What the utilities plan for AMP5

Water companies in England and Wales have sent their draft business plans to Ofwat for approval. The plans vary greatly in their priorities and their approach towards contractors. Dean Stiles analyses some of the utilities' planned expenditure.

Draft business plans by water companies in England and Wales, sent to Ofwat last month for approval, show that overall companies plan to invest around £27B. Investment in capital maintenance will increase by more than a third compared with the current programme, from just under £10B to more than £13B for AMP5.

The business plans are diverse, reflecting the different environments in which companies operate, the different priorities they have set and the nature of their assets. Equally diverse is the approach towards contractors, and we are already seeing changes in the way many water companies allow contractors to pitch for a share of the maintenance spend.

For many water companies, selecting suppliers is less about technical competence and more about how contractors work with their customers. “We find these days the technical competencies are a given: it’s the issues of organisational behaviour and culture that are, for us, the differentiator,” said a spokeswoman for Severn Trent. “We are already halfway through our six-stage selection process and commercial criterion don’t kick in until stage five,” she said. “Stages one to four are all focused on quality. We are seeking to work with partner companies which share similar goals and objectives, and whose organisational behaviour and culture best fits with our own.

This means companies with the right approach to issues such as corporate responsibility, carbon footprinting, health and safety, environmental awareness.”

Severn Trent’s capital efficiencies are based largely on the development of its AMP5 strategy, which involves improving its existing processes and the introduction of a new design-and-build contract strategy. “The AMP5 contract strategy is intended to ensure that STW, contractors, consultants, suppliers and operational staff will work closely together, collaborating to eliminate waste, in terms of time and money.

Greater emphasis will be placed on ensuring that requirements are clearly defined and communicated at all stages especially in respect of frameworks and standards,” said the spokeswoman.

In order to ensure a smooth transition to the new arrangements, the process of selection of new capital delivery contractors for AMP5 and beyond is under way for Severn Trent. Ten-year framework contracts are being considered, and it intends to begin design work on the projects for years one and two of AMP5 with its new contractors by March 2009.

Contract awards

It is widely accepted that the cyclical nature of water company capital investment leads to inefficiency and increases the risks to delivery of regulatory outputs.

Severn Trent points to a recent study by UK Water Industry Research that estimated longer-term planning could deliver capital efficiency savings of around 2.6% of capital turnover by providing the time required for “optimised staff utilisation, improved purchasing and greater innovation”.

In order to achieve these potential efficiency savings, Severn Trent accelerated feasibility on a number of capital projects. “We currently have a programme containing around £1B of investment at various stages of development, with

a corresponding feasibility budget of £40M included in our AMP4 programme. This advanced programme will provide the planned capital projects required for the first two years of AMP5,” said the spokeswoman.

Severn Trent started the tendering process last year and has selected its consulting engineers. “We are currently in the process of selecting the design and build contractors we’d like to have on our list of preferred suppliers. We started with 47 potential companies and have narrowed this down to a shortlist of 18, with a view to making decisions at the end of this year, ready for official contract awards in January 2009. This means the selected contractors will be able to begin work on what’s required for the AMP5 programme in April 2009; a year in advance,” she said.

Severn Trent Water used Achilles’ Verify Service to help it make initial selections, based on health, safety, quality and environmental criteria but not the Utilities Vendor Database (UVDB). “We are keen to follow a one-supply-chain process, and follow a route that flattens out the traditional roller-coaster process,” she said. “We have found that, increasingly, contractors have a similar view: they wish to work with clients who want to work as a partnership, take a one supply chain view, and share similar goals, objectives, and approaches on matters such as HS&E, quality, carbon emissions, and CSR,” she said.

The utilities sector represents one of Achilles’ largest customer groups with 175 participants. Initially developed to deal with sourcing and qualifying suppliers, today’s services are increasingly addressing wider issues – not only of health and safety, but also of CSR and climate change, said the company.

