Suppliers to the water industry are anticipating a 15% rise in workload in the next five-year spending period, starting in 2010.
The draft determination on water prices from industry regulator Ofwat would, if adopted, commit the ten water-only plcs in England and Wales to spending £19.6bn in AMP 5, substantially up from the £15.7bn they are spending in the current AMP4.
“In general the supply chain is feeling pretty positive,” said president of MWH Europe Africa and chair of the ICE’s water panel David Nickols.
Suppliers’ welcome for the draft determination is in contrast to water company complaints when the draft determination was released because Ofwat said there was to be no increase in the prices charged to customers.
“The regulator has been very aggressive and operational expenditure is where the ability not to have price increases comes from.”
David Nickols, MWH
But the efficiencies that will keep prices down are expected by the regulator to come from the operations budget. “The regulator has been very aggressive and it [operational expenditure] is where the ability not to have price increases comes from,” Nickols said.
EC Harris director Terry Povall said suppliers would be affected by the reduced capital targets, however. “What is going to interest suppliers on the capital side is where the cuts are going to come from. The companies initially asked for £27bn of capital spending in their draft business plans (dropping to £22.4bn in the final plans). Will the cuts be in scope or efficiencies? And say 50% is efficiencies, where is that coming from?”
Most companies are “digesting” the information from Ofwat, but Thames Water has indicated where it might have to make cuts.
“It’s early days, but initial indications suggest the draft determination may not allow us to deliver what our customers want in the future. For example, this means we won’t be able to reduce leakage at all over the next five years,” said Thames’ chief executive David Owens.
“The regulator’s draft determination has also cut by almost a third the funds available to tackle sewer flooding at people’s homes,” he added.
Optimistic for the future
But Nickols said he was optimistic for the future. “We are in the middle of the biggest dip in workload ever but in three-to-six months it is going to be a good time to be a water engineer,” he said.
Companies are less inclined to hang on to water staff as there is currently a surplus of engineering skill and engineers are easy to hire. “But in 18 months there is likely to be a huge shortage of resources,” said Nickols.
Capital spending comparisons AMP4:AMP5
|Water plc||AMP 5 draft|
|AMP 4 capital|