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Water & environment

Float on

Spending in the water sector will not dry up for at least one more year says Neil Doyle.

The good news for civil engineering is that the immediate future of the water sector looks bright. However, the emerging picture suggests that the Government's demands for substantial new investment may not avert a dip in fortunes come the new millennium.

The first indication of future investment levels was delivered in September, when the Deputy Prime Minister John Prescott and Welsh Secretary Ron Davies delivered a paper to water regulator Ian Byatt setting out policy guidelines for the current five year review. The Government wants to see a 10% cut in customers' bills and increased investment to fund environmental improvements, which would amount to a doubling of spending from pounds 4bn to pounds 8bn in the years 2000-2005.

The hard line reinforces suspicions that the water companies hoodwinked the regulator by understating efficiency savings and overstating the cost of environmental improvements in the last price review. It was expected that Byatt would place the emphasis on delivering major price cuts in the 1999 review, giving environmental improvements a much lower priority, but the Government is determined to claw back some of the excessive gains enjoyed by directors and shareholders in the past.

In his latest analysis of capital expenditure published on 20 October, Byatt said the companies have cut costs and increased efficiency faster than anticipated, and that this should result in lower prices after 2000 'and still allow companies to finance a substantial environmental programme'.

But all may not be quite as it appears, as he has previously questioned the viability of some of the larger schemes on the list because of the upward pressure they would put on prices, citing proposals for cleaning up the north east coast as an example.

The water companies responded to Prescott's guidelines by saying that his sums do not add up and claiming that the 10% figure is an arbitrary one. The companies regard the list of 54 areas of environmental improvements as 'very large and ambitious' and maintain that final scope of the improvements cannot be determined until March next year, when discussions with the Environment Agency about the viability of specific projects are complete.

They also claim there are a lot of unknowns on the spending side, especially the final costs of compliance with the EU Drinking Water Directive and the lack of an agreed regime for monitoring lead levels.

'Although one welcomes guidelines from the Government, there are some concerns about the effects of the European Directive,' says Water UK, the water industry trade association. 'The Drinking Water Directive could mean many billions in new investment. What most surveys are flagging is that customers want environmental improvements and stable prices, not just a price cut. That is the preference of the majority of customers.'

Despite the current state of flux, it seems clear that civil engineering is set for a substantial injection of new work in any event. But it is anticipated that increased investment levels stemming from the current review will not be enough to avert the start of a steady decline in workload from 2000, in terms of overall volume. With so many large construction concerns depending on water work to keep them afloat in the short term, the current round of negotiations is therefore of critical importance.

'The truth at the moment is that you can't really judge it,' says Construction Forecasting & Research economist Jim Turner. 'The plans the water companies are working to at the moment are from the 1994 price review and investment should have peaked in the first year and declined slowly after. What we've been saying is that the peak will be later, due to a backlog from years one and two and work coming in from the Scottish PFI water schemes.'

He adds: 'At the moment you've got the rather remarkable situation that it's only water and sewerage that are keeping civils order books positive. It is by far and away the most healthy civil engineering sector.'

Based on the past performance of the companies, CFR is forecasting growth in the water and sewerage sector of 12% this year, slowing to around 6% in 1999, and then falling by 5% a year from 2000 to 2003.

The companies and the City appear to holding out for a public sector contribution towards meeting the requirements of the European directives. As Water UK chairman Brian Duckworth (also managing director of Severn Trent) points out: 'It should not be overlooked that meeting environmental and quality obligations form only part of the equation. Extra funding will also be needed to ensure we have a sustainable water supply system as we move into the 21st century with possible periods of greater climatic uncertainty.'

However, the Government pours scorn on any suggestion that it should help to ease the burden - 'absolute rubbish', according a spokeswoman for the Department of the Environment, Transport and the Regions.

The City is already anticipating that the 10% cut in charges will go through as planned, and this has resulted in heavy downgrading of water company profits forecasts by analysts over recent weeks. James Capel analyst Verity Mitchell says: 'The Government has to decide on what level of capital expenditure it wants - it'll have to be a political compromise.

'It could be tremendous news for the construction industry, she adds, 'although a lot of the major stuff, sewage treatment works and so on, has already been built. I don't expect to see the same level of spending, but I do expect to see a lot of smaller schemes.'

Wreakin Construction managing director Dr Simon Frane concurs with the view that the sector will remain buoyant, albeit at lower levels. Like Byatt, he views a number of the proposed projects, such as disinfection schemes at outfalls, as unnecessary and therefore non-starters from the outset.

'The most certain thing is that there will be a drop in workload unless the regulator gets his act together', he says. 'It all depends on the mix of work. It has to be targeted in the right areas and there are a number of schemes on the list that are just not appropriate. We would just like to see steady or steadily increasing workload.'

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