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Water industry told to fix “boom and bust” culture

Ministers this week came under fire from the water industry after deciding that no major change to the five year spending cycle was needed.

Boom and bust cycle

Instead they blamed the water companies for creating the boom and bust cycle, which coincides with the beginning and end of each spending period.

The government’s Gray Review last week acknowledged that the price review cycle has a “profound impact” on the supply chain. But it found that the patterns were driven by water companies’ behaviour rather than the regulatory system.

The review found that there was a “general lack of trust” between regulator Ofwat and the water companies. As a result the companies avoid initiating projects late in a five year asset management plan (AMP) period fearing they will be stopped in the following AMP period.

It said water industry calls for AMP periods to be lengthened or staggered would not improve the relationship between the water industry and the regulator and could increase the regulatory burden.

“Opportunity missed”

Association for Consultancy and Engineering (ACE) chief executive Nelson Ogunshakin said the review should have called for fundamental changes. “The opportunity has been missed,” he said. “Cyclical investment is damaging the capacity of the UK supply chain and generating higher costs and poorer outcomes for consumers.”

The Chartered Institution of Water and Environmental Management (CIWEM) said it too was “disappointed” by the results, and the ICE criticised the review for “lacking any real focus on the infrastructure assets”.

The ICE’s own “State of the Nation 2010” assessment called for reforms to Ofwat to improve long term investment and to stop companies and experienced people from leaving the sector because work was so cyclical.

South West Water chief executive and Water UK chairman Chris Loughlin acknowledged water companies’ reluctance to invest in the latter years of AMP periods.

“Pressure from shareholders”

But he said this was often due to pressure from shareholders. He said he agreed that water companies had to begin looking to the supply chain rather than the regulator for investment cues.

“You can blame whoever you want − us, the regulator, it doesn’t matter − but we need to redress that balance,” he told a Westminster Energy, Environment and Transport Forum seminar. “We don’t need rules from Ofwat to help us with that. We should be able to try and do that ourselves.”

“You can blame whoever you want − us, the regulator, it doesn’t matter − but we need to redress that balance”

South West Water chief executive and Water UK chairman Chris Loughlin

Ofwat director of future water charging George Day expressed his own frustration with investment peaks and troughs, which he felt were avoidable.

“There is this culture within [water] companies that they need to see the price determination before they can commit to things. I do not understand why companies are quite as reluctant as they are.

But he said Ofwat will not wash its hands of the problem. “It is still an issue, so it is still something we need to address.”

Readers' comments (1)

  • Barry Walton

    I have said this before. The instruments of appointment as water and water and sewerage undertakers (from the early days when the lazy term 'licence' had not caught on) provided for a one off five year review then reviews at ten year rests. The problem then was that the companies could not stay sufficiently on programme as to render comparison with the plans meaningful either to them or the regulator. Hence the five year cycle. It remains practical for the industry to revert to the original contracts as they presumably now have a much better idea of what they intend to do - 25 year water demand plans (instilled by the EA without so much as a 'Don't tell us you can't do it.), relatively settled legislation are with us. All they really have to do is sit down with the economic regulator and agree the extended period. The companies' inertia clearly suits their purposes.

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