Earth Tech Engineering, Halliburton Brown & Root; and the other of United Utilities, Morgan Est and Babtie.

Almost exactly a year later, the MoD confirmed NEVIS had been awarded the contact and would take over responsibility for the provision of water and wastewater services on its Scottish properties from March 2005, following a pre-commencement period.

James Elwen, from UK law firm McGrigors, advised on Package B acting for the MoD. He explains that a £18m (US$34m) funding package was needed to cover the asset investment programme over the first 5-10 years.

This was provided in a debt package supplied by RWE Thames Water, split between £16.5m (US$31m) and £1.5m (US$2.8m) senior and sub debt respectively. The amount of equity involved was nominal.

‘The two principal sub contractors were Scottish Water and Thames Water Services,’ says Elwen. ‘Scottish Water is the operations and maintenance sub contractor, and Thames Water Services is the asset investment sub contractor.’

The £2.3bn overall value of the three packages is based on MPV and unitary charge over 25 years. The breakdown between the three deals works out at around £1bn (US$1.85bn) for Package A, £500m (US$939m) for Package B and £800m (US$1.5bn) for Package C.

Retired McGrigors partner Jim Smith, who worked on Project Aquatrine from the beginning, says the scheme threw up a number of challenges.

‘Firstly, it was unique because it involved the MoD getting involved in something that wasn’t anywhere near its core business and didn’t impact on its main role. Standard MoD PFIs – Air Tanker, FSTA and Vehicles C for example – impact directly to the MoD’s main role, whereas Aquatrine is essentially a utilities project,’ says Smith.

The other major consideration was the fact that the three packages were spread over more than 3,000 UK sites – each of which required individual work done on them.

Explains Smith: ‘With Package B we were dealing with everything from large military establishments like Faslaine [home to the UK’s Polaris nuclear submarine fleet] to remote huts on firing ranges. The diversity was a major factor.’

The procurement team realised from an early stage that the varying nature of sites and different treatment needed for each one was going to make the deal incredibly technical.

‘The variations involved certainly made the contract a lot more complicated,’ says Smith. ‘One of the crucial elements was getting the contractors to accept the risks associated not only with a huge variety of locations, but also with the way the treatment was done.’

As it turned out, those variations were more extreme than anything previously tackled by a water PFI scheme.

‘On the wastewater side, you have lots of different treatments,’ says Smith. ‘Often it wasn’t just a case of pulling the chain and having it flow into the sewer. Some run straight into the main sewers and some distribute waste into reed beds.

‘A lot of these sites already have their own waste treatment plants, but some didn’t. Some had private water supplies, some were working out of boreholes – we had to adapt for particular risks in particular areas. There wasn’t a solution that covered the whole project.’

When the contract was awarded to NEVIS, UK Defence Minister Ivor Caplin said he looked forward to ‘a successful long-term partnership’ which would bring private sector expertise and capital into the management of the department's water and wastewater infrastructure.

‘This contract will also enable the transfer of environmental risk to those in the private sector who are best placed to manage it,’ he added.

Although, the three packages have all closed this year, and are therefore at the beginning of their project lives, the success of the individual procurements have set a standard for outsourcing of the MoD’s non-core services.

As the pressure increases to concentrate the MoD’s budgets on key military operational services, projects like Aquatrine have shown military planners that the private sector can be brought in to take over the more ‘everyday’ aspects of the MoD estate.

If a complex £2.3bn programme split into three packages involving several private sector companies can move from concept to close in a little over six years, the MoD PFI market has a lot to look forward to.