Tackling boom and bust in the water industry (Comment)

Water companies hold the key to resolving many of the problems being created by the AMP cycle, writes Chris Day, operations director of Hydro International’s UK wastewater division:

In a recent report, Infrastructure UK confirmed that boom-and-bust spending is having a real and damaging impact on the industry - and the consumers it serves.

The consequences of five-year investment cycles are adding an extra £5 to £6.50 to customers’ annual water bills as well as costing the industry up to £1.1 billion each AMP cycle, says the Government study which has been applauded by many industry and engineering groups.

The report, titled Smoothing Investment Cycles in the Water Sector, included input from stakeholders in the supply chain, who provided evidence of the cycle’s ‘hire-and-fire’ impact on industry employment levels.  It is estimated that between 20,000 and 40,000 employees are lost and re-hired every five years.

Infrastructure UK acknowledges that the situation is not improving and that attempts to mitigate its effects have had little success. There is now wholehearted agreement about the problem from all parts of the industry and OFWAT, but finding solutions that can bring about real change will be another matter.

The report suggests that there is no ‘simple, single cause’ for the investment patterns that have emerged since water industry privatisation and no one part of the industry is to blame.  Instead, it says the cyclical effect has become ‘cultural’ and the industry needs to make a conscious effort to challenge ‘learnt behaviour’.  

But, isn’t there an ‘elephant in the room’ here - that the simple, single cause of the problem is the regulatory structure of the industry itself?  

Admittedly, all suggested solutions to change the structure by staggering AMP cycles in some way have failed to convince regulators and investors that they are worth the risk. Longer price control periods of up to eight years may be considered before AMP7 begins in 2020.

For now, the Government is pinning its hopes on better planning by water companies to smooth out the peaks and troughs. It is challenging them and the whole supply chain to work more collaboratively and improve communication.

Working out robust contractual mechanisms will be essential, especially those which incentivise projects according to a Totex (total expenditure) model, rather than just according to capital expenditure.

This will be a major challenge:  it will mean water companies potentially letting contracts on the basis of cheaper operating and through-life costs, even when initial set-up costs appear uncompetitive.  

So, water companies will need to be open-minded and creative in developing the necessary scrutiny and assessment criteria for bids, as well as providing robust incentives for suppliers to deliver operating efficiencies long after they have left site.

All these changes signal hope that the water industry supply chain can contribute to greater engineering innovation and develop solutions that are based on achieving the best through-life costs for our customers.

Ofwat will consider Infrastructure UK’s recommendations as part of its Future Price Limits consultation this autumn and a British Water conference on 15 Nov  will debate the Infrastructure UK report.