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NCE water special - smoothing the ripples

Water regulator Ofwat is consulting on how to smooth the peaks and troughs in water investment.

Next week Ofwat launches its first consultation on how it plans to carry out the water price review for the 2010 to 2015 spending period.

Price Review 2009 (PR09) will focus on the need for the water industry to plan its spending more than five years in advance. As a result next week's methodology consultation is likely to include some welcome changes for contractors.

The difficulties imposed on the water industry supply chain by the current spending regime have been well documented in the pages of NCE.

Water companies divide their spending programmes into five-year Asset Management Plans (AMP) aligned to Ofwat's prsice review cycle.

The firms hold off procuring work for the next AMP until they know how much they can charge their customers. This does not happen until the end of each five-yearly price review.

As a result, there is little time for water companies to set out their procurement programmes before the start of each AMP, and as a result their spending tends to be skewed towards the end of each five-year review period.

Water industry suppliers lobby group British Water has calculated that assuming 12% of the industry's 35,000 workforce leaves the industry at the end of each spending cycle, and that it costs about £40,000 a head to recruit and train new employees, it could cost the industry about £168M to gear up for each investment programme. This is without factoring in the knock-on effects in the supply chain, so the final figure is likely to be higher.

"We have been moaning for years about the disruption that the Price Review causes to the industry," says British Water director Paul Mullord.

"Water companies just stop spending money and this drastically affects contractors' turnover."

In an attempt to iron out the peaks and troughs of the spending cycle during the current AMP4 period, Ofwat introduced an early start initiative that encouraged water companies to begin new capital programmes as soon as Ofwat had finished its price review.

However, even before AMP4 was under way, Ofwat chief engineer Bill Emery said the regulator was considering scrapping the early start programme due to its poor take-up by water companies.

Water firms found it difficult to start schemes before they had digested the implications of the AMP4 review and so were only able to procure a small proportion of work early.

Mullord says the early start initiative should be replaced by a late finish one, under which agreed portions of spending will be allowed to trickle into the next spending period.

This solution is one of many suggested by a forthcoming report by UK Water Industry Research (UKWIR). The report, The Regulatory Cycle and its Impact on the Efficiency of Supply Chain Delivery, has been written for UKWIR by consultant Mouchel Parkman and is the result of a survey of water companies and contractors.

Mouchel Parkman technical director Brendan McAndrew says the concept of extended programmes of work that straddle spending periods is the only recommendation in the UKWIR report that, on its own, could make a significant impact to the 2010 to 2015 spending period. The rest of the report's three pages of recommendations are all interdependent, says McAndrew.

"The key messages are really about early engagement with the supply chain by the water companies to ensure they have the capacity in place to deliver their programmes," he adds.

Key recommendations of the report include:

Ofwat should allow extended delivery of AMP programmes.

- It should also balance incentives to discourage underspending.

- Water companies should engage with the supply chain to provide visibility and continuity of workload.

- Contractors should be proactive in identifying efficiencies through longer-term workload stability.

- They should also be prepared to enter risk-sharing arrangements in response to the offer of greater visibility and continuity of workload.

The results of the UKWIR were first presented to the industry in July, and there are signs that Ofwat took some of these on board as it drafted its PR09 methodology consultation.

"Our methodology paper will make it clear we are expecting them [the water companies] to look beyond the five years and that may mean some work brought forward and other work held back," says Ofwat corporate affairs director Fiona Pethick.

"The paper will look at bridging that gap between the two periods. Some funding in principle could be agreed within the first five years to run over into the next five-year period."

As part of PR09, water companies are being asked to produce their strategic plans for the next 25 years. These are due to be submitted to Ofwat by 14 December. The 25-year strategies are part of each water firm's business plan, which must also include cost-benefit analyses of all their activities that must account for carbon emissions as a cost.

Pethick says she is hopeful that getting companies into a long-term mindset by thinking about their future activities and their impact on climate change should also smooth out the bumpy five-year spending cycle.

While not committing to contractors' demands to take maintenance budgets out of the price review, and therefore the five-year spending cycle, Pethick is sympathetic.

"There are only parts of the business that are uncertain between the five-year period: much of it they [the water companies] know what they need to do. For example, there’s no need to let up on maintenance."

The PR09 methodology consultation is released 18 October.

More features in NCE's water special:

Northern Ireland's privately financed infrastructure boom

Water goes green by putting turbines in pipes

Bradford's brilliant new treatment plant

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