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Ahead of our half day seminar on 10 October, Mike Streetly of ESI Consulting considers how water companies are meeting asset management period 6 (AMP6) targets and the importance of working with the environment.
With 18 months of the current five year asset management period (AMP) cycle already behind us many water companies are approaching peak spend on capital programmes while also planning ahead for future regulatory change. These are the topics we will explore in more depth at ICE's half day seminar on 10 October: Delivering efficiency in AMP6.
Some may ask if time is running out for water companies to deliver some of their more complex schemes. As we continue to look for effective solutions, one area we must not lose sight of is working with the environment – though careful planning is required.
The Water Services Regulation Authority's (Ofwat) aim for AMP6 has been to remove the previous bias towards investment in capital projects with a combined outcome delivery incentive (ODI) and total expenditure (TOTEX) approach. A key driver was government's findings that water companies were overly reliant on direction from Ofwat creating a risk averse attitude, particularly towards innovation.
The TOTEX approach also presents significant potential efficiency benefits from engaging more proactively with the environment. However, these projects often don't fit neatly into the AMP cycle. Dealing with the natural environment involves getting used to different types of risk and uncertainties. Innovative approaches need careful consideration and planning and often involve a number of partners, from large contractors to smaller SMEs, all working together to combine unique skillsets.
The success of the TOTEX approach relies on water companies prioritising this kind of 'joined up thinking'. Progress so far in AMP6 is promising. We have started to see a shift in attitude towards recognising the significance of partnering at a strategic level. A number of water companies are already working to ensure greater team input to develop the best appropriate solution, not just a good capital solution.
With ambitious targets for 2020 water companies not only need to improve how they work with their supply chain but also assess how they identify innovative opportunities through existing and enhanced collaboration with SMEs.
When it comes to large 10 year alliance frameworks, some SMEs raised concerns that the appointment of larger consultancies and contractors would make it difficult for them to win contracts directly.
Some water companies have in fact shown clear desire to keep innovation in the industry by engaging with SMEs on specialist environmental frameworks. Although these have tended to be few and far between, these partnerships have delivered increased levels of environmental investigation and protection, while giving SMEs a much desired pivotal role.
The scope of work for consultants is expected to change over the next five years from the investigation and analysis that characterised much of AMP5, to the implementation of recommendations to achieve improved water quality and environmental outcomes up to 2020.
In AMP7, as well as seeing companies investing in managing their customers' changing expectations, we can also expect to see further environmental change, in terms of climate, population and increasing environmental legislation.
The Environment Agency's fifth National Environment Programme (2015-20) – a key part of Price Review 14 (PR14) – will be one of the key underlying drivers. This places requirements on water utilities to cover the main obligations of the Water Framework Directive and work towards 'good' water body status by 2027.
Activity levels will rise over the next few years with options appraisals to identify the most cost-beneficial solutions to known environmental issues, adaptive management trials and monitoring programmes. The extent of this future activity will largely depend on cost-benefit ratios, something smaller consultancies have become well versed in following the economic downturn.
Overall AMP6 has seen a trend towards increasing environmental investigation and protection. However, many parts of the water industry have still not grasped the full significance of this change. Procurement has in many cases not developed with many delivery partners still incentivised on outputs, not outcomes.
The risk is that many of the opportunities for using innovation to deliver required outcomes more efficiently may not be grasped. Timing is crucial to solution delivery in AMP6 and it may well be that the full benefits of innovation will not be achieved until AMP7.
It's clear that innovation is coming from the SME sector and that major changes are needed both in the commercial approaches of big Tier 1 contractors, and the industry as a whole, to ensure this vertical integration is achieved. Otherwise behaviour towards investment in new innovative solutions is unlikely to alter.
Attend our half day seminar, Delivering Efficiency in AMP6, this Monday 10 October to hear the latest viewpoints from water companies and the regulator.