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Job cuts loom as Ofwat squeezes water spending

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.”

Tough targets

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 PlcAMP 5 final determination £bnPlc business plans £bnAMP 4 capital spending £bn
Dwr Cymru1.101.31.15
Severn Trent2.452.62.2
South West0.670.750.76
United Utilities3.573.72.5

Readers' comments (3)

  • I really fear for this industry now and I find it absurd that an industry with a guaranteed income that is not reliant on public spending has fallen victim to the recession in such a major way.
    We are in real danger of losing a lot of this expertise permanently at a time when we really need them (integrated surface water management for example). A supply chain ‘squeeze’ is almost certainly going to lead to increased use of off-shore resources as it is a simple case of cost rather than value.
    If the industry wasn’t knocked down at the end of every AMP and wasn’t constantly squeezed it might have found some room to innovate and build up a skills base and therefore tackle its inefficiency. If the choice is between a low cost inefficient team abroad or a high cost inefficient team in the UK it’s obvious who will win.

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  • I do not understand all the water company complaints about the recent Ofwat price review and
    especially those from South West Water. In 2005-06 Pennon took £200 million as dividend and in
    2008-09 it was £104 million. The fact is that since the last review about a third of our bills have gone to
    Pennon in this way. The high charges in the South West has traditionally been blamed on the high cost
    of keeping the beaches clean. Must we assume that this responsibility has now been taken over by the
    Pennon Group?

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  • The comments of the water plc chairmen do not seem to reflect those of the stock market where share prices have risen significantly since the final determination was announced last week. This is because they understand that the plc's are monopolies with guaranteed earnings who will always pay good dividends relative to the investment risk.

    The increase in capital spending is surely good news for the supply chain given the current economic climate. The amount of work that can be carried out overseas is relatively small in water projects and is mainly restricted to routine technical work such as drawing production and structural design. Project development and project management together with construction which comprise the bulk of work on a water project have to be undertaken here in the UK. (I write as a currently unemployed water engineer.)

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