For those who don’t know me, I have worked in the utility sector for almost all my working life.

To age myself, I joined North West Water (now United Utilities) on 11 November 1985. This was some 37 years ago. The week after I joined UU, the number one record was ‘A good heart’ by Feargal Sharkey. More of him later.

During my time at UU, I was Programme Director for two Price Reviews – PR14 & PR19. Through the Price Review (PR) process water companies agree with OFWAT (the regulator) how much they can recover through customer bills, during the following five years. For example, Price Review 2019 (PR19), covered the period 2020 to 2025. UU were allowed to recover more than £5 billion (yes billion) through customer bills during those five years, to run its business and deliver its capital programme.

Background:

Since privatisation in 1989 (as part of the Price Review process) each company agrees an Asset management Plan (AMP) for the following five years. The first was AMP1. All the water companies are currently deeply engaged in producing their PR24 plans. These plans will be submitted in October 2023, for agreement by December 2024.  Each company will then agree their AMP8 plan for the period 2025 to 2030.

The AMP periods have resulted in multiple benefits for customers and the environment including reduced pollution and increased resilience, water quality, service levels and efficiency. It is fair to say however, that each AMP has seen the demands on companies increase with a greater emphasis on value for money and the customer engagement. OFWAT has improved their challenge processes and customer expectations have increased over time. What used to be considered a ‘silent service’ can now generate a lot of press interest.

The last five years

The overriding political pressure in PR19, was for companies not to increase their bills. Given this, the requirements to meet European Legislation and finance their functions, companies struggled to balance all these factors. There is no doubt that the financial pressure impacted both the water companies and their capital delivery supply chain. The water companies looked to transfer risk and drive costs down aggressively.  Some very large construction companies (Laing O’Rourke, Balfour Beatty) exited the sector as margins grew tighter. Few water companies won friends with their suppliers.

Sewage, the press and public

Although leakage has hit the headlines in the past, few of us could have avoided the intense press focus on sewage in rivers. Historically design principles have been based on assumed storm frequency – e.g., what impact would a ‘one in thirty year’ storm have. The reality is that (potentially due to global warming) previously assumed ‘one in thirty’ storms are happening almost annually. The existing sites and networks are therefore under-sized and overflows are spilling into rivers. Although these overflows are often diluted by rain water, they are very unpleasant. The press has rightly focused on these issues, as have interest groups and some key figures have emerged.  One keen fly fisherman has become a vocal challenger on pollution – Feargal Sharkey (of ‘a good heart’ fame).

The focus on environmental improvements will likely significantly increase the size of the capital programmes in AMP8, with most companies saying they wish to double their capital spend (some saying they wish to triple or more). This has the following consequences:

• Ofwat will need to consider the impact of potential increases in customer bills, given wider economic challenges and rising inflation. Many companies will not get what they ask for and may need to deliver improvements without further funding
• Water Companies will need to gear up to deliver these very large programmes.
• Many companies may struggle to resource their programmes (internally and via construction partners). The demand for construction services now exceeds supply. The supply chain may be able to pick its partners. Water Companies will struggle to dictate the market, force construction prices down and may need to change their risk sharing commercial models

What does this mean for Skewb – Project 7

The Water sector is entering a challenging period, but this will also bring opportunity. Skewb has a number of ex-Executive Directors from water companies. We understand the market and have ‘walked in the same shoes’ as many of our potential clients. We have expertise, products and services that can support water companies. We will also partner with companies of complementary services to provide joint offerings.

By Christopher Jacques

Christopher Jacques is the Cadent DPP Transformation & Strategy Lead at Skewb. To speak with him about this topic in more detail, you can connect with him on LinkedIn.