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Water faces cost hikes

Inflation will be the biggest single challenge facing the water industry as it proposes to spend a massive £27bn over the five years from 2010 to 2015, warned consultants and contractors this week.

"Because the water companies will have fixed their prices for the five years to 2015, it is likely that they will expect their supply chain to shoulder the burden of rising inflation," said British Water director Paul Mullord.

Recent inflation figures show that the consumer price index (the government’s benchmark) rose in July reaching 4.4%, up from 3.8% in June.

"In the currently volatile economic climate, forecasting accurately for even a number of months is proving difficult, as rising prices in the energy markets have consistently shown," said Mullord.

Consultants, contractors and subcontractors will lock themselves into fixed five-year framework contracts based on forecasts made two years before the framework’s start date. This could leave them to pick up inflationary costs. Regulation does not react quickly enough to changes in the economy, said Mullord.

However, Terry Povall, director of utilities at cost consultant
EC Harris said that the huge spends proposed will draw people into that sector (see Viewpoint).

"The water sector still has significant levels of investment over any five-year period. While the credit crunch will have an impact on other sectors, it will have the effect of drawing new people into the water sector, which will in turn increase competition." Povall believes that the new entrants could in turn trigger further consolidation in the industry as competition increases.

The UK’s water companies submitted their plans to regulator Ofwat last week, having proposed a combined spend of £27bn over the five years beginning 2010.

MWH regional managing director Jon Pike said this vast sum was not unexpected. "Climate change, sustainability, water resources, flooding: these are all competing issues that need to be balanced with keeping consumer prices at acceptable levels."

Mullord said figures in final business plans, expected next April, would be telling. "Too great a difference in the capital expenditure from the draft and final business plans could cause a lot of uncertainty," he added.

Ofwat will publish its draft determinations in July 2009.

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