Business

Water sector exuding a more secure hue

A sixth five-year cycle of capital investment is now being delivered by the regulated water companies and their suppliers. For a health check on the sector, Jon Masters grabbed 10 minutes with Atkins’ market director for water Graham Hunt.

Graham Hunt

A complex regime of targets and measures are used to keep track of the performance of water companies for their customers and shareholders. But one comment from Atkins’ market director for water Graham Hunt stands out as a good reflection on how the sector is doing: “Our staff turnover, above a natural baseline level, was not impacted by the transition from the AMP5 to AMP6 (asset management programme) cycles,” Hunt says.

This can be compared with the transition from AMP4 to AMP5 in 2010, which came at a time when virtually all 32 water companies were working to the same aligned AMP cycles.

“We had to reduce headcount across a number of our teams as AMP4 came to a close,” says Hunt. The consultant, along with all other suppliers, could only then await award of contracts for AMP5 before deciding how many heads to recruit again. Quite a lot has changed since then.

This is a sector worth £44.3bn in total expenditure – operations and capital investment – during the current AMP6 period from 2015 to 2020. According to the regulator Ofwat, the water companies have invested over £108bn since the water industry was privatised in 1989.

But over that time, the sector has also been characterised by the stop-start nature of investment programmes – hampering resource efficiency and squeezing work into the latter years of AMP periods. There will likely always be cycles of work to some extent. Framework contracts and alliances legally have to include an end point. But the industry has put significant effort into staggering procurement processes and in some cases developing longer alliances to reduce the ramping up and down of workloads.

“The supply chain in the water sector is in a healthy condition. It’s a mature market now, with a number of different procurement approaches. It’s great that the supply chain has a lot of skin in the game, incentivised and committed to making it work." Graham Hunt

Thames Water’s Alliance members are delivering work of the current AMP6 period up to 2020 and potentially will continue onto the subsequent AMP7 through a 10-year framework. Severn Trent Water announced it would extend the contracts of all seven of its AMP5 delivery partners, while starting the planning and design of AMP6 work early to maintain a continuum of workflow.

Atkins is working as part of the Thames Water Alliance and as a framework contract supplier to Severn Trent, Scottish Water and others. “Not all of these will cross over more than one regulatory period, but most are now out of step. They no longer all line up,” Hunt says.

“All are aiming for best value of delivery for the customer. The spin-off for the supply chain is a longer commitment to allow investment in innovation and the digital agenda, to deliver more efficiently at less cost.”

Ofwat’s oversight of the water companies’ performance shows some promising results. The average SIM (service incentive mechanism) score across the sector rose marginally from 81.6 out of 100 to 82.5 in 2015/16. However, only two of the leading water companies, Severn Trent and Anglian Water, have been allowed price increases through Ofwat’s ODI (outcome delivery incentive) regime for strong performance on wastewater treatment and leakage rates.

A lot of further investment is needed across the water sector, which presents a promising long-term outlook for suppliers, but it’s also clear that everyone has to keep pushing for better results. Ofwat’s determination on Severn Trent’s 2015/16 ODI results says: ‘Severn Trent Water’s targets become increasingly demanding during this price control period so the company will need to perform even better if it wants to earn a similar net reward next year.’

"There is a word of caution. At some stage, as mega projects such as Hinkley Point C and HS2 get going, there is going to be a lot of pressure put on the water sector’s ability to attract and retain the skills needed.”

“Procurement teams at the water companies are in business to get best value from suppliers,” says Hunt. “From Atkins’ point of view, we are often delivering to target cost and we’re on a journey to changing the way we deliver through the digital agenda and automation. And for cost-effectiveness and dealing with fluctuations in workload, we can provide 24 hour services from overseas locations.”

Atkins would appear to be in a good position. The firm’s resources can be balanced across a substantial portfolio of water contracts to take out the peaks and troughs in workload. Other suppliers will not have the same luxury. The overseas capability, Atkins’ 1500 strong Global Design Centre in India, is also a big asset.

“The supply chain in the water sector is in a healthy condition. It’s a mature market now, with a number of different procurement approaches aimed at greater value and efficiency. It’s great that the supply chain has a lot of skin in the game, incentivised and committed to making it work.

“People can see longer term and more secure career opportunities in this sector now. We made the transition from AMP5 to AMP6 without significant impact on staff numbers. But there is a word of caution. At some stage, as mega projects such as Hinkley Point C and HS2 get going, there is going to be a lot of pressure put on the water sector’s ability to attract and retain the skills needed.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you would like to contact Jon Masters about this, or any other story, please email jmasters@infrastructure-intelligence.com.