Water consultants and contractors this week said they feared they would have to make job cuts after water regulator Ofwat ordered water companies to rein in spending budgets and cut bills.
Water companies now face the prospect of hunting efficiencies in the supply chain after the regulator told them to spend much less than they had asked it to allow.
The regulator’s final determinations for water and sewerage companies in England and Wales for AMP5 (2010-2015), published last week, imposed tough limits on how much water companies can charge.
The price limits will lead to average annual domestic water bills falling £3 in real terms over the period from 2010 to 2015 the water companies had asked for an average increase of £31.
“We have included some specific costs for some specific schemes. For this increase we expect more outputs.”
Regina Finn, Ofwat
The average domestic water bill at the end of that period (2014/15) will be £340, compared to £343 at the end of the current period (2009/10). The limits set increase by an average of 0.5% a year before inflation.
Ofwat has also said that water companies capital spend over the five years must total £22bn − a 7% increase on the present review period and higher than any previous five-year period.
The figure is £1.3bn higher than July’s draft determination but lower than the figure asked for in final business plans. “We have included some specific costs for some specific schemes,” said Ofwat chief executive officer Regina Finn. “For this increase we expect more outputs.”
Supply chain squeeze
Consultants and contractors representative body British Water director Paul Mullord warned that the supply chain will bear the brunt of the consequences. “The one concern we have is that some of the water companies may react by thinking they need to screw more out of the supply chain.”
The survival of some consultants and contractors could be jeopardised by decisions to delay or cancel work, said Mullord. “They are currently surviving without work, and the longer that goes on the less they can survive,” he said.
“They are currently surviving without work, and the longer that goes on the less they can survive.”
Paul Mullord, British Water
Grontmij UK and Ireland water director Scott Aitken agreed: “The consequences are being felt now. There are very limited opportunities for the industry to commence work with water companies. We are in danger of losing core skills and expertise in the industry.”
Mullord said high numbers of redundancies could cause irreversible damage. “Once that expertise is lost it’s very difficult to get back,” he said.
Consultant Atkins has recently been criticised for making redundancies in its water operations division in the UK and transferring the work to staff in Bangalore, but Atkins chief executive Keith Clarke defended the practice.
“Water companies are under extreme pressure to cut costs and we have responded. But we’re not changing the quality of work.”
Most water companies refused to comment until they had digested the content of the final determinations. But Anglian Water chief executive Jonson Cox did call the determination “harsh”. “We will now have to make significant cost cuts and efficiency improvements to meet the tough financial targets,” he said.
South West Water chief executive Chris Loughlin said “far-reaching decisions” will have to be made. “This leaves around a £50M funding gap in our investment plans,” he said.
Thames Water said that rising bad debts and the more expensive cost of financing “will make it more difficult to fund the essential investment in the network that is required”. Its chief executive David Owens quit in protest at the determination.
“This leaves around a £50M funding gap in our investment plans.”
Chris Loughlin, South West Water
Ofwat has also ruled that the cost of capital, which sets in stone the interest rate at which water companies are expected to borrow money at to fund investments, will remain at 4.5% post tax, which could make it harder to finance investment.
MWH director of business strategy for the UK David Smith said the determinations present a “tough challenge” for water companies.
“It is good to see the capital expenditure increase, but it is going to be challenging,” he said. “Financing that investment is going to be difficult.”
Aitken said the financial effects will affect water companies’ attempts to raise finance to pay for capital spending. “Water companies are concerned as to the financeability of the programme. They face that challenge of attracting investment and equity into their business.”
Water companies now have until late January to consider Ofwat’s determinations and can appeal to the Competition Commission.
Capital spending comparisons AMP 4:AMP 5
|Water Plc||AMP 5 final determination £bn||Plc business plans £bn||AMP 4 capital spending £bn|