NEWS ANALYSIS


Ofwat takes control


Water regulator Ofwat is to allow water companies to bring forward investment to help smooth the peaks and troughs traditionally created by the five-yearly AMP cycles. The move will also bring about efficiencies and reduced costs. Dean Stiles explains.


OFWAT’S CHAIRMAN Jonson Cox,


is driving


change in the water industry. He is pushing water utilities to lower customer bills in 2015-20 and demanding that they “build trust” with their customers.


Cox, who previously led Anglian Water from 2004 to 2010, has been in the post for a year but has already instigated more change at Ofwat than many of his predecessors. While his criticism of “morally questionable” tax structures in the water sector may be unwelcome, other changes are not: he is driving the move to assess water companies on total expenditure (totex) rather than the separate assessment of capital expenditure and operational expenditure used until now. And he is behind Ofwat’s permission given to water firms in England and Wales to bring forward into 2014 investment that would have been spent in the five years from 2015.


to


The latter move is designed reduce


the stop and


start pattern of work in the sector driven by the asset management plan cycles.


Infrastructure


While the sixth Asset Management


Plan, AMP6


for the five-year period from 2015, still needs approval from


Ofwat, it is likely


that the total expenditure on building and improving water infrastructure will exceed £20B over the five years. New water and sewage treatment works, distribution


pipes and sewers will be built with many existing assets upgraded or refurbished. Phil Joyce, director at Orange


The Partnership,


pioneer of forensic auditing in construction overcharges and which works for water companies including Scottish Water, Southern Water and United Utilities, says Ofwat’s decision to bring forward into 2014 spending from the five years from 2015 could lower costs. “The change in AMP periods brings about a ramping down of work under the old period and an increase in the new.”


He says: “Traditionally, as this transition occurs, many water companies also change the suppliers they work with and the contractual terms with which they employ them. This creates inefficiencies and additional costs in the supply chain as suppliers demobilise and


remobilise people


and resources; new joint ventures get to know each other and water companies and suppliers work out how they will operate together in practice.


Inevitably some of these are passed on to the water companies.


“If the water companies can use the Ofwat’s announcement


that they


can bring forward £100M of works from 2014-2015 to smooth the transition and for example avoid the need for supplier staff to be made redundant and then re-employed,


they should


see the benefit of improved efficiency and reduced costs.” British Water’s research


shows that cyclical spending, caused by the five-year regulated periods the water firms work to, had led to up to 40,000 job losses. In addition, the peaks and troughs in spending cause uncertainty and inefficiency for contractors, British Water found.


Ofwat’s decision to bring forward


spending follows


the establishment in April of a joint industry group to tackle the issue of cyclical investment.


Cyclicality working group chair and former ICE president Richard Coackley says the decision will “reduce the peaks and troughs of workload that do so much damage to companies” in the sector.


“We believe that the water companies will bring forward significant volumes of work, not only ensuring more efficient delivery through the reduction in the roller coaster cycle of investment, but also contributing to growth in the economy by bringing forward much needed spending,” he says.


Research


The change during the course of AMP6 to a Totex based assessment could also drive further efficiencies and lead to big savings in the water industry, says Jason Jones, UK water sector


leader


Turner & Townsend. “Turner


at & Townsend


has supported several of the UK’s top water companies in their planning for AMP6. Our research shows that companies that fully embrace


totex will be able to drive efficiencies at least 15% greater than those achievable with separate capex and opex approaches. This greater efficiency could give them the edge when, and if, Ofwat increases competition beyond the opening up of the retail market for non- domestic customers planned for 2017,” Jones says. The introduction of this new approach will provide companies with greater freedom to choose the optimum solution to a business


risk. Value-based


“whole life” costing will become the norm, as water companies take a more holistic approach to how they spend their money, he says.


Inevitably these changes, that have direct consequences for Tier 1 contractors, will trickle down the system to smaller suppliers. But how fast and to what extent is less clear.


“Some


already business


companies have re-shaped in


their preparation,


while others are only just starting to think about it. Some of those who have yet to grab the totex bull by the horns grumble that Ofwat was late in setting out the new rules of the game. Certainly many of the best brains in the industry have until now been focused on finalising business plans,” Jones says


Whatever the reason, those who have yet to prepare for totex have their work cut out as time is starting to become tight, he says. ■


Those who have yet to grab the totex bull by the horns grumble that Ofwat was late in setting out the new rules of the game, says Jason Jones


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December 2013 | WET News | 5


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