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Tough water procurement strategy set to hit small firms

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SMALL CONSULTANTS and contractors are set to be squeezed out of the multi-billion pound water market, as clients seek to meet tough efficiency targets set by regulator Ofwat.

Three more water companies this week disclosed severe restrictions on procurement lists for the next five years - part of a drive to push down costs and increase efficiencies.

Yorkshire, Severn Trent and Hyder, controlling Welsh Water, will all use forms of strategic partnering to work with a small number of contractors and consultants for capital improvements and maintenance works.

They join Thames Water and Anglian Water who made similar announcements in the past few weeks.

Some £15bn of water work is at stake in England and Wales, £6.4bn of that in capital investment for infrastructure and £7.4bn on quality upgrades. Another £1.7bn will go on supply improvements.

The money is due to be spent over the next five years under the third round of the Asset Management Programme or AMP3. But the water companies were told by water regulator Ian Byatt in November that they must cut prices for consumers as well as making improvements.

The latest shift in procurement strategy will tighten pressure on small and medium size design and contracting firms who will find themselves increasingly sidelined or pushed into subcontracting.

Industry analysts think it will accelerate a shake-out of the construction market, already being driven in new directions by post-Egan reforms.

'At best we will see the industry changing its nature, at worst smaller firms could go down as surplus capacity is driven out,' suggested one economist.

Others on both the client and contractor sides now predict a shake-out, both specifically in the water industry and in other branches of construction.

Laing utilities manager Jim Brown said he thought the procurement change would mean 'a reduction in overcapacity'. At Severn Trent Water engineering director Ian Elliot also felt that a 'consolidation was inevitable'.

Many clients have since said they will need to make redundancies. Tightening procurement is another shot at cutting costs.

Yorkshire Water said this week that it had spent the last year working on its new procurement structure. For small works under £2M the region will be divided geographically and work assigned to consortia of contractors and consultants. An averaged target cost system will be used where gains and losses will be balanced out over a year.

Yorkshire Water said it would split work with its contractors. Larger jobs will be tendered but to a reduced list of pre-qualified firms. It said the changes were partly driven by the changed nature of works in AMP3, with only 15% of larger projects by value.

Severn Trent Water, which had stuck to competitive tendering in AMP2, also underlined a move to a much smaller average size of projects as a reason for change.

Hyder has not yet announced who will be on its lists, and the final shape of its AMP3 programme awaited the outcome of a board meeting this week. But it said it was 'going for strategic partnering for the whole programme' having trialled such arrangements on bigger schemes during AMP2.

Adrian Greeman

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