Yorkshire Water is using the Achilles Utilities Vendor Database to source a pre-qualified list of potential partners. And organisations interested in taking part in the process must ensure they register with Achilles Group before the process commences and that their entries are up to date, said the company. Yorkshire Water aims to spend £1.9B on several schemes, including reducing the number of properties experiencing internal-sewer flooding, and maintaining service levels and water quality. “We’re starting the process of selecting and appointing partners to work with us to deliver our ambitious AMP5 capital programme. We’re exploring a range of commercial options to deliver the programme and expect to use more than one capital delivery model, dependent on the nature of the work and finding suitable delivery partners,” said a spokesperson.

Southern Water’s draft investment plan amounts to £2.7B at today’s prices but after projected efficiency it believes it can deliver this for £2.5B, said Les Dawson, its chief executive. Of the total investment, £964M is allocated for maintaining treatment works, £665M for environment and quality improvements and £437M for water resources and growth.

“We face a £655M programme of work to deliver 329 projects, more than anywhere else in the UK, specifically for legislation imposed on us from Europe. We also have to spend £450M to cater for growth in the South-east region,” he said.

Southern Water has developed “a very positive relationship with contractors” in its supply chain, said the company in its report, which notes that, the “extent of review and interference in contractors’ programmes has been reduced, allowing them to deliver the outputs we set at a lower cost”.

Shorter life

United Utilities proposed maintenance investment for water and wastewater total £2B split between wastewater networks at £346M, water networks at £431M, wastewater treatment at £849M, and water treatment at £461M.

The bulk of this investment is focused on its wastewater service, in particular on the maintenance of its wastewater treatment works. “For our wastewater service this represents an increase of some £300M on our maintenance investment in the current period,” said the company in its draft report.

“The principal reason for the increase in investment is the need to improve our maintenance of a number of our larger wastewater treatment works where performance has shown signs of weakness in recent years. We also plan to invest in our network of pumping stations to reduce pollution incidents; to increase maintenance on our sludge assets; to ensure we keep available existing disposal routes; and to invest in our wastewater network more broadly to reduce flooding,” said the company in its report.

United Utility’s water service investment programme is around £900M, an increase of around 30% on the period 2005-2010. The overall trend for increased maintenance needs is to be expected, said the company. “We have invested very heavily since privatisation in new assets and as they age they begin to need significant maintenance.

In addition, much of the post-privatisation investment has been in more complex mechanical and electrical equipment, which has a shorter life than some of our more traditional assets, such as pipelines and sewers. This also puts upward pressure on our maintenance requirements,” its report notes.

Capital maintenance

South West Water’s plan emphasises higher capital maintenance to support service improvements and maintenance of assets. Its planned investment is for £813M for 2010-2015: £69M improving tap water and installation of duplicate water mains at key points to maintain supplies when problems arise.

It also plans to investigate methods to improve storm drainage and stop sewer flooding although no specific investment specified.

Thames Water’s £6.5B plan focuses on measures such as keeping existing assets, water main and sewers, in good condition. The company proposes to start building a new reservoir in Oxfordshire, “which will be essential to help us secure water supplies for the future, and which will provide up to 10% of the region’s water when completed in 2021,” said David Owens, Thames Water’s chief executive.

The plan allows for an increase in investment on tackling sewer flooding, reducing the number of properties at risk of flooding with sewage by nearly a quarter. Programmes to reduce odour are planned at sewage treatment works around the region.

“We will be improving the quality of the river Thames and the lower river Lee by building the Lee Tunnel and improving Beckton Sewage Treatment Works, which will dramatically reduce the volume of sewage overflows entering the river. In addition, we’ll be improving the quality of around 250km of other rivers in our region,” he said.

Sustainable urban drainage forms part of Wessex Water’s £1.5B programme. The initial programme is to stop surface water from entering the sewer network. Wessex Water also plans improvements to water treatment at 26 sites, and investment in four “advanced waste-treatment facilities”.

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