With limited capital investment, water company spending in AMP5 will be tight. But is this necessarily bad for consultants and contractors? John McKenna reports.
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Nine months. That magical passage of time over which a new life can be born is also the period that the water companies have had to go back through their draft business plans for Asset Management Period 5 (AMP5) − which governs water companies spending for the next five years − and cut out any spending deemed unnecessary before handing in their final business plans in April.
Spending in the final AMP5 plans was down 12% on the £27bn proposed in last August’s drafts to £24bn between the 21 companies for 2010-2015 (NCE 23 April). The reason for the cutbacks? The cost of debt, which has soared during the credit crisis, raising water companies’ cost of borrowing and therefore the price of investments during AMP5.
Attempting to increase customers’ prices further was not an option, with regulator Ofwat applying pressure to ensure price rises were kept to a minimum during these straightened times. So if work costs more, but there is no extra income to fund the increases, the only option left open the water companies was to cut the amount of work carried out in AMP5.
“The amount of money available for the majority of work isn’t that great. I don’t think anyone could accuse the industry of being profligate.”
Piers Clark, Mouchel regulated industries
The most high profile cutback was the postponement of Thames Water’s planned £400M, 150Mm³ reservoir at Abingdon, Oxfordshire until AMP6 (NCE 12 March). Thames, the biggest spender, made the biggest cuts from its draft plan, down £1bn from £6.5bn to £5.5bn in its final plan.
Despite these cuts, the spending during AMP5 will still be at record levels, up 20% on the £20bn spent during AMP4.
Major projects such as Thames’ London Tideway Tunnels and United Utilities’ West East Link pipeline between Liverpool and Manchester will continue.
“There will be a greater quantum of money available in AMP5,” says Mouchel regulated industries managing director Piers Clark.
“But if you take account of inflation and the big projects, the amount of money available for the majority of work isn’t that great. I don’t think anyone could accuse the industry of being profligate.”
Maintenance and upgrade
The majority of work in AMP5 will centre on the maintenance and upgrade of existing facilities. Despite the cutbacks in the final plans, it was always going to be the case that there would be few major capital projects going ahead during AMP5. Ofwat’s emphasis on carbon emission reduction meant that the big easy gains for water companies were to avoid carbon intensive heavy civil engineering projects.
“There is a definite move away from building, for example, huge wastewater treatment works,” says Clark.
“It’s now about the resilience of the equipment you have got and maintaining that. There will be a lot of work analysing data and assessing how the assets are operating. It’s going to be a tight period financially, but that is also good news for us because the water companies will look to consultants to find efficiencies.”
While lack of major civils in AMP5 might be bad news for some contractors, Morrison Utility Services chief executive Charles Morrison is also upbeat about AMP5, albeit the period’s later years.
“The spending plans for AMP5 should probably play to our strengths - we predominately repair and upgrade existing facilities,” says Morrison.
“The real value is actually being able to work with clients so they understand how their assets work. There is a need for, and there will be a strong focus on, accurate asset management data.
“Once we know the determination we can sit down with clients with long term contracts and work out what services can be provided within that cost envelope. With tough cost targets, I envisage much closer working between us and those long term clients.”
Morrison added that he predicted a reduced spend in year one of AMP5 and years two to five will pick up. In addition to basic repair and maintenance Morrison predicted that Ofwat’s majoring on customer satisfaction would mean more collaborative working between utilities to reduce public disruption.
“The real value is actually being able to work with clients so they understand how their assets work.”
Charles Morrison, Morrison Construction
“It is important to let the public understand how we work,” he says.
“In one street we may have the maintenance contract with gas, electricity and water supplier, and the customer may want to know why we keep returning to dig up the road.
“This is something we are addressing with Thames Water and Scotia Gas Network − their footprints overlap, so we are trying to synchronise when we do work for both clients − by only having to dig a trench the once cuts costs and minimises customer disruption.
“Local authorities are also looking at it and there are some big wins there that I think the regulator will be trying to encourage.”
A welcome move
While AMP5 may not promise much in the way of major civils projects, the draft Floods & Water Management Bill, also published in April for consultation, proposes introducing regulations to allow the creation of companies to deliver large infrastructure schemes, noting that “since privatisation, the significant majority of investment projects have been relatively small scale”.
New companies could be set up to deliver single “mega projects”, and its shareholders would most likely comprise of several water companies and private investors.
Clark welcomes the move.
“We want to be in a situation where new entities can be formed to create super projects because that will drive new innovations,” he says.
“This proposal would allow new entities to come in and funding to come from other sources and that can only be a good thing.”
Morrison said the prospect of raising much larger levels of finance than currently is possible in the water sector could finally make the idea of a national water transfer scheme a reality (see box).
“Logic dictates that [a national water grid] is a good idea,” said Morrison.
“There is lots of rainfall in the north of the UK but there are parts of southern England that are technically desert.
“From an engineering point of view creating a water grid is not rocket science. It is the funding that is key.”
A way back for a national water grid
The concept of a national water grid was last seriously debated in 2006, when an Environment Agency study rejected the scheme on cost grounds (NCE 8 September 2006).
It estimated that to build a national water grid comprising five pipelines carrying 1,100 megalitres a day over a distance of 560km would cost £15bn. This, claimed the report, would be four times more expensive thsn building new reservoirs to provide similar levels of water supplies.
However, climate change scientists predict water resources are only going to get more scarce in the south of England, and this may yet tip cost-benefit analyses back in favour of a water grid. The measures proposed in the draft bill would create the funding mechanism necessary to build it.