Starting next year the water industry will start to make one of the largest UK infrastructure investments ever, a total of £96 billion in its AMP 8 investment period. That represents a near doubling from the £51 billion previous five year investment period of AMP 7.
Procurement routes that might have been suitable for the smaller, more manageable AMP 7 are likely to often prove to be not the best options for AMP 8. Choosing successful procurement routes is important; much depends on the success of this investment, not least the size of our water bills, as well as our ability to supply water in an age of changing rainfall patterns that are hard to forecast, and our ability to treat wastewater rather than dumping it untreated into the sea and rivers.
It is a big programme to fund. Almost all of water companies’ income comes from the bills we pay. There seems on the surface to be plenty available to fund it though; the water companies paid some £1.4 billion in dividends in 2022, according to a Financial Times analysis, which was up from £540 million the previous year. Paying dividends on that scale means funding for AMP 8 will have to come from elsewhere. Raising borrowings might be problematic as the water companies already have borrowings of some £60.6 billion, according to industry regulator Ofwat.
Having Thames Water seemingly on the verge of going bust won’t help the other water companies raise funds for this work, and the talk surrounding Thames Water about taking the industry back into public ownership creates further uncertainty for construction suppliers. Disruption to the AMP 8 programmes of work could prove fatal to key suppliers; but despite the risk few could consider not getting involved.
Successful delivery of AMP 8 is crucial to clients and their supply chains, which will bring a focus onto procurement. One procurement route that will be getting a good run out under AMP 8 is Enterprise Model type contracts. These could still be design and build contracts for larger projects, but adopting Project 13 principles. Project 13 says it has reached milestone numbers of signatories to its principles, which chime well with the growth in recognition of the benefits of collaborative approaches.
There will be some large projects in AMP 8, including reservoirs like the under construction £325 million Havant Thicket reservoir near Portsmouth, which, although desperately needed, have been shunned for many years for political and not-in-my-back-yard reasons. Planned reservoirs include Anglian Water’s £2.2 billion Fens reservoir, which might not start construction until the next AMP period or be ready for use until the start of AMP 10.
A myriad of smaller projects affecting a large proportion of the water asset base will be undertaken. To meet these greatly differing demands a range of procurement approaches will be needed. Some water companies have been reported as saying they will shoulder a lot of design responsibility themselves which will let smaller contractors into the water market.
Water companies are showing a greater willingness to take on more appropriate shares of risk, sometimes using in house design and project management skills and other times using smaller, local suppliers than they might have used directly in the past. Collaboration will be easier with these suppliers, it is hoped, and innovation might be better promoted by having new suppliers with ideas from other sectors.
Traditional, larger, suppliers will still find a lot of work available, even using traditional procurement. But they will be expected to fully embrace the spirit of collaboration that is growing in construction. Whatever procurement routes are chosen, let’s hope the clients reciprocate.
Nick Barrett
Editor