Adaptation the key after Byatt determination
Despite Ofwat's draft determination, there is as much opportunity for companies with proactive strategies - particularly those able to offer a 'one-stop shop' and to take advantage of partnering and the framework approach - in the next five years as the last. Lis Stedman reports.With Ofwat director general Ian Byatt's tough draft determination providing a rude awakening for the privatised water companies, it might be assumed that the contractors, consultants and suppliers to the industry would also be enveloped in gloom.
Bruno Speed, director of Miller Water, part of the Miller Civil Engineering contracting group, confirms this view. "The work's definitely going to be different in terms of structure and the size of contracts. There is no question that it is moving more towards refurbishment, small contracts with a mix of civils and M&E rather than the larger schemes which were driven by European legislation."
He says the key to success for contractors will be the ability to offer a 'one-stop shop' and to be able to take advantage of the framework approach in which the water companies appear to be taking a considerable interest.
At least three of the major water companies - Yorkshire, Thames and Anglian - are taking an active interest in partnering, and Yorkshire and Anglian are close to selecting a final list of participants. A significant part of their capital programmes will be achieved in this way, Mr Speed says, though their approaches to framework agreements differ. "Yorkshire left it open whether to apply as an individual or a group; Thames was very much looking for single entities but has now two shortlists of consultants and contractors and is looking for people to team up, and Anglian is very much looking at single entities."
Welsh Water and South West Water are also said to be showing an interest in framework deals, which offer contractors guaranteed tranches of work in advance over a fixed term - generally between three to five years. Most of those currently looking at frameworks have been enthusiastic proponents of partnering schemes or similar client-contractor-supplier agreements in the past. Frameworks take forward that non-confrontational approach, giving both the client and the contractor a degree of security and an ability to forward plan effectively. "It is a long term approach. As far as contractors are concerned it has always been one of the greatest difficulties, providing a stable team. This is one ways to create efficiency, build trust and understanding," says Mr Speed.
Miller restructured last September to target itself at the sort of contract it saw coming up after the next review, integrating its M&E expertise within the water division. Frameworks should also help end the 'stop-start' pattern of work which characterised AMPs 1 and 2. With the heavy environmental workload that the companies must undertake in the next five-year period, Mr Speed sees frameworks as an ideal way to deliver the goods. "The figures suggest some companies will practically have to deal with one combined sewer overflow a day. There is no way they will ever achieve that through the traditional procurement route."
Companies are predicting that partnering will continue to increase in popularity among the water companies, given their track record in driving costs and confrontation out of contracts. Weir Engineering Services believes that Ian Byatt's proposed £1Bn worth of cuts in consumer tariffs could lead to a major but unexpected order boost for the company. It is already in advanced negotiations with six UK utilities over partnering contracts, and has just signed a £37.5M five-year outsourcing agreement with Yorkshire Water covering M&E work at 1,200 of its water and wastewater pumping stations - the largest contract of its type in the UK water industry.
Now, Weir says, most of the other English and Welsh-based water companies are talking to it about the implications of Mr Byatt's draft determination. "Contract negotiations are at various stages, but we are hopeful of signing at least one before the year-end," said Leeds-based Andrew Hodgson, WES general manager for England and Wales. "The Yorkshire Water link-up has made us the recognised leader in this specialist engineering field and now other UK utilities want to adopt similar models in order to reduce costs, increase efficiency and improve customer service.
"Ofwat's April 2000 deadline is focusing minds and there is tremendous pressure on utilities to improve their cost base. We believe that outsourcing can help them and that we are in pole position to benefit from this rapidly-growing market." Weir's Leeds operation now employs 100 former Yorkshire Water employees at eight regional offices. To cope with anticipated demand, WES has set up a dedicated water engineering division at Leeds and its parent company, the Weir Group, has earmarked the provision of engineering services as a major component in its future growth strategy.
Mr Hodgson says success has come from recognition of the need to align company strategies with those of clients, and that the current trend towards long-term outsourcing contracts helps to achieve this: "We are now looking at increased efficiency and enhanced performance through whole life costings and total asset management. In a five year contract you can take a long-term view, spend an extra £1,000 but save £10,000 in reduced energy costs, for instance."
Prospects in other sectors also appear to be rosy. Chris Rees, of man-entry structure maintenance specialist Sewer Services, says that the prospects in the sector have improved considerably over the last five years, and he sees nothing in the periodic review detail that will change the situation.
The Government, he feels, has had a significant effect on the companies. "There is now a situation where the environmental and engineering aspects are now a priority. Five years ago, the accountants ruled, but now the companies are recognising the need to maintain and improve."
Before the last review, as a leading member of the Sewer Renewal Federation, Mr Rees was a critic of the companies' treatment of their infrastructure renewals funds, which were not being spent at the rate they were being accrued. But now, he feels that there is a fundamental change in the way the companies operate which will ensure there continues to be plenty of work in the maintenance and renewals sector.
"The companies now have a middle management that have their eyes on the ball as regards what standards have to be met. They push top management so everything is carried out in the spirit in which it was intended. In the early days, top management seemed to be looking at the effect on their shares and their pockets, but now the companies have got a very realistic management structure."
Weir Envig, a South African company bought recently by Weir Group, has expertise in another area which may well flourish after the periodic review - membrane technology. Weir Envig's Fiona Finlayson says the company expects to see increased use of membranes in the near future. "Of late, the municipal water market has started to see membrane treatment as proven and reliable, hence the size of plant installed is getting bigger."
She also sees opportunities opening up in inset appointments, with water companies increasingly focusing their attention on ways of providing a wider range of services for large industrial clients. Either the companies or the industries themselves are potential clients for Weir's membrane technology which can enable wastewater to be recycled as process or cooling water.
Indeed, there is a possibility - with the Government's scrapping of the designation of high natural dispersion areas for bathing waters - of companies recouping some of the outlay they will have to make on improved levels of treatment by recycling the high-quality effluent to industry.
"There are power stations in India, where the potable water supply is not reliable, where a couple of the plants are run on sewage effluent." This may not be a short-term option for the UK, but it has appeared in at least one power station feasibility study in this country so it is not as unlikely a notion as it might sound. Given the situation the companies find themselves in, all suggestions are being eagerly received. And despite the initial fears voiced about the effect of the price cuts on spending, most sectors appear optimistic - there is work to be done, for companies that can adapt to the type of work on offer.